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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Unless otherwise stated, dollar amounts are provided in thousands, except share and per share data.

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with, and is qualified in its entirety by, our consolidated financial statements (including notes to the consolidated financial statements) and the other consolidated financial information appearing elsewhere in this Annual Report on Form 10-K. In addition to historical financial information, the following discussion contains forward-looking statements that reflect our plans, estimates and beliefs. Some of the information contained in this discussion and analysis, including information with respect to our plans and strategy for our business, includes forward-looking statements that involve risks and uncertainties. Actual results and timing of events could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

Overview

On January 5, 2018, we changed our name to XpresSpa Group, Inc. (“XpresSpa Group” or the “Company”) from FORM Holdings Corp. Our Common Stock, par value $0.01 per share, has been listed under the trading symbol “XSPA” on the Nasdaq Capital Market since January 8, 2018. Rebranding to XpresSpa Group aligned our corporate strategy to build a pure-play health and wellness services company, which we commenced following our acquisition of XpresSpa Holdings, LLC (“XpresSpa”) on December 23, 2016.

XpresSpa Group is a health and wellness services company. We have been a leading airport retailer of spa services through our XpresSpaTM locations, offering travelers premium spa services, including massage, nail and skin care, as well as spa and travel products (“XpresSpa”). In addition, through our subsidiary, XpresTest, Inc. (“XpresTest”), we launched XpresCheckTM Wellness Centers, also in airports, offering COVID-19 and other medical diagnostic testing services to airport employees and the traveling public

XpresTest, through its XpresCheck Wellness Centers and under the terms of Managed Services Agreements (“MSAs”) with physician’s practices, offers COVID-19 and other medical diagnostic testing services to the traveling public, as well as airline, airport and concessionaire employees, TSA and U.S. Customs and Border Protection agents, and the general public. Under the terms of the MSAs, XpresTest provides the physician practices with medical facilities, equipment, supplies, non-licensed staff, and management services, in return for a monthly management fee.

We currently have two reportable operating segments: XpresSpa and XpresTest. As of December 31, 2020, we operated 45 XpresSpa locations, consisting of 40 domestic (including one franchise location) and 5 international locations, and XpresTest, through its XpresCheck brand, operated in 5 domestic airport locations.

As a result of the coronavirus pandemic, effective March 24, 2020, we temporarily closed all global XpresSpa locations due to the categorization by local jurisdictions of the spa locations as “non-essential services.” Substantially all of our XpresSpa locations remain closed. During 2020 and 2019, XpresSpa Group generated $8,385 and $48,515 in revenue, respectively. In 2020 and 2019, approximately 84% and 82% of XpresSpa Group’s total revenue was generated by XpresSpa services, primarily massage and nailcare, respectively. In 2020 and 2019, XpresSpa retail products and travel accessories accounted for 12% and 15%, respectively, of revenue and 4% and 3%, respectively, was other revenue generated through product placement arrangements in XpresSpa spas and from management fees earned by XpresTest.

XpresTest offers convenient COVID-19 and other medical diagnostic testing services to airport employees and to the traveling public. See our further discussion in this section below under “—Recent Developments—Newly launched XpresCheckTM Wellness Centers.”

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Recent Developments

Effects of Coronavirus on Business

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a pandemic. The outbreak is having an impact on the global economy, resulting in rapidly changing market and economic conditions. National and local governments around the world instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain non-essential businesses, curfews, shelter-in-place orders and recommendations to practice social distancing, and many jurisdictions have begun to re-impose stricter measures in response to increasing infection rates. The outbreak and associated restrictions on travel that have been implemented have had a material adverse impact on our XpresSpa business and cash flow from operations, similar to many businesses in the travel sector. Effective March 24, 2020, we temporarily closed all global XpresSpa spa locations, largely due to the categorization of the spa locations by local jurisdictions as “non-essential services.” Substantially all of our spa locations remain closed. We intend to reopen XpresSpa spa locations on a location-by-location basis and resume normal operations at such selected locations once restrictions are lifted and airport traffic returns to sufficient levels to support operations at a unit level. On March 25, 2020, we announced that, during such period as we remain unable to reopen our spa locations for normal operations, we were advancing conversations with certain COVID-19 testing partners to develop a model for testing in U.S. airports. In the balance of 2020 after such announcement we successfully launched our XpresCheckTM Wellness Centers, offering such testing services, as described below.

The impact of COVID-19 is unknown and may continue as the rates of infection have increased in many states in the U.S., thus additional restrictive measures may be necessary.

The temporary closing of our global spa operations has had a materially adverse impact on our cash flows from operations and caused a liquidity crisis.

We have been able to secure financing during the year ended December 31, 2020 totaling gross proceeds of approximately $117,000, primarily through registered direct offerings of our common stock, in addition to obtaining a loan under the Paycheck Protection Program, a cash advance on our accounts receivable balances, and a loan from our senior secured lender, B3D, LLC (“B3D”) (see discussions below).

Newly launched XpresCheckTM Wellness Centers

Through its XpresCheckTM Wellness Centers and under the terms of Managed Services Agreements (“MSAs”) with a physician’s practice, we offer testing services to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, as well as the traveling public. We entered into MSAs with professional medical service entities that provide healthcare services to patients. Under the terms of the MSAs, XpresTest provides office space, equipment, supplies, non-licensed staff, and management services to be used for the purpose of COVID-19 and other medical diagnostic testing in return for a management fee.

On May 22, 2020, we announced the signing of a contract with JFK International Air Terminal LLC (“JFKIAT”) to pilot test our concept of providing diagnostic COVID-19 tests. To facilitate the JFK pilot test, we signed an agreement with JFKIAT for a new modular constructed testing facility within the terminal that hosts nine separate testing rooms. The pilot test at JFK launched on June 22, 2020.

On August 13, 2020, we announced that it had signed a contract with the Port Authority of New York and New Jersey to provide diagnostic COVID-19 testing at Newark Liberty International Airport through its XpresCheckTM Wellness Centers. We built a modular constructed testing facility that will hosts six separate testing rooms. The facility opened on August 17, 2020.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

On October 26, 2020, we announced that it had expanded its testing services beyond COVID-19 to offer additional rapid testing services for other communicable diseases including influenza, mononucleosis and group A streptococcus, as well as this season’s 2020/21 flu vaccine and a quadrivalent high-dose flu vaccine recommended for seniors.

On October 28, 2020, we announced the opening of an XpresCheckTM Wellness Center at Boston’s Logan International Airport. It contains seven separate testing rooms to provide diagnostic COVID-19 testing.

On December 15, 2020, XpresCheck entered into the Services Agreement with United Airlines under which XpresCheckTM agreed provide pre-travel onsite COVID-19 testing services select United flights originating in or connecting through various major U.S. domestic hubs in which United currently has (or if and when it does have) operations, including Newark Liberty International Airport (EWR), Denver International Airport (DEN), Daniel K. Inouye International Airport (HNL), George Bush Intercontinental/Houston Airport (IAH), San Francisco International Airport (SFO), Dulles International Airport (IAD), O'Hare International Airport (Chicago) (ORD), Los Angeles International Airport (LAX) and such other locations as may become available and as mutually agreed upon by the parties. The initial term of the agreement is six months, and will continue thereafter subject to cancellation by either party on 30 days’ prior written notice.

Liquidity

As of December 31, 2020, we had approximately $89,801 of cash and cash equivalents, total current assets of approximately $91,779. Our total current liabilities balance, which includes primarily accounts payable, accrued expenses, the current portion or promissory note, and the current portion of operating lease liabilities was $13,477 as of December 31, 2020. The working capital surplus was $78,302 as of December 31, 2020, compared to a working capital deficiency of $12,287 as of December 31, 2019.

While we have aggressively reduced operating and overhead expenses, and while we continue to focus on our overall profitability, we have continued to generate negative cash flows from operations, and we expect to incur net losses for the foreseeable future, especially considering the negative impact COVID-19 will have on our liquidity and financial position.

Credit Cash Funding Advance

On January 9, 2020, certain of our wholly owned subsidiaries (the “CC Borrowers”) entered into an accounts receivable advance agreement (the “CC Agreement”) with CC Funding, a division of Credit Cash NJ, LLC (the “CC Lender”). Pursuant to the terms of the CC Agreement, the CC Lender agreed to make an advance of funds in the amount of $1,000 for aggregate fees of $160, for a total repayment amount of $1,160 . As of March 31, 2020, the outstanding repayment amount of $910 was secured by substantially all of the assets of the CC Borrowers, including CC Borrowers’ existing and future accounts receivables and other rights to payment. On June 1, 2020, the CC Borrowers entered into a payoff letter (the “Payoff Letter”) with the CC Lender pursuant to which the CC Agreement was terminated. Under the Payoff Letter, we repaid $733 owed under the CC Agreement as of June 1, 2020 (net of a $91 early pay cash discount) and the CC Lender released all security interests held on the assets of the CC Borrowers, including the CC Borrowers’ existing and future accounts receivables and other rights to payment.

As compensation for the consent of existing creditor B3D, LLC (“B3D) to the CC Agreement described above, on January 9, 2020, XpresSpa Holdings, LLC, (“XpresSpa Holdings”) a wholly-owned subsidiary, entered into a fifth amendment (the “Fifth Credit Agreement Amendment”) to our existing credit agreement with B3D in order to, among other provisions, (i) amend and restate its existing convertible promissory note (the “B3D Note”) in order to increase the principal amount owed to B3D from $7,000 to $7,150, which additional $150 in principal and any interest accrued thereon will become convertible, at B3D’s option, into shares of our Common Stock subject to receipt of the approval of our stockholders, which was obtained on May 28, 2020 and (ii) provide for the advance payment of 97,223 shares of Common Stock in satisfaction of the interest payable pursuant to the B3D Note for the months of October, November and December 2020. The Common Stock was issued to B3D on January 14, 2020.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

B3D Senior Secured Loan

On July 8, 2019, we entered into the fourth amendment to its existing credit agreement (the “Amendment to the Credit Agreement”) with B3D, to renegotiate the terms of its 11.24 %, $6,500 senior secured note. The Amendment to the Credit Agreement, among other provisions, (i) extended the maturity date to May 31, 2021, (ii) reduced the applicable interest rate to 9.0%, and (iii) amended and restated certain other provisions. As consideration for these and other modifications, the principal amount owed to B3D was increased to $7,000.

On January 9, 2020, as compensation for the consent of B3D to the CC Agreement, we entered into the Fifth Credit Agreement Amendment with B3D in order to (i) increase the principal amount owed to B3D from $7,000 to $7,150, which additional $150 in principal and any interest accrued thereon will become convertible, at B3D’s option, into shares of our Common Stock upon receipt of the approval of our stockholders, which was obtained on May 28, 2020 and (ii) provide for the advance payment of 97,223 shares of Common Stock in satisfaction of the interest payable pursuant to the B3D Note for the months of October, November and December 2020. The Common Stock was issued to B3D on January 14, 2020. We capitalized a $150 fee charged by the lender to consent to the CC Agreement.

The total of fees paid to the lender as consideration for entering into the Fourth and Fifth Credit Agreement Amendments of $650 was capitalized and was being amortized over the remaining term of the B3D Note. We recorded amortization expense of $62 related to these capitalized costs, which is included in Interest expense in our consolidated statements of operations and comprehensive loss.

On March 6, 2020, XpresSpa Holdings entered into the Sixth Credit Agreement Amendment with B3D in order to, among other provisions, (i) increase the principal amount owed to B3D from $7,150 to $7,900, which additional $750 in principal, comprised of $500 in new funding and $250 in debt issuance costs, and any interest accrued thereon will be convertible, at B3D’s option, into shares of our Common Stock subject to receipt of the approval of our stockholders which was obtained on May 28, 2020 and (ii) decrease the conversion rate under the B3D Note from $6.00 per share to $1.68 per share. On March 19, 2020, the conversion rate was further reduced to $0.525 per share after giving effect to certain anti-dilution adjustments.

The Sixth Credit Agreement Amendment was accounted for as an extinguishment of debt in our consolidated financial statements. In March 2020, we extinguished debt with a carrying value of $4,829, net of unamortized debt discount of $1,845 and unamortized debt issuance costs of $476. In addition, we extinguished $2,048 of derivative liability, which represented the estimated fair value of the conversion option based upon provisions included in the Fifth Credit Agreement Amendment. We determined that the conversion option in the Sixth Credit Agreement Amendment should be bifurcated from the host instrument and engaged a third party to assess the fair value of the conversion option. As a result, we recorded debt with a carrying value of $3,994, net of a debt discount of $3,656 and debt issuance costs of $250, and a derivative liability of $3,656. We recognized a loss on the extinguishment of debt of $273 during the year ended December 31, 2020, which represents the difference between the carrying amount of the debt recorded under the Fourth and Fifth Credit Agreement Amendments and the debt recorded under the Sixth Credit Agreement Amendment and is included in Other non-operating income (expense), net in the consolidated statements of operations and comprehensive loss.

Subsequent to the Sixth Credit Agreement Amendment and during the year ended December 31, 2020, B3D elected to convert a total of $7,900 of principal into shares of Common Stock at conversion prices of $1.68 and $0.525. As a result, approximately $15,395 of derivative liability was settled and reclassified to equity, we wrote off $3,156 of unamortized debt discount and debt issuance costs, and 13,934,525 shares of Common Stock were issued. We recognized a revaluation loss related to the derivative liability of $11,990 during the year ended December 31, 2020 and a gain of $1,012 during the year ended December 31, 2019, which are included in “Loss on revaluation of warrants and conversion options” in the consolidated statements of operations and comprehensive loss.

A total of $884 and $724 of accretion expense on the debt discount was recorded in the years ended December 31, 2020 and 2019, respectively, which is included in “Interest expense” in the consolidated statements of operations and

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

comprehensive loss and increased the carrying value of the B3D Note. Total amortization expense related to the B3D Note debt issuance costs was $98 and $130 for the year ended December 31, 2020 and 2019, respectively, which is included in “Interest expense” in the consolidated statements of operations and comprehensive loss.

The B3D Note was guaranteed on a full, unconditional, joint, and several basis, by the parent Company, XpresSpa Group, Inc., and all wholly owned subsidiaries of Holdings (the “Guarantor Subsidiaries”). Under the terms of a security and guarantee agreement dated July 8, 2019, XpresSpa Group, Inc. (the parent company) and the Guarantor Subsidiaries each fully and unconditionally, jointly and severally, guaranteed the payment of interest and principal on the B3D Note. Holdings pledged and granted to B3D a first priority security interest in, among other things, all of its equity interests in Holdings and all of its rights to receive distributions, cash or other property in connection with Holdings. We have not presented separate consolidating financial statements of XpresSpa Group, Inc., Holdings and Holdings’ wholly-owned subsidiaries, as each entity has guaranteed the B3D Note, so each entity is responsible for the payment.

Paycheck Protection Program

On May 1, 2020, we entered into a U.S. Small Business Administration (“SBA”) Paycheck Protection Program (“PPP”) promissory note in the principal amount of $5,653 payable to Bank of America, NA (the “Bank of America”) evidencing a PPP loan (the “PPP Loan”). The PPP Loan bears interest at a rate of 1% per annum. No payments will be due on the PPP Loan during a ten month deferral period. Commencing one month after the expiration of the deferral period, and continuing on the same day of each month thereafter until the maturity date of the PPP Loan, we will be obligated to make monthly payments of principal and interest, each in such equal amount required to fully amortize the principal amount outstanding on the PPP Loan by the maturity date. The maturity date is May 2, 2022. The principal amount of the PPP Loan is subject to forgiveness under the PPP upon our request to the extent that PPP Loan proceeds are used to pay expenses permitted by the PPP. Bank of America may forgive interest accrued on any principal forgiven if the SBA pays the interest. At this time, there can be no assurance that any part of the PPP Loan will be forgiven. The PPP Loan contains customary borrower default provisions and lender remedies, including the right of Bank of America to require immediate repayment in full the outstanding principal balance of the PPP Loan with accrued interest. As of December 31, 2020, $37 of interest has been accrued and is included in Accounts payable, accrued expenses and other in the consolidated balance sheet.

Common Stock Offerings and Warrant Exchange

On March 19, 2020, we entered into a Securities Purchase Agreement (the “First Purchase Agreement”) with certain purchasers named therein, pursuant to which we agreed to issue and sell, in a registered direct offering, (i) 1,396,281 shares of our Common Stock, at an offering price of $0.525 per share and (ii) an aggregate of 698,958 pre-funded warrants exercisable for shares of Common Stock (the “First Pre-Funded Warrants”) at an offering price of $0.495 per First Pre-Funded Warrant (the offering of the shares of Common Stock and the First Pre-Funded Warrants, the “First Offering”). We received gross proceeds of approximately $1,100 in connection with the First Offering, before deducting financial advisory consultant fees and related offering expenses. The First Pre-Funded Warrants were sold to the purchasers to the extent that a purchaser’s subscription of shares of Common Stock in the First Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% of our outstanding Common Stock immediately following the consummation of the Offering, in lieu of shares of Common Stock. Each First Pre-Funded Warrant represented the right to purchase one share of Common Stock at an exercise price of $0.0033 per share. The First Pre-Funded Warrants were exercised in full in March 2020.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

On March 19, 2020, we entered into separate Warrant Exchange Agreements (the “Exchange Agreements”) with the holders of certain existing warrants (the “Exchanged Warrants”) to purchase shares of Common Stock. The Exchanged Warrants were originally issued (i) pursuant to a securities purchase agreement, dated as of May 15, 2018, and in connection with a related consent and (ii) in connection with that certain Agreement and Plan of Merger by and among the Company (formerly known as FORM Holdings Corp.), FHXMS, LLC, XpresSpa Holdings, LLC and Mistral XH Representative, LLC, as representative of the unitholders, dated October 25, 2016, as subsequently amended. Pursuant to the Exchange Agreements, on the closing date and subject to (i) the receipt of approval of our stockholders as required by the applicable rules and regulations of the Nasdaq Stock Market and (ii) the receipt of approval of our stockholders to increase our authorized shares, the holders of Exchanged Warrants would exchange each Exchanged Warrant for a number of shares of Common Stock (the “New Shares”) equal to the product of (i) the number of shares of Common Stock underlying such Exchanged Warrants (based on a formula related to the closing price of the Common Stock at the time of the closing of the Exchange as further detailed in the Exchange Agreement) and (ii) 1.5 (the “Exchange”). To the extent any holder of Exchanged Warrants would otherwise beneficially own in excess of any beneficial ownership limitation applicable to such holder after giving effect to the Exchange, that holder’s Exchanged Warrants shall be exchanged for a number of New Shares issuable to the holder without violating the applicable beneficial ownership limitation and the remainder of the holder’s Exchanged Warrants shall automatically convert into pre-funded warrants to purchase the number of shares of Common Stock equal to the number of shares of Common Stock in excess of the applicable beneficial ownership limitation. The closing is expected to take place on the first business day on which the conditions to the closing are satisfied or waived, subject to satisfaction of customary closing conditions.

On March 25, 2020, we entered into a Securities Purchase Agreement (the “Second Purchase Agreement”) with certain purchasers, pursuant to which we agreed to issue and sell, in a registered direct offering, (i) 2,483,333 shares of our Common Stock, at an offering price of $0.60 per share and (ii) an aggregate of 500,000 pre-funded warrants exercisable for shares of Common Stock (the “Second Pre-Funded Warrants”) at an offering price of $0.57 per Second Pre-Funded Warrant (the offering of the shares of Common Stock and the Second Pre-Funded Warrants, the “Second Offering”). We received gross proceeds of approximately $1,790 in connection with the Second Offering, before deducting financial advisory consultant fees and related offering expenses. The Second Pre-Funded Warrants are being sold to the purchasers to the extent that a purchaser’s subscription of shares of Common Stock in the Second Offering would not otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, in certain cases, 9.99%) of our outstanding Common Stock immediately following the consummation of the Second Offering, in lieu of shares of Common Stock. Each Second Prefunded Warrant represented the right to purchase one share of Common Stock at an exercise price of $0.0033 per share. The Second Pre-Funded Warrants were exercised in full in March 2020.

On March 27, 2020, we entered into a Securities Purchase Agreement (the “Third Purchase Agreement”) with certain purchasers named therein, pursuant to which we agreed to issue and sell, in a registered direct offering, (i) 2,631,667 shares of our Common Stock, at an offering price of $0.60 per share and (ii) an aggregate of 701,667 pre-funded warrants exercisable for shares of Common Stock (the “Third Pre-Funded Warrants”) at an offering price of $0.57 per Third Pre-Funded Warrant (the offering of the shares of Common Stock and the Pre-Funded Warrants, the “Offering”). We received gross proceeds of approximately $2,000 in connection with the Third Offering, before deducting financial advisory consultant fees and related offering expenses. The Third Pre-Funded Warrants are being sold to the purchasers to the extent that a purchaser’s subscription of shares of Common Stock in the Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, in certain cases, 9.99%) of our outstanding Common Stock immediately following the consummation of the Third Offering, in lieu of shares of Common Stock. Each Third Prefunded Warrant represents the right to purchase one share of Common Stock at an exercise price of $0.0033 per share. The Third Pre-Funded Warrants were exercised in full in March and April 2020.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

On April 6, 2020, we entered into a Securities Purchase Agreement (the “Fourth Purchase Agreement”) with certain purchasers named therein, pursuant to which we agreed to issue and sell, in a registered direct offering, (i) 4,139,393 shares of Common Stock, at an offering price of $0.66 per share and (ii) an aggregate of 481,818 pre-funded warrants exercisable for shares of Common Stock (the “Fourth Pre-Funded Warrants”) at an offering price of $0.63 per Fourth Pre-Funded Warrant (the offering of the shares of Common Stock and the Fourth Pre-Funded Warrants, the “Fourth Offering”). We received gross proceeds of approximately $3,050 in connection with the Fourth Offering, before deducting financial advisory consultant fees and related offering expenses. The Fourth Pre-Funded Warrants were sold to the purchasers to the extent that a purchaser’s subscription of shares of Common Stock in the Fourth Offering would otherwise result in the purchaser, together with its affiliates and certain related parties, beneficially owning more than 4.99% (or, in certain cases, 9.99%) of our outstanding Common Stock immediately following the consummation of the Fourth Offering, in lieu of shares of Common Stock. Each Fourth Prefunded Warrant represented the right to purchase one share of Common Stock at an exercise price of $0.0033 per share.

On June 17, 2020, we entered into a securities purchase agreement pursuant to which we agreed to issue and sell 7,614,700 shares of the Company’s Common Stock at an offering price of $5.253 per share (the “Registered Offering”). In a concurrent private placement (the “Private Placement” and together with the Registered Offering, the “Offerings”), we agreed to issue to the purchasers who participated in the Registered Offering warrants (the “Warrants”) exercisable for an aggregate of 7,614,700 shares of Common Stock at an exercise price of $5.25 per share. Each Warrant will be immediately exercisable and will expire 21 months from the issuance date. The Offerings closed on June 19, 2020 and we received gross proceeds of $40,000 before deducting placement agent fees and related offering expenses of $4,414.

In connection with the Registered Offering, warrants to purchase 133,258 shares of our Common Stock were issued to Palladium Capital Advisors, LLC (“Palladium”) (the “Palladium Warrants”) at an exercise price equal to $5.25 per share and warrants to purchase 609,176 shares of our Common Stock were issued to H.C. Wainwright & Co., LLC (the “H.C.W. Warrants”) at an exercise price equal to $6.5663 per share pursuant to the respective placement agent agreements. Palladium Capital Advisors, LLC and H.C. Wainwright & Co., LLC are also entitled to additional warrants upon the holders’ exercise of warrants pursuant to the respective placement agent agreements.

On August 25, 2020, we entered into a securities purchase agreement pursuant to which we agreed to issue and sell in a registered direct offering 10,407,408 shares of Common Stock and warrants exercisable for an aggregate of 11,216,932 shares of Common Stock at a combined offering price of $3.15 per share. The Warrants have an exercise price of $3.02 per share. We also offered and sold to certain purchasers pre-funded warrants to purchase an aggregate of 809,524 shares of Common Stock, in lieu of shares of Common Stock. Each pre-funded warrant represented the right to purchase one share of Common Stock at an exercise price of $0.001 per share and was exercised in August 2020. The offering closed on August 28, 2020 with us receiving gross proceeds of $35,333 before deducting placement agent fees and related offering expenses of $3,871.

In connection with the August offering, warrants to purchase 222,222 shares of our Common Stock were issued to Palladium at an exercise price equal to $3.02 per share and warrants to purchase 897,355 shares of our Common Stock were issued to H.C. Wainwright & Co., LLC at an exercise price equal to $3.9375 per share pursuant to the respective placement agent agreements. Palladium Capital Advisors, LLC and H.C. Wainwright & Co., LLC are also entitled to additional warrants upon the holders’ exercise of warrants pursuant to the respective placement agent agreements.

On December 17, 2020, we entered into a securities purchase agreement pursuant to which we agreed to issue and sell, in a registered direct offering 24,509,806 shares of common stock, par value $0.01 per share and warrants exercisable for an aggregate of 24,509,806 in a registered direct offering. The combined purchase price for one share of common stock (or common stock equivalent) and a warrant to purchase one share of common stock is $1.70. Each Warrant is immediately exercisable and will expire 24 months from the issuance date. The offering closed on December 21, 2020 and we received gross proceeds of approximately $41,667 before deducting placement agent fees and related offering expenses of $5,118.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

In connection with the December offering, warrants to purchase 754,902 shares of our Common Stock were issued to Palladium at an exercise price equal to $1.70 per share and warrants to purchase 1,960,784 shares of our Common Stock were issued to H.C. Wainwright & Co., LLC (the “H.C.W. Warrants”) at an exercise price equal to $2.125 per share pursuant to the respective placement agent agreements. Palladium Capital Advisors, LLC and H.C. Wainwright & Co., LLC are also entitled to additional warrants upon the holders’ exercise of warrants pursuant to the respective placement agent agreements.

Calm Private Placement

On July 8, 2019, we entered into a securities purchase agreement with Calm.com, Inc. (“Calm”) pursuant to which the Company agreed to sell (i) an aggregate principal amount of $2,500 in an unsecured convertible note (the “Calm Note”), which is convertible into shares of Series E Convertible Preferred Stock at a conversion price of $6.00 per share of Common Stock equivalent (the “Series E Preferred Stock”) and (ii) warrants to purchase 312,500 shares of the Company’s Common Stock at an exercise price of $6.00 per share (the “Calm Warrants”). On March 6, 2020, the exercise price of the Calm Warrants was reduced to $1.68 per share and on March 19, 2020 further reduced to $.0525 per share, after giving effect to certain anti-dilution adjustments. The Calm Note is an unsecured subordinated obligation of the Company. The Calm Note matures on May 31, 2022, and bears interest at a rate of 5% per annum, subject to increase in the event of default. Interest on the Calm Note is payable in arrears and may be paid in cash, shares of Series E Preferred Stock or a combination thereof. We recorded derivative liabilities for the conversion feature and the Calm Warrants related to the issuance of the Calm Note on July 8, 2019, resulting in a debt discount of $1,369.

On April 17, 2020, we and Calm entered into an amended and restated the Calm Note in order to provide, among other items, that Calm shall not have the right to convert the shares of Series E Preferred Stock issued in connection with the Calm Note into shares of Common Stock to the extent that such conversion would cause Calm to beneficially own in excess of the Beneficial Ownership Limitation, initially defined as 4.99% of the number of shares of the Common Stock outstanding immediately after giving effect to the issuance of shares of Common Stock issuable upon conversion of the Series E Preferred Stock.

On April 22, 2020, we further amended and restated the Calm Note, which had been transferred from Calm to B3D in a private transaction, in order to (i) reflect the transfer of the Calm Note to B3D and (ii) provide for the conversion of the Calm Note directly into Common Stock instead of into shares of the Company’s Series E Convertible Preferred Stock. Aside from the changes outlined above, the original terms of the Calm Note, including the underlying conversion price and the number of shares of Common Stock that may ultimately be issued in connection with the Calm Note, remain in effect and have not been changed. During the second quarter of 2020, the holder of the Calm Note elected to convert all $2,500 of principal into shares of Common Stock at a conversion price of $0.525. As a result, $9,200 of derivative liability was settled and reclassified to equity, we wrote off $947 of unamortized debt discount and $154 of unamortized debt issuance costs, and 4,761,906 shares of Common Stock were issued.

Relocation of Corporate Headquarters and Global Support Team

On October 21, 2019, the Company relocated its corporate office functions and its Global Support Center in New York City from 780 Third Avenue to 254 W 31st Street. The new XpresSpa Global Support Center houses all corporate employees and the move yielded a cost reduction in occupancy expenses of approximately $360 annually.

Reverse Stock Split

On June 11, 2020, the Company effected a 1-for-3 reverse stock split, whereby every three shares of its Common Stock was reduced to one share of its Common Stock and the price per share of its Common Stock was multiplied by 3. All references to shares and per share amounts have been adjusted to reflect the reverse stock split.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Our Strategy and Outlook

We believe that our company is well positioned to benefit from consumers’ growing interest in travel health and wellness and increasing demand for health and wellness related services and products.

XpresSpa was created for travelers to address the stress and idle time spent at the airport, allowing travelers to spend this time relaxing and focusing on personal care and wellness. It is a well-recognized and popular airport spa brand with a dominant market share in the United States, with nearly three times the number of domestic locations as its closest competitor.

Travel needs are changing based on new health and passenger safety concerns resulting from the COVID-19 pandemic. Therefore, in 2020 we created a companion company, XpresCheck, which is also in airports and which offers COVID-19 testing and other medical diagnostic testing services to airport employees and the traveling public.

Further, the Company is developing a travel health and wellness brand that is positioned for a post-pandemic world and that leverages its historic travel wellness experience and newly acquired healthcare expertise. The Company is preparing a launch of a Travel Health and Wellness company delivering on-demand access to integrated healthcare through technology and personalized services.

The Company sees this concept evolution as a significant opportunity to be a category innovator in a new niche industry where it can leverage technology in addition to its existing real estate and airport experience in providing travelers with peace of mind and access to integrated care. The brand name of this concept will be announced at a later date.

While COVID-19 testing will be available under this new brand, the broader suite of services may include: pre-travel health and wellness planning, on-site medical services such as metabolic panel testing, anxiety care, and convenient travel care; virtual chat care and video care through a partnership with an established telemedicine company; and access to virtual wellness care such as guided meditations and yoga.

Comparable Store Sales

XpresSpa regularly measures comparable store sales, which it defines as current period sales from stores opened more than 12 months compared to those same stores’ sales in the prior year period (“Comp Store Sales”). The measurement of Comp Store Sales on a daily, weekly, monthly, quarterly and year-to-date basis provides an additional perspective on XpresSpa’s total sales growth when considering the influence of new unit contribution. A reconciliation between Comp Store Sales and total revenue as reported on the financial statements is presented below:

Year ended December 31, 2020 Year ended December 31, 2019 % Inc/(Dec)

Non-Comp Non-Comp

Comp Store Store Total Comp Store Store Total Comp Store

Comp Store Sales decreased 83.7% during the year ended December 31, 2020 as compared to the same period in 2019. As of December 31, 2020, XpresSpa had 45 open locations; during the year, XpresSpa opened one new location, and closed seven locations while having 51 open locations as of December 31, 2019. The decrease in Comp Store sales was due to the XpresSpa spa closures as a result of the COVID-19 pandemic.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Full-Year 2020 and 2019 Adjusted EBITDA Loss (Non-GAAP Measure)

Years ended December 31,

Cost of sales

Product and other operating costs 2,884 7,176

Depreciation and amortization 5,210 6,124

Impairment/disposal of assets 15,356 6,090

Other non-operating income (expense), net 858 (4,074)

Loss from operations before income taxes (92,225) (20,676)

Income tax benefit (7) 146

Net loss (income) attributable to noncontrolling interests 1,744 (693)

Net loss attributable to common shareholders $ (90,488) $ (21,223)

Add back:

Depreciation and amortization 5,210 6,124

Impairment/disposal of assets 15,356 6,090

Stock-based compensation expense 1,328 335

Adjusted EBITDA loss $ (18,210) $ (3,323)

We use GAAP and non-GAAP measurements to assess the trends in our business. We review its Adjusted EBITDA, a non-GAAP measure, which we define as earnings before interest, tax, depreciation and amortization expense, excluding merger and acquisition, integration and one-time costs and stock-based compensation.

Adjusted EBITDA is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. Reconciliations of operating loss from continuing operations for the Company for the years ended December 31, 2020 and 2019 to Adjusted EBITDA loss are presented in the tables above.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

We consider Adjusted EBITDA to be an important indicator for the performance of our business, but not a measure of performance or liquidity calculated in accordance with U.S. GAAP. We have included this non-GAAP financial measure because management utilizes this information for assessing our performance and liquidity, and as an indicator of our ability to make capital expenditures and finance working capital requirements. We believe that Adjusted EBITDA is a measurement that is commonly used by analysts and some investors in evaluating the performance and liquidity of companies such as us. In particular, we believe that it is useful for analysts and investors to understand this indicator because it excludes transactions not related to our core cash operating activities. We believe that excluding these transactions allows investors to meaningfully analyze the performance of our core cash operations. Adjusted EBITDA should not be considered in isolation or as an alternative to cash flow from operating activities or as an alternative to operating income or as an indicator of operating performance or any other measure of performance derived in accordance with GAAP. In evaluating our performance as measured by Adjusted EBITDA, we recognize and consider the limitations of this measurement. Adjusted EBITDA does not reflect our obligations for the payment of income taxes, interest expense, or other obligations such as capital expenditures. Accordingly, Adjusted EBITDA is only one of the measurements that management utilizes.

Results of Operations

Revenue

We recognize revenue from the sale of XpresSpa products and services when the services are rendered at our stores and from the sale of products at the time products are purchased at our stores or online (usually by credit card), net of discounts and applicable sales taxes. Accordingly, we recognize revenue for our single performance obligation related to both in-store and online sales at the point at which the service has been performed or the control of the merchandise has passed to the customer. Revenues from the XpresSpa retail and e-commerce businesses are recorded at the time goods are shipped. We exclude all sales taxes assessed to our customers. Sales taxes assessed on revenues are included in accounts payable, accrued expenses and other current liabilities in the consolidated balance sheets until remitted to state agencies.

Other revenue in 2020 primarily represents fees earned through strategic partnerships and product placement arrangement in our spas. Revenue in 2019 includes one-time intellectual property licenses as well as the sale of certain of our intellectual property. Revenue from patent licensing is recognized when we transfer promised intellectual property rights to purchasers in an amount that reflects the consideration to which we expect to be entitled in exchange for those intellectual property rights.

Through its XpresCheckTM Wellness Centers and under the terms of Management Services Agreements (“MSAs”) with a physician’s practice, the Company offers testing services to airline employees, contractors, concessionaire employees, TSA officers and U.S. Customs and Border Protection agents, as well as the traveling public. The Company entered into MSAs with professional medical service entities that provide healthcare services to patients. Under the terms of the MSAs, XpresTest provides office space, equipment, supplies, non-licensed staff, and management services to be used for the purpose of COVID-19 and other medical diagnostic testing in return for a management fee. XpresTest recognized $80 of revenue initially under the MSAs, however as a result of uncertainties around the cash flows of the XpresCheckTM Wellness Centers, the Company subsequently concluded that the collectability criteria to qualify as a contract under ASC 606 was not met, and no further revenue associated with the monthly management fee will be recognized until a subsequent reassessment results in the MSAs meeting the collectability criteria.

Cost of sales

Cost of sales consists of at the spa-level and wellness center-level. These costs include all costs that are directly attributable to the location’s operations and include:

● payroll and related benefits for the location’s operations and management;

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● rent, percentage rent and occupancy costs;

● the cost of merchandise, including testing kits;

● freight, shipping and handling costs;

● production costs;

● costs associated with sourcing operations.

Cost of sales associated with revenue from intellectual property mainly includes expenses incurred in connection with the Company’s patent licensing and enforcement activities, patent-related legal expenses paid to external patent counsel (including contingent legal fees), licensing and enforcement related research, consulting and other expenses paid to third parties, as well as related internal payroll expenses.

Depreciation and amortization

Property and equipment is stated at cost, net of accumulated depreciation. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. The useful lives of our property and equipment is based on estimates of the period over which we expect the assets to be of economic benefit to us. Our property and equipment assets primarily consist of leasehold improvements to our stores and are amortized over the shorter of the useful life of the asset or the term of the lease.

Amortization of our intangible assets are recognized on a straight-line basis over the remaining useful life of the intangible assets.

Impairment/disposal of assets

We test our long-lived assets (which primarily includes property and equipment and right of use lease asset) for impairment on at least an annual basis or whenever circumstances indicate that the carrying amount may not be recoverable. Long-lived assets are tested for impairment at the lowest level at which there are identifiable operating cash flows. An impairment loss is recognized if the carrying amount of a fixed asset (asset group) is not recoverable and exceeds its fair value.

Impairment charges related to our amortized, intangible assets are recorded when an impairment indicator exists and the carrying amount of the related asset exceeds its fair value.

General and administrative

General and administrative expenses include management and administrative personnel, public and investor relations, overhead/office costs, insurance legal fees, accounting fees and various other professional fees, as well as sales and marketing costs and stock-based compensation for management and administrative personnel.

(Loss) gain on revaluation of warrants and conversion option

(Loss) gain on revaluation of warrants and conversion options is primarily comprised of adjustments to the fair value of the derivative conversion option of the debt instruments and the fair value of the warrants.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Non-operating income (expense)

Non-operating income (expense) primarily includes gain on equity investments and bank charges.

Income taxes

As of December 31, 2020, deferred tax assets generated from our activities in the United States were offset by a valuation allowance because realization depends on generating future taxable income, which, in our estimation, is not more likely than not to be generated before such net operating loss carryforwards expire.

Year ended December 31, 2020 compared to the year ended December 31, 2019

Revenue

Year ended December 31,

During the year ended December 31, 2020, total revenues decreased $40,130, or 83%, due to the temporary closure of spas on March 24, 2020 as a result of the COVID-19 pandemic, as compared to the comparable prior year period. In addition, the Company closed a net of six locations during the year ended December 31, 2020. During 2020, we generated 84% of our revenues from services, 12% of our revenues from retail sales, and 4% from other revenue.

Cost of sales

Year ended December 31,

The decrease in cost of sales of $25,871, or 68%, was due to the decrease in revenues as a result of spa closure because of the COVID-19 pandemic. We had 2 open spa locations as of December 31, 2020, and 51 open locations as of December 31, 2019. The largest component in the cost of sales are labor costs at the location-level, as our spa associates receive commission-based compensation as well as additional incentives based on individual and spa-level performance and our wellness center associates receive an hourly wage. Cost of sales also includes rent and related occupancy costs, which can primarily include rent based on percentage of sales, as well as product costs directly associated with the procurement of retail inventory, testing kits, and other operating costs.

Depreciation and amortization

Year ended December 31,

Depreciation and amortization $ 5,210 $ 6,124 $ (914)

During the year ended December 31, 2020, depreciation and amortization expense decreased $914, or 15%, compared to the depreciation and amortization expense recorded during the year ended December 31, 2019. The decrease was primarily due to the write-off of the stores that were permanently closed during the year ended December 31, 2020. Fewer locations resulted in lower amortization of leasehold improvements. Depreciation and amortization expense also decreased as a result of the impairments and disposals of fixed assets during the years ended December 31, 2020 and 2019.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Impairment/disposal of assets

Year ended December 31,

We completed an assessment of our property and equipment and right of use lease assets for impairment as of December 31, 2020 and 2019. Based upon the results of the impairment test, we recorded an impairment of property and equipment and right of use lease assets of approximately $4,954 and $6,341, respectively, in the year ended December 31, 2020. The expense was primarily related to the impairment of leasehold improvements made to certain XpresSpa locations and right of use lease assets where as a result of the COVID-19 pandemic, management determined that the location’s discounted future cash flow was not enough to support the carrying value of the leasehold improvements and right of use lease assets over the remaining lease term.

(Loss) gain on revaluation of warrants and conversion option

Year ended December 31,

Loss on revaluation of warrants and conversion option in 2020 is primarily comprised of adjustments to the fair value of the derivative conversion option of the debt instruments and the fair value of the warrants, including losses of $11,990, $8,985, $15,480 and $14,692 related to the B3D Note, the Calm Note, the Calm Warrants and the Class A Warrants, respectively, during the year ended December 31, 2020. A gain of $2,170 in 2019 relates to the Calm Private Placement and the B3D Note revaluation during the year ended December 31, 2019.

General and administrative

Year ended December 31,

During the year ended December 31, 2020, general and administrative expenses increased by $1,621, or 11%. This increase was due primarily to the accrual of certain legal expenses associated with existing litigation of approximately $2,400 and an increase in stock-based compensation expense of $996, offset by an overall reduction in corporate overhead expenses and lower professional fees as compared to the 2019 period. See Note 18. Commitments and Contingencies to the consolidated financial statements for further discussion regarding the litigation accrual.

Interest expense

Year ended December 31,

Interest expense decreased by $1,068, or 37%, due primarily to the conversion of substantially all debt principal balances to common stock during second and third quarters of 2020.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Non-operating income (expense), net

Year ended December 31,

Non-operating income (expense), net $ 858 $ (4,074) $ 4,932

The following is a summary of the transactions included in non-operating income (expense), net for the years ended December 31, 2020 and 2019:

Year ended December 31,

Issuance of Series F Preferred Stock — (1,131)

Issuance of warrants — (689)

Issuance of common stock in lieu of cash payments on debt — (105)

Gain on equity investments 1,284 —

Loss on extinguishment of debt (182) —

Bank fees and financing charges (244) (408)

Other — (157)

As of December 31, 2020, the equity investment in Route1 had a readily determinable fair value of $1,768. We recorded an unrealized gain of $1,284 connection with the remeasurement of the common shares and warrants of Route 1 it obtained in the 2018 sale of Group Mobile to Route 1.

In 2019, we entered into the Third Amendment Agreement to the 5% Secured Convertible Notes (the “Third Amendment”) whereby the holders agreed to convert their notes then held into Common Stock. The Third Amendment reduced the conversion price from $37.20 per share to $7.44 per share. As a result of the reduction in the conversion price, we recorded a debt conversion expense of $1,584 to account for the additional consideration paid over what was agreed to in the original note agreement.

In 2019, issuance expense was recorded for the issuance of 8,996 shares of Series F Convertible Preferred Stock, which represents the fair value of the shares as of the date issued.

See the notes to the consolidated financial statements for additional information on the above transactions.

Non-operating income (expense) will be affected by the adjustments to the fair value of our equity investment, which could fluctuate materially from period to period. Fair value of these instruments depends on a variety of assumptions.

Income Taxes

As of December 31, 2020, our estimated aggregate total NOLs were $150,926 for U.S. federal purposes, expiring 20 years from the respective tax years to which they relate, and $60,269 for U.S. federal purposes with an indefinite life due to new regulations in the Tax Act of 2017. The NOL amounts are presented before Internal Revenue Code, Section 382 limitations. The Tax Reform Act of 1986 imposed substantial restrictions on the utilization of NOL and tax credits in the event of an ownership change of a corporation. Thus, our ability to utilize all such NOL and credit carryforwards may be limited. The CARES Act was enacted on March 27, 2020 and provides favorable changes to tax law for businesses impacted by COVID-19. However, we do not anticipate the income tax law changes will materially benefit us.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

We did not have any material unrecognized tax benefits as of December 31, 2020. We do not expect to record any additional material provisions for unrecognized tax benefits within the next year.

Liquidity and Capital Resources

Effective March 24, 2020, we temporarily closed all global XpresSpa locations, largely due to the categorization of the spa locations by local jurisdictions as “non-essential services” in connection with the recent COVID-19 outbreak. We look to reopen our spa locations and resume normal operations once such restrictions are lifted and airport traffic returns to sufficient levels to support operations profitably. On March 25, 2020, we announced that during this time, we began conversations with certain COVID-19 testing partners to develop a model for testing in U.S. airports. In the balance of 2020 after such announcement we successfully launched our XpresCheckTM Wellness Centers, offering such testing services, as described above under “—Recent Developments—Newly launched XpresCheckTM Wellness Centers.”

Similar to many businesses in the travel sector, our business was materially adversely impacted by thecoronavirus outbreak and associated restrictions on travel that have been implemented. The extent to which the coronavirus continues to impact our results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the coronavirus and the actions to contain the coronavirus or treat its impact, among others.

As a result of the coronavirus outbreak, we saw a material decline in demand across all our locations, which resulted in a materially adverse impact on our cash flows from operations and which caused an immediate liquidity crisis in the first half of 2020. To address this crisis, we secured financing in 2020 totaling approximately $110,619 through several registered direct common stock offerings, and to a lesser extent by obtaining a cash advance on our accounts receivable balances, an additional loan from our senior secured lender and a loan through the Paycheck Protection Program (See “Recent Developments” above).

As of December 31, 2020, we had approximately $89,801 of cash and cash equivalents and total current assets of $91,779. Our total current liabilities balance, which primarily includes accounts payable, accrued expenses, the current portion of promissory note and the current portion of operating lease liabilities was $13,477 as of December 31, 2020. The working capital surplus was $78,302 as of December 31, 2020, compared to a working capital deficiency of $12,287 as of December 31, 2019. The increase in the working capital surplus was primarily due to the net proceeds received as a result of registered direct offerings in 2020, which are discussed in detail in “—Recent Developments” above-K and disclosed in the notes to the consolidated financial statements.

Our primary liquidity and capital requirements are for the maintenance of our current XpresSpa locations and brand, as well as the expansion of the XpresCheckTM Wellness Centers. During the year ended December 31, 2020, we used $25,012 in operations, we incurred $3,969 of capital expenditures, and distributed $244 to noncontrolling interests. This was offset by the receipt of $110,619 of net proceeds from direct offerings and $5,653 in proceeds from the Paycheck Protection Program. We expect to utilize our cash and cash equivalents, along with any cash flows from operations, to provide capital to support the growth of our business and maintaining our existing XpresSpa airport locations, growth in the XpresCheck Wellness Center brand, and supporting corporate functions.

Cash flows

Year ended December 31,

Net cash used in operating activities $ (25,012) $ (113) $ (24,899)

Net cash used in investing activities $ (4,349) $ (2,275) $ (2,074)

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Operating activities

During the year ended December 31, 2020, net cash used in operating activities was $25,012, as compared to net cash used in operating activities in 2019 of $113. The increase in net cash used in operating activities was primarily due the opening of our new XpresCheck Wellness Centers brand, offset somewhat by savings related to the closure of all spa locations on March 24, 2020 as a result of the COVID-19 pandemic and the payment of accounts payable and certain accrued expenses.

Investing activities

During the year ended December 31, 2020, net cash used in investing activities totaled $4,349, compared to net cash used in investing activities during the year ended December 31, 2019 of $2,275. Cash used in 2020 was used to acquire primarily leasehold improvements for new openings of XpresCheck locations and the development of a new website for the XpresCheck brand.

We expect that net cash used in investing activities will increase as we intend to continue to open new XpresCheck locations and develop supporting infrastructure and systems.

Financing activities

During the year ended December 31, 2020, net cash provided by financing activities totaled $117,225, compared to $1,138 during the comparable prior year period. Included in the net cash provided by financing activities in 2020 were the proceeds from the registered direct offerings of our common stock, the SBA’s Paycheck Protection Program, the Credit Cash loan, and an increase in the B3D note.

Off-Balance Sheet Arrangements

We have no obligations, assets or liabilities that would be considered off-balance sheet arrangements. We do not participate in transactions that create relationships with unconsolidated entities or financial partnerships, often referred to as variable interest entities, which would have been established for the purpose of facilitating off-balance sheet arrangements.

Critical Accounting Estimates

We believe the following accounting estimates to be the most critical estimates we used in preparing our consolidated financial statements for the year ended December 31, 2020.

Impairment of Long-Lived Assets

Long-lived assets are tested for impairment at the lowest level at which there are identifiable operating cash flows, which is at the individual spa or clinic location for the XpresSpa and XpresCheck businesses. The Company’s long-lived assets consist primarily of leasehold improvements and right to use lease assets for each of its locations (considered the asset group). The Company reviews its long-lived assets for recoverability yearly or sooner if events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. If indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset group in question to its carrying amount. An impairment loss is recognized if it is determined that the long-lived asset group is not recoverable and is calculated based on the excess of the carrying amount of the long-lived asset group over the long-lived asset groups fair value. The Company estimates the fair value of long-lived assets using present value income approach. Future cash flow was calculated based on forecasts over the estimated remaining useful life of the asset group, which for each of the Company’s locations, is the remaining term of the operating lease. The Company estimates it weighted average cost of capital as the discount rate since it expects that this rate incorporates not only the time value of money but also the expectations regarding future cash flows and an appropriate risk premium.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

The estimates used to calculate future cash flows are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimated fair value of each asset group. The Company will calculate the future cash flow using what it believes to be the most predictable of several scenarios. Typically, the changes in assumptions run under different business scenarios would not result in a material change in the assessment of the potential impairment or the impairment amount of a locations long-lived asset group. But if these estimates or related assumptions were to change materially, the Company may be required to record an impairment charge.

Intangible assets

Intangible assets include trade names, customer relationships, and technology, which were primarily acquired as part of the acquisition of XpresSpa in December 2016 and were recorded based on the estimated fair value in purchase price allocation. The intangible assets are amortized over their estimated useful lives, which are periodically evaluated for reasonableness. Gain or loss on dispositions of intangible assets is reflected in general and administrative expense in the consolidated statements of operations and comprehensive loss.

The Company’s intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of the Company’s intangible assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. We determine fair value by using the relief from royalty method. These estimates and assumptions could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge. Fair value estimates are made at a specific point in time, based on relevant information. These estimates are subjective in nature and involve uncertainties and matters of significant judgments and therefore cannot be determined with precision. Changes in assumptions could significantly affect the estimates. If these estimates or material related assumptions change, the Company may be required to record impairment charges related to its intangible assets.

Fair value measurements

The Company’s financial instruments consist principally of cash and cash equivalents, receivables, debt, equity investments, and derivative liabilities. The fair value of a financial instrument is the amount that would be received in an asset sale or paid to transfer a liability in an orderly transaction between unaffiliated market participants. Assets and liabilities measured at fair value are categorized based on whether the inputs are observable in the market and the degree that the inputs are observable. The categorization of financial instruments within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The hierarchy is prioritized into three levels (with Level 3 being the lowest) defined as follows:

Level 1: Quoted prices in active markets for identical assets or liabilities that the entity has the ability to access.

Level 2: Observable inputs other than prices included in Level 1, such as quoted prices for similar assets and liabilities in active markets; quoted prices for identical or similar assets and liabilities in markets that are not active; or other inputs that are observable or can be corroborated with observable market data.

Level 3: Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets and liabilities. This includes certain pricing models, discounted cash flow methodologies, and similar techniques that use significant unobservable inputs.

There have been no changes in Level 1, Level 2, and Level 3 and no changes in valuation techniques for these assets or liabilities for the years ended December 31, 2020 and 2019.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Investments in public companies are carried at fair value based on quoted market prices. Investments in equity securities of nonpublic entities without readily determinable fair values are carried at cost minus impairment, if any, plus or minus changes resulting from observable price changes in orderly transactions for the identical or a similar investment of the same issuer. The Company reviews its equity securities without readily determinable fair values on a regular basis to determine if the investment is impaired. For purposes of this assessment, the Company considers the investee’s cash position, earnings and revenue outlook, liquidity and management ownership, among other factors, in its review. If management’s assessment indicates that an impairment exists, the Company estimates the fair value of the equity investment and recognizes in current earnings an impairment loss that is equal to the difference between the fair value of the equity investment and its carrying amount. Equity investments are recorded in other assets on the accompanying consolidated balance sheets.

Derivative instruments

The Company recognizes all derivative instruments as either assets or liabilities in the consolidated balance sheets at their respective fair values. The Company’s derivative instruments are revalued at each reporting date, with changes in the fair value of the instruments included in the consolidated statements of operations and comprehensive loss as non-operating income (expense). The Company reviews the terms of features embedded in non-derivative instruments to determine if such features require bifurcation and separate accounting as derivative financial instruments. Equity-linked derivative instruments are evaluated in accordance with Accounting Standard Codification 815-40, “Contracts in an Entity’s Own Equity,” to determine if such instruments are indexed to the Company’s own stock and qualify for classification in equity.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is provided for the amount of deferred tax assets that, based on available evidence, are not more likely than not to be realized. Tax benefits related to excess deductions on stock-based compensation arrangements are recognized when they reduce taxes payable.

In assessing the need for a valuation allowance, we look at cumulative losses in recent years, estimates of future taxable earnings, feasibility of tax planning strategies, the ability to realize tax benefit carryforwards, and other relevant information. Valuation allowances related to deferred tax assets can be impacted by changes to tax laws, changes to statutory tax rates and future taxable earnings. Ultimately, the actual tax benefits to be realized will be based upon future taxable earnings levels, which are very difficult to predict. In the event that actual results differ from these estimates in future periods, we will be required to adjust the valuation allowance.

Significant judgment is required in evaluating our federal, state and foreign tax positions and in the determination of our tax provision. Despite management's belief that our liability for unrecognized tax benefits is adequate, it is often difficult to predict the final outcome or the timing of the resolution of any particular tax matters. We may adjust these accruals as relevant circumstances evolve, such as guidance from the relevant tax authority, our tax advisors, or resolution of issues in the courts. Our tax expense includes the impact of accrual provisions and changes to accruals that it considers appropriate. These adjustments are recognized as a component of income tax expense entirely in the period in which new information is available. We record interest related to unrecognized tax benefits in interest expense and penalties in the accompanying consolidated statements of operations and comprehensive loss as general and administrative expenses.

We recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income tax positions are measured at the largest amount that is greater than 50% of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs.

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

Recently adopted accounting pronouncements

Accounting Standards Update No. 2016-13, Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (“ASU No. 2016-13”)

On January 1, 2020, the Company adopted ASU No. 2016-13 using a modified-retrospective approach. This standard changes the impairment model for most financial assets that are measured at amortized cost and certain other instruments, including trade receivables, from an incurred loss model to an expected loss model and adds certain new required disclosures. Under the expected loss model, entities will recognize estimated credit losses to be incurred over the entire contractual term of the instrument rather than delaying recognition of credit losses until it is probable the loss has been incurred. Adoption of this standard did not result in an adjustment to opening accumulated deficit and did not have a material impact on the Company’s consolidated financial statements.

Accounting Standards Update No. 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU No. 2018-13”)

On January 1, 2020, the Company adopted ASU No. 2018-13. This amendment provides updates to the disclosure requirements on fair value measures in Topic 820, which includes the changes in unrealized gains and losses in other comprehensive income for recurring Level 3 fair value measurements, the option of additional quantitative information surrounding unobservable inputs and the elimination of disclosures around the valuation processes for Level 3 measurements. The amendments on changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements, and the narrative description of measurement uncertainty have been applied prospectively beginning in the quarter ended March 31, 2020. All other amendments have been applied retrospectively to all periods presented. Adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

Recently issued accounting pronouncements

Accounting Standards Update No. 2020-10—Codification Improvements

Issued in October 2020, this release updates various codification topics by clarifying or improving disclosure requirements to align with the SEC’s regulations. The Company will adopt ASU 2020-10 as of the reporting period beginning January 1, 2021. The adoption of this update is not expected to have a material effect on the Company’s consolidated financial statements.

Accounting Standards Update No. 2020-06—Debt--Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40)

Issued in August 2020, this update is intended to reduce the unnecessary complexity of the current guidance thus resulting in more accurate accounting for convertible instruments and consistent treatment from one entity to the next. Under current GAAP, there are five accounting models for convertible debt instruments. Except for the traditional convertible debt model that recognizes a convertible debt instrument as a single debt instrument, the other four models, with their different measurement guidance, require that a convertible debt instrument be separated (using different separation approaches) into a debt component and an equity or a derivative component. Convertible preferred stock also is required to be assessed under similar models. The Financial Accounting Standard Board (“FASB”) decided to simplify the accounting for convertible instruments by removing certain separation models currently included in other accounting guidance that were being applied to current accounting for convertible instruments. Under the amendments in this update, an embedded conversion feature no longer needs to be separated from the host contract for convertible instruments with conversion features that are not required to be accounted for as derivatives. Consequently, a convertible debt instrument will be accounted for as a single liability measured at its amortized cost and a convertible preferred stock will be accounted for as a single equity instrument measured at its historical cost, as long as no other features require

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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Continued)

bifurcation and recognition as derivatives. The Board also decided to add additional disclosure requirements in an attempt to improve the usefulness and relevance of the information being provided.

The new standard is effective for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

Accounting Standards Update No. 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815)—Clarifying the Interactions between Topic 321, Topic 323, and Topic 815

Issued in January 2020, the amendments in this update affect all entities that apply the guidance in Topics 321, 323, and 815 and (1) elect to apply the measurement alternative or (2) enter into a forward contract or purchase an as option to purchase securities that, upon settlement of the forward contract or exercise of the purchased option, would be accounted for under the equity method of accounting. The Company applies the guidance included in Topic 815 to its derivative liabilities but does not intend on applying the new measurement alternative included in the update. The new standard is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

Accounting Standards Update No. 2019-12—Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes

Issued in December 2019, the amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020. The amendments in this update simplify the accounting for income taxes by removing certain exceptions to guidance in Topic 740. The specific areas of potential simplification were submitted by stakeholders as part of the FASB’s simplification initiative. The Company does not believe the adoption of this standard will have a material impact on its consolidated financial statements.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not required as we are a smaller reporting company.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

Our consolidated financial statements required by this Item are set forth in Item 15 beginning on page F-1 of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain disclosure controls and procedures (as defined in Rule 13a-15(e) promulgated under the Exchange Act that are designed to ensure that information required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer (Principal Financial and Accounting Officer), as appropriate, to allow timely decisions regarding required disclosure.

Under the supervision of and with the participation of our chief executive officer and chief financial officer, we conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2020. Our evaluation as of December 31, 2019 identified a material weaknesses in our internal control over financial reporting, which remained unmitigated as of December 31, 2020, as noted below in Report of Management on Internal Control over Financial Reporting. Based on their evaluation, our chief executive officer and chief financial officer concluded that the Company’s disclosure controls and procedures were not effective as of December 31, 2020 to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and to provide reasonable assurance that such information is accumulated and communicated to our management, including our chief executive officer and chief financial officer, as appropriate to allow timely decisions regarding required disclosure.. Notwithstanding this conclusion, management believes that the consolidated financial statements in this Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows in conformity with GAAP.

Report of Management on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) promulgated under the Exchange Act as a process designed by, or under the supervision of, our principal executive officer and principal financial and accounting officer and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with GAAP and includes those policies and procedures that:

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Because of our inherent limitations, our internal control over financial reporting may not prevent or detect misstatements. Therefore, even those systems determined to be effective can provide only reasonable assurance with respect to financial statement preparation and presentation. Projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2020. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013 Framework).

Based on our evaluation, management concluded that our internal control over financial reporting was not effective as of December 31, 2020 due to a material weakness in our internal controls over our financial close and reporting process identified in 2019 and remaining unmitigated as of December 31, 2020. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented or detected and corrected on a timely basis. As this deficiency created a reasonable possibility that a material misstatement would not be prevented or detected in a timely basis, management concluded that the control deficiency represented a material weakness and accordingly our internal control over financial reporting was not effective as of December 31, 2019 and December 31, 2020. Management concluded that additional formal procedures should be implemented in the financial close and reporting process to ensure that appropriate and timely reviews occur on all financial reporting analysis. Management also concluded that as of December 31, 2020, we still did not have a sufficient complement of corporate personnel with appropriate levels of accounting and controls knowledge and experience commensurate with our financial reporting requirements to appropriately analyze, record and disclose accounting matters completely and accurately.

The material weakness in our internal control over financial reporting resulted in proposed audit adjustments to the Company’s consolidated financial statements in the areas of lease accounting, long-lived asset impairment and accrued liabilities accounting as of and for the year ended December 31, 2019.

Remediation Plan for Material Weakness in Internal Control over Financial Reporting

We and our Board treat the controls surrounding, and the integrity of, our financial statements with the utmost priority. Management is committed to the planning and implementation of remediation efforts to address control deficiencies and any other identified areas of risk. These remediation efforts are intended to both address the identified material weakness and to enhance our overall financial control environment. In particular:

Following identification of this control deficiency, commenced remediation efforts by implementing modifications to better ensure that the Company has appropriate and timely reviews on all financial reporting analysis. The material weakness in our internal control over financial reporting will not be considered remediated until these modifications are implemented, in operation for a sufficient period of time, tested, and concluded by management to be designed and operating effectively. In addition, as we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to address control deficiencies or determine to modify our remediation plan. Management will test and evaluate the implementation of these modifications during 2021 to ascertain whether they are designed and operating effectively to provide reasonable assurance that they will prevent or detect a material misstatement in the Company’s financial statements.

The steps we took to address the deficiencies identified included:

• we appointed a permanent Chief Financial Officer in December 2020;

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We are committed to maintaining a strong internal control environment, and we believe the measures described above will strengthen our internal control over financial reporting and remediate the material weakness we have identified. Our remediation efforts have begun, and we will continue to devote significant time and attention to these remedial efforts. As we continue to evaluate and work to improve our internal control over financial reporting, management may determine to take additional measures to strengthen controls or to modify the remediation plan described above, which may require additional implementation time.

As noted above, we believe that, as a result of management’s in-depth review of its accounting processes, and the additional procedures management has implemented, there are no material inaccuracies or omissions of material fact in this Form 10-K and, to the best of our knowledge, we believe that the consolidated financial statements in this Form 10-K fairly present in all material respects our financial condition, results of operations and cash flows in conformity with GAAP.

Changes in Internal Control over Financial Reporting

Other than as set forth in the foregoing paragraph, there have been no changes in our internal control over financial reporting that occurred during the quarter ended December 31, 2020 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

ITEM 9B. OTHER INFORMATION

None.

PART III

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 10.

ITEM 11. EXECUTIVE COMPENSATION

Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 11.

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ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC ” and is incorporated by reference in this Item 12.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 13.

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

Information called for by this Item will be included in an amendment to this Annual Report on Form 10-K to be filed with the SEC and is incorporated by reference in this Item 14.

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PART IV

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a)(1) Consolidated Financial Statements. For the financial statements included in this Annual Report on Form 10-K, see “Index to the Financial Statements” on page F-1.

(a)(2) Consolidated Financial Statement Schedules. All schedules are omitted because they are not applicable or because the required information is included in the financial statements or notes thereto.

(a)(3) Exhibits. The following exhibits are filed as part of, or incorporated by reference into, this Annual Report on Form 10-K.

Exhibits Index

Exhibit No. Description

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Exhibit No. Description

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Exhibit No. Description

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Exhibit No. Description

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Exhibit No. Description

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Exhibit No. Description

21* Subsidiaries of XpresSpa Group, Inc.

23.1* Consent of CohnReznick LLP, independent registered public accounting firm

23.2* Consent of Friedman LLP, independent registered public accounting firm

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Exhibit No. Description

101.INS* XBRL Instance Document.

101.SCH* XBRL Taxonomy Extension Schema Document

101.CAL* XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF* XBRL Taxonomy Extension Definition Linkbase Document

101.LAB* XBRL Taxonomy Extension Label Linkbase Document

101.PRE* XBRL Taxonomy Extension Presentation Linkbase Document

* Filed herewith.

** Furnished herewith.

Management contract or compensatory plan or arrangement.

†† Certain portions have been omitted pursuant to a confidential treatment request. Omitted information has been filed separately with the SEC.

ITEM 16. FORM 10-K SUMMARY

None.

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Exhibit XpresSpa Group, Inc. and Subsidiaries

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

Page

Report of Independent Registered Public Accounting Firm F-2

Consolidated Balance Sheets F-5

Consolidated Statements of Operations and Comprehensive Loss F-6

Consolidated Statements of Changes in Stockholders’ Equity (Deficit) F-8

Consolidated Statements of Cash Flows F-9

Notes to the Consolidated Financial Statements F-10 - F-66

F-1

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Report of Independent Registered Public Accounting Firm

To the Board of Directors and

Stockholders of XpresSpa Group, Inc.

Opinion on the Financial Statements

We have audited the accompanying consolidated balance sheet of XpresSpa Group, Inc. and subsidiaries (the “Company”) as of December 31, 2020, and the related consolidated statements of operations, comprehensive loss, stockholders’ equity, and cash flows for the year ended December 31, 2020, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2020, and the results of its operations and its cash flows for the year ended December 31, 2020, in conformity with accounting principles generally accepted in the United States of America.

Basis for Opinion

These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. Our audit included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audit also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audit provides a reasonable basis for our opinion.

Critical Audit Matters

The critical audit matters communicated below are matters arising from the current period audit of the financial statements that were communicated or required to be communicated to the audit committee and that: (1) relate to accounts or disclosures that are material to the financial statements and (2) involved our especially challenging, subjective, or complex judgments. The communication of critical audit matters does not alter in any way our opinion on the financial statements, taken as a whole, and we are not, by communicating the critical audit matters below, providing separate opinions on the critical audit matters or on the accounts or disclosures to which they relate.

Valuation of Long-Lived Assets

As described in Note 2 to the financial statements, the Company evaluates long-lived assets for recoverability if events or changes in circumstances indicate that the carrying value of long-lived assets may not be recoverable. If indicators are present, the Company performs a recoverability test by comparing the sum of the estimated undiscounted future cash flows attributable to the asset group in question to its carrying amount. An impairment loss is recognized if it is determined that the long-lived asset group is not recoverable and is calculated based on the excess of the carrying amount of the long-lived asset group over the long-lived asset group fair value. The impairment tests require management to make assumptions when estimating the fair value of the asset groups, including financial projections.

We identified the valuation of long-lived assets as a critical audit matter because of certain significant assumptions management makes in determining the fair value of the asset groups, including projections. The significant judgements made by management resulted in a high degree of auditor judgment and an increased audit effort in performing procedures. This is made more challenging by the uncertainty of the potential impact to cash flows due to the COVID-19 pandemic.

Our audit procedures related to the Company’s valuation of long-lived assets included the following, among others, (i) testing management’s process for determining fair value estimates; (ii) evaluating the reasonableness of the significant assumptions used by management related to financial performance, and discount rates. Evaluating management’s

F-2

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assumptions related to financial performance involved evaluating whether the assumptions were reasonable considering (i) current and historical trends of the underlying assets; and (ii) engaging in discussions with management to evaluate the Company’s plans to develop an asset or dispose of an asset before the end of its estimated useful life. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the reasonableness of the significant assumptions related to the discount rate.

Valuation of Intangible Assets

As described in Note 2 to the financial statements, the Company’s intangible assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. In assessing the recoverability of the Company’s intangible assets, the Company must make estimates and assumptions regarding future cash flows and other factors to determine the fair value of the respective assets. These estimates could have a significant impact on whether an impairment charge is recognized and also the magnitude of any such charge.

We identified the valuation of intangible assets as a critical audit matter because of certain significant assumptions management makes in determining the fair value of the assets. The significant judgments made by management resulted in a high degree of auditor judgement and an increased audit effort in performing procedures. This is made more challenging by the uncertainty of the potential impact to cash flows due to the COVID-19 pandemic.

Our audit procedures related to the Company’s valuation of its intangible assets included the following, among others, (i) testing management’s process for determining fair value estimates; (ii) evaluating the appropriateness of the method used; (iii) evaluating the reasonableness of the significant assumptions used by management related to revenue growth rates, discount rates, and royalty rates. Evaluating management’s assumption related to revenue growth rates involved evaluating whether the assumption was reasonable considering (i) current and historical trends of the underlying asset; and (ii) whether the revenue growth rates were consistent with evidence obtained in other areas of the audit. Professionals with specialized skill and knowledge were used to assist in evaluating (i) the appropriateness of the valuation method and (ii) the reasonableness of the significant assumptions used.

/s/ Friedman LLP

We have served as the Company’s auditor since 2020.

East Hanover, New Jersey

F-3

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Report of Independent Registered Public Accounting Firm

The Board of Directors and

Stockholders of XpresSpa Group, Inc.:

Opinion on the Consolidated Financial Statements

We have audited the accompanying consolidated balance sheets of XpresSpa Group, Inc. and subsidiaries (the Company) as of December 31, 2019 and 2018, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficit) and cash flows for the years then ended, and the related notes (collectively referred to as the consolidated financial statements). In our opinion, the consolidated financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2019 and 2018, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2019, in conformity with accounting principles generally accepted in the United States of America.

Substantial Doubt about the Company’s Ability to Continue as a Going Concern

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the consolidated financial statements, based on its projections, the Company anticipates that during 2020, it will not have sufficient capital to repay its current obligations. Furthermore, the Company’s recurring losses from operations, working capital deficiency and stockholders’ deficit raises substantial doubt about its ability to continue as a going concern. Management's plans in regard to these matters are also described in Note 1. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

Basis for Opinion

These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (PCAOB) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we are required to obtain an understanding of internal control over financial reporting, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ CohnReznick LLP

We have served as the Company’s auditor since 2015.

Jericho, New York

F-4

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XpresSpa Group, Inc. and Subsidiaries

CONSOLIDATED BALANCE SHEETS

(In thousands, except share and per share data)

December 31, December 31,

Current assets

Cash and cash equivalents $ 89,801 $ 2,184

Property and equipment, net 4,161 8,064

Intangible assets, net 870 6,783

Operating lease right of use assets, net 3,034 8,254

Current liabilities

Accounts payable, accrued expenses and other $ 7,382 $ 12,551

Current portion of operating lease liabilities 2,797 3,669

Current portion of promissory note, unsecured 3,298 -

Long-term liabilities

Promissory note, unsecured 2,355 -

Convertible senior secured note, net - 4,580

Convertible notes, net - 1,182

Derivative liabilities - 3,137

Operating lease liabilities 6,930 5,826

Other liabilities - 315

Commitments and contingencies (see Note 11)

Stockholders’ equity (deficit)

Accumulated other comprehensive loss (220) (283)

Total stockholders’ equity (deficit) 80,371 (2,536)

Total liabilities and stockholders’ equity (deficit) $ 103,133 $ 28,724

*2019 share amounts were adjusted to reflect the impact of the 1:3 reverse stock split that became effective on June 11, 2020.

The accompanying notes form an integral part of these consolidated financial statements.

F-5

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XpresSpa Group, Inc. and Subsidiaries

CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE LOSS

(In thousands, except share and per share data)

Year ended December 31,

Revenue, net

Cost of sales

Products and other operating costs 2,884 7,176

Depreciation and amortization 5,210 6,124

Impairment/disposal of assets 15,356 6,090

Interest expense, net (1,832) (2,900)

Other non-operating income (expense), net 858 (4,074)

Loss from operations before income taxes (92,225) (20,676)

Income tax (expense) benefit (7) 146

Net loss (income) attributable to noncontrolling interests 1,744 (693)

XWEL US Equity

XWEL · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 16. FORM 10-K SUMMARY

XWEL US Equity☆

XWEL · 10-K · period ended 2020-12-31

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

ITEM 9A. CONTROLS AND PROCEDURES

ITEM 9B. OTHER INFORMATION

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

ITEM 11. EXECUTIVE COMPENSATION

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES

ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

ITEM 16. FORM 10-K SUMMARY

XWEL US Equity