Rite Aid (RADCQ) Risk Analysis

During the COVID-19 related federal public health emergency, the federal government provided supplemental Medicaid funding to states as long as states agreed to provide for continuous Medicaid coverage for current enrollees. This continuous enrollment has ended as of March 31, 2023. States will once again be required to remove Medicaid ineligible individuals from the Medicaid rolls. Anywhere from 5 to 15 million Americans could lose coverage as a result. Each state will manage the unwinding differently so the impact will be different from state to state. These changes could have a sudden and material negative impact on the Company's overall retail pharmacy revenue received from Medicaid and Medicaid MCOs.

Our PBM business generates net revenues primarily by contracting with clients to provide prescription drugs and related health care services to plan members. PBM client contracts often have terms of approximately three years in duration, so approximately one third of a PBM's client base typically is subject to renewal each year. In some cases, however, PBM clients may negotiate a shorter or longer contract term or may require early or periodic renegotiation of pricing prior to expiration of a contract. In addition, the reputational impact of a service-related incident could negatively affect our ability to grow and retain our client base. Further, the PBM industry has been impacted by consolidation activity that may continue in the future. In the event one or more of our PBM clients is acquired by an entity that obtains PBM services from a competitor, we may be unable to retain all or a portion of our clients' business. Due to the competitive nature of the business, we continually face challenges in competing for new PBM business and retaining or renewing our existing PBM business. There can be no assurance that we will be able to win new business or secure renewal business on terms as favorable to us as the present terms. These circumstances, either individually or in the aggregate, could result in an adverse effect on our business and financial results.

We had, as of March 4, 2023, approximately $2.9 billion of outstanding indebtedness and stockholders' deficit of $641.8 million. We also had additional borrowing capacity under our $2.85 billion senior secured asset-based revolving credit facility (the "Existing Senior Secured Revolving Credit Facility" or "revolver") of $1,404.0 million, net of outstanding letters of credit of approximately $208.7 million. Our high level of indebtedness and limited cash flow will continue to restrict our operations. Among other things, our indebtedness will: - limit our flexibility in planning for, or reacting to, changes in the markets in which we compete;- place us at a competitive disadvantage relative to our competitors with less indebtedness;- limit our ability to reinvest in our business;- render us more vulnerable to general adverse economic, regulatory and industry conditions; and - require us to dedicate a substantial portion of our cash flow to service our debt. Our ability to meet our cash requirements, including our debt service obligations, is dependent upon our ability to maintain and improve our operating performance, which is subject to general economic and competitive conditions and to financial, business and other factors, many of which are beyond our control, such as perceived reputation and ongoing litigation. In particular, in fiscal 2023, we were named as a defendant in numerous lawsuits relating to the distribution and dispensing of prescription opioids. Costs incurred in litigation can be substantial, regardless of the outcome, and could harm our reputation, even if we are successful. Although we believe we have adequate sources of liquidity to meet our anticipated requirements for working capital, debt service and capital expenditures through at least the next twelve months, the costs associated with these legal proceedings are impossible to estimate with certainty, could exceed any applicable insurance coverage, and could significantly impact such liquidity. See "Risks Related to the Retail Pharmacy and PBM Industries in which we Operate -We are, and in the future may become, involved in legal proceedings that may adversely affect our financial position and our pursuit of refinancing opportunities" and "Risks Related to our Operations- Negative public perception of the industries in which we operate, or of our industries' or our practices, can adversely affect our businesses, our operating results, cash flows and prospects." If our operating results, cash flow or capital resources prove inadequate, or if interest rates rise significantly, we could face liquidity constraints. Additionally, we improved our leverage and liquidity position this past year by selling our rights in our calendar 2022 Medicare Part D final reconciliation payment. There can be no assurance that we will enter into a similar transaction for our calendar 2023 payment, or that if we do so, that the terms of such transaction will differ, and such differences could be material. If we are unable to service our debt or experience a significant reduction in our liquidity, we could be forced to reduce or delay planned capital expenditures and other initiatives, sell assets, restructure or refinance our debt, raise additional capital through short-term loans, selling or licensing intellectual property or seek additional equity capital, or need to change certain elements of our strategy, and we may be unable to take any of these actions on satisfactory terms or in a timely manner. Any of these actions may not be sufficient to allow us to service our debt obligations or may have an adverse impact on our business. Our existing debt agreements limit our ability to take certain of these actions. Our failure to generate sufficient operating cash flow to pay our debts or refinance our indebtedness could have a material adverse effect on us. We are currently exploring several refinancing opportunities and will continue to explore various options in the pursuit thereof. However, many of our existing debt agreements contain provisions that could require us to obtain unanimous consent for specified amendments or changes, including those needed for certain refinancings, or to waive an event of default if we are unable to service our debt. A default on any of our debt obligations could trigger certain acceleration clauses, causing those and our other debt obligations to become due and payable. Upon an acceleration of any of our debt, we may not be able to make payments under our other debt agreements. While we continue to work through a number of refinancing alternatives to address our upcoming debt maturities, which are no earlier than July 2025, we make no assurance regarding the likelihood or exact timing of any refinancing or the terms thereof. See "The covenants in the instruments that govern our current indebtedness may limit our operating and financial flexibility." Our failure to generate sufficient operating cash flow to pay our debts or refinance our indebtedness could have a material adverse effect on us.

We have not achieved the sales productivity level of our major competitors. Improving our retail sales, prescription volumes and profitability and membership at our PBM are essential to enable us to cover our fixed staffing costs and to improve profitability and generate operating cash flow. If we are not successful in implementing our strategies, including our efforts to increase sales and further reduce costs, or if our strategies are not effective, we may not be able to improve our operations. Furthermore, any adverse change or weakness in general economic conditions or major industries can adversely affect drug benefit plans and reduce our pharmacy sales. Adverse changes in general economic conditions, including, but not limited to, increased costs including higher wages, those resulting from supply chain disruptions, high energy costs, increasing production costs, and record inflation, has affected and could continue to affect consumer buying practices. These factors may consequently reduce our sales of front-end products, and cause a decrease in our profitability. Failure to improve operations or weakness in major industries or general economic conditions would adversely affect our results of operations, financial condition and cash flows and our ability to make principal or interest payments on our debt.We purchase all of our brand and generic drugs from a single wholesaler. A disruption in this relationship may have a negative effect on us. We purchase all of our brand drugs and, with limited exceptions, all of our generic drugs from a single wholesaler, McKesson. Given that McKesson acts as a wholesaler for drugs purchased from manufacturers worldwide, any disruption in the supply of a given drug, including disruptions related to a pandemic or to extreme weather or natural disasters, supply shortages of key ingredients, or regulatory actions by domestic or foreign governmental agencies, or specific actions taken by drug manufacturers, could adversely impact McKesson's ability to fulfill our demands, which could adversely affect us. Pharmacy sales represented approximately 71.2% of our total drugstore sales during fiscal 2023. While we believe that alternative sources of supply for most generic and brand name pharmaceuticals are available, a significant disruption in our relationship with McKesson could result in disruptions to our business until we execute a replacement wholesaler agreement or develop and implement self-distribution processes. We believe we could obtain qualified alternative sources, including through self-distribution, for substantially all of the prescription drugs we sell on an acceptable basis, and accordingly that the impact of any disruption would be temporary. On February 28, 2019, we and McKesson entered into a contract that will continue our pharmaceutical sourcing and distribution partnership for an additional ten years. Under the terms, McKesson will continue providing us with sourcing and direct-to-store delivery for brand and generic pharmaceutical products through March 2029. Material changes in our agreement with McKesson could result in disruptions in our business until we execute a replacement wholesaler agreement or develop and implement self-distribution processes.

We regularly compete with similar companies for talented employees and our success depends in part on attracting, retaining, and/or replacing key personnel with equally qualified employees. The unusually difficult challenge to find and retain talented employees and to reduce turnover, including, but not limited to, pharmacists and pharmacy technicians, in recent months and years continues due to macroeconomic conditions, societal issues, and other factors. In addition, job market dynamics have been impacted by the "great resignation," with a significant number of people leaving the workforce, and future challenges related to workplace practices could lead to attrition and difficulty attracting high-quality employees. These factors may require our retail pharmacies to increase compensation to both hire and retain employees. We may also lose employees due to illness or other sudden occurrences, which makes succession planning difficult. Loss and/or transition of Company personnel, including senior executives, creates uncertainty as there is no guarantee that new personnel or leadership will adequately perform or smoothly transition into their new roles. Moreover, our investors, business partners, and employees prefer stability and any high level of employee turnover could undermine stakeholder support. Ultimately, the unpredictability regarding employee continuity and potential disruption stemming from employee losses pose a threat to our overall financial condition and operations. We are actively searching for a new chief executive officer and need to fill other senior positions. We cannot assure you when we will fill such positions, the success of the integration of such personnel and whether such hires will result in changes to our strategy or result in the need to fill other positions.

The United States financial markets have been experiencing, and may continue to experience, volatility and disruptions, including diminished liquidity and credit availability, inflation, declines in consumer confidence and economic growth and increases in unemployment rates, all of which have resulted in uncertainty about economic stability. Our business is affected by economic instability and declines in consumer confidence in general and in the communities we serve, and various other economic factors, including inflation and changes in consumer purchasing power, preferences and/or spending patterns. An unfavorable, uncertain or volatile economic environment, as we have experienced as a result of inflation, rising interest rates, supply chain disruptions and COVID-19, has caused and could cause a decline in drug utilization, a dampening demand for PBM services and retail products, and an increase in theft or other crime that could impact our retail locations. For example, in fiscal 2023, retail theft was significantly higher than predicted. Such theft has had a negative impact on our retail profit and continued high or unpredictable retail theft rates could continue to negatively impact our results of operations. In addition, adverse changes in the U.S. economy, consumer confidence and economic conditions could have an adverse effect on our results of operations.

We continue to closely monitor lingering impacts relating to the COVID-19 pandemic. The approaching end of the public health emergency and the expiration of certain measures related to local, national and international responses to the pandemic could have uncertain impacts on the services that we offer to patients and our revenue stream and/or reimbursement. The continuing nature and scope of COVID-19's impacts to our business and operations, as well as the impact of the end of the public health emergency and other pandemic-related measures, will depend on a series of evolving factors and developments that are difficult to assess, predict, or control, which include, but are not limited to, the following: - additional outbreaks or spikes in the number of COVID-19 cases, future mutations or related variants of the virus, and the continuing efficacy and availability of vaccines;- the extent and duration of the effect on consumer confidence, economic well-being, spending, and drug utilization, customer demand, consumer behavior, buying patterns and shopping behaviors, including spending on discretionary categories, which often include higher margin products, and increased utilization of online sales channels after the COVID-19 pandemic;- the possible expiration, termination or reduction of governmental, business, or other measures implemented in response to the COVID-19 pandemic;- continuing impacts on our distribution channels and supply chain;- volatility or disruptions in the credit and financial markets;- increased cyber-security risks, including as a result of our associates, and employees of our business partners, vendors, suppliers and other third parties with which we do business, working remotely;- additional increased costs associated with operating during the COVID-19 pandemic;- evolving macroeconomic factors, including general economic uncertainty, product costs, unemployment rates, and recessionary and inflationary pressures;- economic activity as the COVID-19 pandemic subsides, which may vary materially over time and among the different regions and markets we serve;- the long-term impact of the COVID-19 pandemic on the global economy, trade relations, consumer behavior, our industry, our business operations, and the political environment; and - relaxation or lifting of government mandates and restrictions related to COVID-19, such as the mask mandate. The above factors and risks, among others, are difficult to predict and could result in material adverse impacts to our business, operations, cash flows, and financial condition. In addition, it is difficult to predict the potentially adverse impacts that COVID-19 and the end of the public health emergency could continue to have on our customers, suppliers, vendors, and other business partners, which, in turn could materially and adversely impact our business. Additionally, the impact of COVID-19 and the end of the public health emergency could further exacerbate the impact of the other risk factors contained herein and the other reports the Company files with the SEC.

Technology and computer systems are critical to many aspects of our pharmacy business, including, but not limited to, the drug supply chain, our dispensing of drugs, and our reimbursement. For instance, we rely extensively on computer systems used by Rite Aid, Elixir Insurance, Bartell, and Health Dialog, to manage our ordering, pricing, point-of-sale, inventory replenishment and other processes. Our computer systems are at risk for failures, security breaches, and natural disasters, and they have been subject to attack by perpetrators of random or targeted malicious technology-related events, such as cyberattacks, ransomware, computer malware, worms, bot attacks or other destructive or disruptive software and attempts to misappropriate customer information, including credit card information. These sorts of attacks could subject our systems to damage or interruption from power outages, computer and telecommunications failures, computer malware, cyber-security breaches, vandalism, coordinated cyber-security attacks, severe weather conditions, catastrophic events and human error. Our disaster recovery planning considers many possible scenarios but cannot account for all eventualities. Collectively, we are building a security-aware culture across the organization by providing role-based security training, developing security champions across Technology and business areas, and partnering with industry experts. Our information security program is designed to protect confidential information, networks and systems against attacks through a multi-layered approach to address information security threats and vulnerabilities. However, a compromise of our information security controls or of those businesses with whom we interact, which results in confidential information being accessed, obtained, damaged or used by unauthorized or improper persons, could harm our reputation and expose us to regulatory actions and claims from customers and clients, financial institutions, payment card associations and other persons, any of which could adversely affect our business, financial position and results of operations. Moreover, a data security breach could require that we expend significant resources related to our information systems and infrastructure, and could distract management and other key personnel from performing their primary operational duties. We could also be adversely impacted by any significant disruptions in, or security breaches of, the systems and technology of third-party suppliers or processors we interact with, including key payors and vendors with whom we share information. If our systems are damaged, fail to function properly or otherwise become unavailable, we may incur substantial costs to repair or replace them, and may experience loss of critical data and interruptions or delays in our ability to perform critical functions, which could adversely affect our business and results of operations. Any compromise or breach of our data security, whether external or internal, or misuse of customer, associate, supplier, or our data could also result in a violation of applicable privacy, information security, and other laws, significant legal and financial exposure, fines or lawsuits, damage to our reputation, loss or misuse of the information and a loss of confidence in our security measures, which could harm our business. Although we maintain cyber-security insurance, we cannot know that the coverage limits under our insurance program will be adequate to protect us against future claims. To effectively compete with our competitors and continue business partner relations, we must and are investing in and updating our technology and computer systems. In addition, as the regulatory environment related to information security, data collection and use, and privacy becomes increasingly rigorous, with new and constantly changing requirements applicable to our business, compliance with those requirements could also result in additional costs. While we seek to ensure that our security operations are current and that our technology can properly interface with our business partners, there are risks that our technology investments will not be successful, will not provide a return on investment, and/or may fail or never be deployed. Oftentimes, we are implementing multiple updates or technology changes at the same time. We are currently in the process of changing our omni-channel distribution and there can be no assurance that we will be able to implement this technology on its intended timeline or that it will achieve its intended benefits.We are subject to payment-related risks that could increase our operating costs, expose us to fraud or theft, subject us to potential liability and potentially disrupt our business. We accept payments using a variety of methods, including cash, checks, credit and debit cards, gift cards and mobile payment technology, and we may accept new forms of payment over time. Acceptance of these payment options subjects us to rules, regulations, contractual obligations and compliance requirements including payment network rules and operating guidelines, data security standards and certification requirements, and rules governing electronic funds transfers. These requirements may change over time or be reinterpreted, making compliance more difficult or costly. For certain payment methods, including credit and debit cards, we pay interchange and other fees, which may increase over time and raise our operating costs. We rely on third parties to provide payment processing services, including the processing of credit cards, debit cards, and other forms of electronic payment. If these companies become unable to provide these services to us, or if their systems are compromised, it could potentially disrupt our business. The payment methods that we offer also subject us to potential fraud and theft by criminals, who are becoming increasingly more sophisticated, seeking to obtain unauthorized access to or exploit weaknesses that may exist in the payment systems. If we fail to comply with applicable rules or requirements for the payment methods we accept, or if payment-related data is compromised due to a breach or misuse of data, we may be liable for costs incurred by payment card issuing banks and other third parties or subject to fines and higher transaction fees, or our ability to accept or facilitate certain types of payments may be impaired. In addition, our customers could lose confidence in certain payment types, which may result in a shift to other payment types or potential changes to our payment systems that may result in higher costs. As a result, our business and operating results could be adversely affected.