UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

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THE AARON’S COMPANY, INC.

NOTE 1. BASIS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

As described elsewhere in this Quarterly Report on Form 10-Q, theThe novel coronavirus ("COVID-19") pandemic has led to significant market disruption and has impacted many aspects of our operations, directly and indirectly. Throughout these notes to the condensed consolidated and combined financial statements, the impacts of the COVID-19 pandemic on the financial results for the three months ended March 31,in 2020, 2021, and comparable prior periods have been identified under the respective sections. Additionally, there are significant uncertainties regarding the future scope and nature of these impacts, which continue to evolve each day.2022. For a discussion of operational measures taken, as well as trends and uncertainties that we believe have affected or are expected to affect our business as a result of the COVID-19 pandemic, see Part I, Item 2. "Management’s Discussion and Analysis of Financial Condition and Results of Operations", including the "Recent Developments and Operational Measures Taken by Us in Response to the COVID-19 Pandemic," "Results of Operations" and "Liquidity and Capital Resources", below, and Part I, Item 1A "Risk Factors" of our CurrentAnnual Report on Form 10-K, filed with the U.S.United States Securities and Exchange Commission (the "SEC") on February 23, 202124, 2022 (the "2020"2021 Annual Report").

Description of Spin-off Transaction

On November 30, 2020 (the "separation and distribution date"), Aaron's Holdings Company, Inc. completed the previously announced separation of the Aaron's Business segment (the "Pre-Spin Aaron's Business") from its Progressive Leasing and Vive segments and changed its name to PROG Holdings, Inc. (referred to herein as "PROG Holdings" or "Former Parent"). The separation of the Pre-Spin Aaron's Business segment was effected through a distribution (the "separation", the "separation and distribution", or the "spin-off transaction") of all outstanding shares of common stock of a newly formed company called The Aaron's Company, Inc. ("Aaron's", "The Aaron's Company" or "the Company"), a Georgia corporation ("the Company"), to the PROG Holdings shareholders of record as of November 27, 2020. Upon the separation and distribution, Aaron's, LLC became a wholly-owned subsidiary of The Aaron's Company. Shareholders of PROG Holdings received one share of The Aaron's Company for every two shares of PROG Holdings' common stock. Upon completion of the separation and distribution transaction, The Aaron's Company, Inc. became an independent, publicly traded company under the ticker "AAN" on the New York Stock Exchange ("NYSE").

Unless the context otherwise requires or we specifically indicate otherwise, references to "we," "us," "our," "our Company," and "the Company"Company," refer to The Aaron's Company, Inc., which holds, directly or indirectly, the Pre-Spin Aaron’s Business priorand all other subsidiaries of the Company, which are wholly owned, as well as other lines of business described in the "Description of Business" section below.

On April 1, 2022, the Company completed the previously announced transaction to acquire a 100% ownership of Interbond Corporation of America, doing business as BrandsMart U.S.A. The Company paid total consideration of approximately $230 million in cash under the terms of the agreement and additional amounts for working capital adjustments and transaction related fees. Refer to Note 2 to these condensed consolidated financial statements for additional information regarding the acquisition. The Company's financial results for the three and six months ended June 30, 2022 include the results of BrandsMart U.S.A. subsequent to the separationApril 1, 2022 acquisition date.

Management believes that the acquisition will strengthen the Company's ability to deliver on its mission of enhancing people’s lives by providing easy access to high quality furniture, appliances, electronics, and distribution date. Referencesother home goods through affordable lease-to-own and retail purchase options. Management also believes that value creation opportunities include leveraging the Company's lease-to-own expertise to "the Company", "Aaron's, Inc.", or "Aaron's Holdings Company, Inc." for periods priorprovide BrandsMart U.S.A.'s customers enhanced payment options and offering a wider selection of products to the separation and distribution date refer to transactions, events, and obligationsmillions of Aaron's Inc. which took place prior to the separationcustomers, as well as generating procurement savings and distribution. Historical amounts herein include revenues and costs directly attributable to The Aaron's Company, Inc. and an allocation to the Company of expenses of the Aaron's Business related to certain PROG Holdings' corporate functions prior to the separation and distribution date.

Description of Business

Aaron'sThe Company is a leading, technology-enabled, omni-channel provider of lease-to-own ("LTO") and retail purchase solutions generally focused onof furniture, electronics, appliances, and other home goods across its brands: Aaron's, BrandsMart U.S.A., BrandsMart Leasing, and Woodhaven Furniture Industries ("Woodhaven").

Since its founding in 1955, the Company has been committed to serving the large, credit-challenged segment ofoverlooked and underserved customer with a dedication to inclusion and improving the population.communities in which it operates. Through oura portfolio of approximately 1,300 stores and ourits Aarons.com e-commerce platform, weAaron's, together with its franchisees, provide consumers with LTO and retail purchase solutions for the products they need and want, with a focus on providing its customers with unparalleled customer service, high approval rates, lease plan flexibility, and an attractive value proposition, including furniture, appliances, electronics, computerscompetitive monthly payments and a varietytotal cost of ownership, as compared to other products and accessories. In addition, the Company includes the operations of LTO providers.

The following table presents store count by ownership type:

Basis of Presentation

The financial statements for periods prior tothe three and through the date of the separation and distribution, November 30, 2020, were prepared on a combined standalone basis and were derived from the consolidated financial statements and accounting records of PROG Holdings. The financial statements for the period from December 1, 2020 through December 31, 2020, and threesix months ended March 31, 2021June 30, 2022 and comparable prior year period are condensed consolidated financial statements of the Company and its subsidiaries, each of which is wholly-owned, and is based on the financial position and results of operations of the Company as a standalone company.Company. Intercompany balances and transactions between consolidated entities have been eliminated. These condensed consolidated and combined financial statements reflect the historical results of operations, financial position and cash flows of the Company in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). The historical results of operations and cash flows of the Company prior to the separation and distribution presented in these condensed consolidated and combined financial statements may not be indicative of what they would have been had the Company been an independent standalone entity, nor are they necessarily indicative of the Company's future results of operations, financial position and cash flows.

The preparation of the Company's condensed consolidated and combined financial statements in conformity with accounting principles generally accepted in the United States ("U.S. GAAP")GAAP for interim financial information requires management to make estimates and assumptions that affect the amounts reported in these financial statements and accompanying notes. Actual results could differ from those estimates. Generally, actual experience has been consistent with management's prior estimates and assumptions. However, as described above, theThe extent to which the macroeconomic inflationary pressures and COVID-19 pandemic and resulting measures taken by Federal and State governments and the Company will impact the Company's business will depend on future developments. These developments which are uncertain and cannot be precisely predicted at this time. In many cases, management's estimates and assumptions are dependent on estimates of such future developments and may change significantly in the future due to unforeseen direct and indirect impacts of the COVID-19 pandemic.future.

The accompanying unaudited condensed consolidated and combined financial statements do not include all information required by U.S. GAAP for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included in the accompanying unaudited condensed consolidated and combined financial statements. These financial statements should be read in conjunction with the financial statements and notes thereto included in the 20202021 Annual Report. The results of operations for the three and six months ended March 31, 2021June 30, 2022 are not necessarily indicative of operating results that may be achieved for any other interim period or for the full year.

Accounting Policies and Estimates

See Note 1 to the consolidated and combined financial statements in the 20202021 Annual Report for an expanded discussion of accounting policies and estimates. Discussions of accounting estimates and application of accounting policies herein have also been updated as applicable to describe the uncertainty associated with the impacts of the COVID-19 pandemic described above.

Earnings per share is computed by dividing net earnings by the weighted average number of shares of common stock outstanding during the period. The computation of earnings per share assuming dilution includes the dilutive effect of stock options, restricted stock units ("RSUs"), restricted stock awards ("RSAs"), performance share units ("PSUs") and other awards issuable under the Company's employee stock purchase plan ("ESPP") (collectively, "share-based awards") as determined under the treasury stock method, unless the inclusion of such awards would have been anti-dilutive.

The Company's basic earnings per share calculations for the periods prior to the separation and distribution assumes that the weighted average number of common shares outstanding was 33,841,624, which is the number of shares distributed to shareholders on the separation and distribution date, November 30, 2020. The same number of shares was used in the calculation of diluted earnings per share for the periods prior to the separation and distribution, as there were no equity awards of The Aaron's Company, Inc. outstanding prior to the distribution date.

Approximately 70,6000.7 million weighted-average share-basedshares-based awards were excluded from the computation of earnings per share assuming dilution during the threesix months ended March 31, 2021,June 30, 2022 as the awards would have been anti-dilutive for that period. The weighted-average anti-dilutive share-based awards that were excluded from the periods presented.computation of earnings per share assuming dilution during the three and six months ended June 30, 2021 were not significant.

Revenue Recognition

Accounts receivable consist primarily of receivables due from customers on lease agreements, corporate receivables incurred during the normal course of business (primarily for vendor consideration, third-party warranty providers, and real estate leasing activities) and franchisee obligations.

The Company maintains an accounts receivable allowance for the Aaron's Business customer lease agreements, under which the Company'sits policy is to record a provision for returns and uncollectible contractually due renewal payments based on historical payments experience, which is recognized as a reduction of lease revenues and retail revenuesfees within the condensed consolidated and combined statements of earnings. Other qualitative factors are considered in estimating the allowance, such as current and forecasted business trends including, but not limited to, the uncertainty of the impacts of the COVID-19 pandemic on our business.trends. The Company writes off customer lease receivables that are 60 days or more past due on pre-determined dates twice monthly.

The Company also maintains an allowance for outstanding franchisee accounts receivable. The Company's policy is to estimate a specific allowance on accounts receivable to estimate future losses related to certain franchisees that are deemed to have a higher risk of non-payment and a generalrecord an allowance based on historical losses as well as the Company's assessment of the financial health of all other franchisees.for these estimated losses. The estimated allowance on franchisee accounts receivable includes consideration of the financial position of each franchisee, broad macroeconomic trends, such asand the uncertainty surrounding the impacts of the normalization of current and future business trends associated with the COVID-19 pandemic on the franchisees'franchisee's ability to satisfy their obligations. Accordingly, actual accounts receivable write-offs could differ from the allowance. The provision for uncollectible franchisee accounts receivable is recorded as bad debt expense in other operating expenses, net within the condensed consolidated and combined statements of earnings.

GivenThe allowance related to remaining corporate receivables is not significant for the uncertainty regarding the impacts of the COVID-19 pandemic on our business, actual accounts receivable write-offs could differ materially from the allowance.three and six months ended June 30, 2022.

The following table shows the components of the accounts receivable allowance:

The following table shows the components of the accounts receivable provision, which includes amounts recognized for bad debt expense and the provision for returns and uncollected payments:

Lease Merchandise

The Company’s lease merchandise is recorded at the lower of depreciated cost, including overhead costs from our distribution centers, or net realizable value. The cost of merchandise manufactured by our Woodhaven operations is recorded at cost and includes overhead from production facilities, shipping costs and warehousing costs. The Company begins depreciating lease merchandise at the earlier of 12 months and one day from its purchase of the merchandise or when the itemmerchandise is leased to customers. Lease merchandise fully depreciates to a 0% salvage value over the lease agreement period when on lease, generally 12 to 24 months, and generally 36 months when not on lease. Depreciation is accelerated upon early payout.

The following is a summary of lease merchandise, net of accumulated depreciation and allowances:

The Company'sAaron's store-based operations' policies require weekly merchandise counts at its store-based operations, which include write-offs for unsalable, damaged, or missing merchandise inventories. In addition to monthlyMonthly cycle counting full physicalprocedures are performed at both the Aaron's fulfillment centers and Woodhaven manufacturing facilities. Physical inventories are generallyalso taken at the fulfillment and manufacturing facilities annually and appropriate provisions are made for missing, damaged and unsalable merchandise. In addition, theannually. The Company also monitors merchandise levels and mix by division, store, and fulfillment center, as well as the average age of merchandise on hand. If obsolete merchandise cannot be returned to vendors, its carrying amount is adjusted to its net realizable value or written off. Generally, all merchandise not on lease is available for lease or sale. On a monthly basis, all damaged, lost or unsalable merchandise identified is written off.

The Company records a provision for write-offs using the allowance method, which is included within lease merchandise, net within the condensed consolidated balance sheets. The allowance method for lease merchandise write-offs estimates the merchandise losses incurred but not yet identified by management as of the end of the accounting period based primarily on

The following table shows the components of the allowance for lease merchandise write-offs:

Prepaid Expenses and Other Assets

Prepaid expenses and other assets consist of the following:

Assets Held for Sale

Certain properties, consisting of parcels of land and commercial buildings, and certain company-owned vehicles met the held for sale classification criteria as of March 31, 2021June 30, 2022 and December 31, 2020.2021. Assets held for sale are recorded at the lower of their carrying value or fair value less estimated cost to sell and are classified within prepaid expenses and other assets in the condensed consolidated balance sheets. Depreciation is suspended on assets upon classification to held for sale.

Gains and losses related to the sale of assets held for sale are recorded in other operating expenses, net or restructuring expenses, net (if the asset is a part of the Company's restructuring programs further described in Note 5)7 to these condensed consolidated financial statements) in the condensed consolidated and combined statements of earnings. Such gains and losses were not significant for the three and six months ended March 31, 2021June 30, 2022 and March 31, 2020.June 30, 2021.

Management estimated the fair values of real estate properties using the market values for similar properties. Real estate properties represent $1.0 million and $1.2 million as of June 30, 2022 and December 31, 2021, respectively. These properties are considered Level 2 assets as defined below. The carrying amount of the propertiesall assets held for sale as of March 31, 2021June 30, 2022 and December 31, 20202021 is $8.9$1.0 million and $1.6 million, respectively.

During the six months ended June 30, 2022, the Company entered into 2 sale and leaseback transactions related to 5 Company-owned Aaron's store properties for a total sales price of $9.0 million, respectively.$5.7 million of which was received during the six months ended June 30, 2022 . Such proceeds are presented within proceeds from dispositions of property, plant and equipment in the condensed consolidated statements of cash flows. The Company recognized gains of $1.9 million and $5.7 million associated with these transactions during the three and six months ended June 30, 2022, respectively, which was classified within other operating expenses, net in the condensed consolidated statements of earnings. As of June 30, 2022, the Company recognized a receivable for the pending proceeds of $3.3 million, which was reflected within accounts receivable, net in the condensed consolidated balance sheets.

Accounts Payable and Accrued Expenses

Accounts payable and accrued expenses consist of the following:

Estimated Claims Liability Costs

Estimated claims liability costs are accrued primarily for workers compensation and vehicle liability, as well as general liability and group health insurance benefits provided to employees.team members. These liabilities are recorded within estimated claims liability costs within accounts payable and accrued expenses in the condensed consolidated balance sheets. Estimates for these claims liabilities are made based on actual reported but unpaid claims and actuarial analysis of the projected claims run off for both reported and incurred but not reported claims. This analysis is based upon an assessment of the likely outcome or historical experience.experience and considers a variety of factors, including the actuarial loss forecasts, company-specific development factors, general industry loss development factors and third-party claim administrator loss estimates of individual claims. The Company makes periodic prepayments to its insurance carriers to cover the projected claims run off for both reported and incurred but not reported claims, considering its retention or stop loss limits. In addition, we have prefunding balances on deposit and other insurance receivables with the insurance carriers which are recorded within prepaid expenses and other assets in our condensed consolidated balance sheets.

Goodwill

The Company’s goodwill is not amortized but is subject to an impairment test at the reporting unit level annually as of October 1 and more frequently if events or circumstances indicate that an impairment may have occurred. An interim goodwill impairment test is required if the Company believes it is more likely than not that the carrying amount of one or moreits reporting unitsunit exceeds the reporting units'unit's fair value. The Company concluded that the need for an interim goodwill impairment test was triggered as of March 31, 2020. Factors that led to this conclusion included: (i) a significant decline in the Aaron's, Inc. stock price and market capitalization in March 2020; (ii) the temporary closure of all company-operated store showrooms due to the COVID-19 pandemic, which impacted our financial results and was expected to adversely impact future financial results; (iii) the significant uncertainty with regard to the short-term and long-term impacts that macroeconomic conditions arising from the COVID-19 pandemic and related government emergency and executive orders would have on the financial health of our customers and franchisees; and (iv) consideration given to the amount by which the Aaron's reporting unit's fair value exceeded the carrying value from the October 1, 2019 annual goodwill impairment test.

As further described in Note 2 to these condensed consolidated financial statements, the acquisition of BrandsMart U.S.A. resulted in the first quarterrecognition of approximately $62.3 million in goodwill, which was assigned to the BrandsMart operating segment. The Company completed acquisitions of certain franchised stores throughout 2020 and 2021, that would more likely than not reducewhich resulted in a goodwill balance of $12.9 million and $13.1 million as of June 30, 2022 and December 31, 2021, respectively, for the fairAaron's Business segment.

Effective as of the BrandsMart U.S.A. acquisition date, the Company entered into lease agreements for 6 store locations retained by the sellers of BrandsMart U.S.A., including Michael Perlman, who is currently an employee of the Company. The agreements include initial terms of ten years, with options to renew. The Company has recorded these leases within operating lease right-of-use assets and operating lease liabilities in the Company's condensed consolidated balance sheets. The 6 operating leases have aggregate annual rental payments of approximately $10.0 million and are considered to be above market. The value of its reporting unit below its carrying amount.the off-market element of the lease agreements has been included as a component of the consideration transferred to the sellers of BrandsMart U.S.A. and has been recognized as a reduction to the operating lease right-of-use-asset.