Basis of Presentation and Significant Accounting Policies

6 Months Ended

Sep. 02, 2023

Basis of Presentation and Significant Accounting Policies

Basis of Presentation and Significant Accounting Policies

1. Basis of Presentation and Significant Accounting Policies

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X and therefore do not include all of the information and footnotes required by accounting principles generally accepted in the United States of America for complete annual financial statements. The accompanying financial information reflects all adjustments which are of a recurring nature and, in the opinion of management, are necessary for a fair presentation of the results for the interim periods. The results of operations for the thirteen and twenty-six week periods ended September 2, 2023 are not necessarily indicative of the results to be expected for the full year, particularly as a result of the filing of the Chapter 11 Cases. These condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Rite Aid Corporation (“Rite Aid”) and Subsidiaries (together with Rite Aid, the “Company”) Fiscal 2023 10-K/A.

Going Concern

As of the date the accompanying unaudited condensed consolidated financial statements were issued (the “issuance date”), management evaluated the significance of the following adverse conditions in accordance with ASC 205-40, Going Concern.

As disclosed in Note 16, Subsequent Events, on October 15, 2023, the Company Parties reached an agreement in principle with the Consenting Noteholders on the terms of a financial operational restructuring, the material terms of which are set forth in the Restructuring Term Sheet. The Company filed a voluntary petition for reorganization under Chapter 11 (the “Chapter 11 filing” or “bankruptcy filing”) of the United States Bankruptcy Code in the District of New Jersey and expects to continue to manage its operations as a “debtor-in-possession” under the jurisdiction of the Bankruptcy Court and in accordance with the applicable provisions of the Bankruptcy Code and orders of the Bankruptcy Court. In general, as a debtor-in-possession, the Company is authorized to continue to operate as an ongoing business but not to engage in transactions outside the ordinary course of business without the prior approval of the Bankruptcy Court. Elixir Insurance (“EI”) was excluded from the Chapter 11 filing due to regulatory factors.

The bankruptcy filing represents an adverse event that creates substantial uncertainty regarding the Company’s ability to recover its assets and satisfy its liabilities in the ordinary course of business. In this regard, while management believes the Company will be able to emerge from bankruptcy and continue to operate as a viable going concern, management can provide no assurance that: (a) the Company’s Plan may never be confirmed or become effective, (b) the Debtors’ voting creditors may reject the Plan embodying the restructuring transactions contemplated by the Restructuring Term Sheet, (c) the Bankruptcy Court may grant or deny motions in a manner that is adverse to the Company and its subsidiaries, and (d) the Chapter 11 Cases may be converted into cases under chapter 7 of the Bankruptcy Code.

The transactions contemplated by the Restructuring Term Sheet are subject to approval by the Bankruptcy Court, among other conditions. Accordingly, management can provide no assurance that the transactions described therein will be consummated.

While management believes the reorganization through the Chapter 11 proceedings will appropriately position the Company upon its re-emergence from bankruptcy, the commencement of these proceedings constituted an event of default (and an acceleration event) under certain of the Company’s debt agreements, for which enforcement of any remedies by the lenders have been automatically stayed as a result of the Chapter 11 proceedings. However, management can provide no assurance that the lenders will ultimately be able to exercise their remedies, which may include, among others, a cessation of the Company’s operations and liquidation of its assets. As a result of the foregoing acceleration event, all of the Company’s outstanding indebtedness, including indebtedness subject to cross-default provisions, has been classified as current debt in the accompanying unaudited condensed consolidated balance sheet of the Company as of September 2, 2023. See Note 10. Indebtedness and Credit Agreement.

These uncertainties raise substantial doubt about the Company’s ability to continue as a going concern. The Company’s ability to continue as a going concern is contingent upon, among other things, its ability to, subject to the approval by the Bankruptcy Court, implement a comprehensive restructuring, successfully emerge from the Chapter 11 and generate sufficient liquidity following the Restructuring to meet its obligations and operating needs as they become due. The accompanying unaudited condensed consolidated financial statements have been prepared on the basis that the Company will continue to operate as a going concern, which contemplates that the Company will be able to realize assets and settle liabilities and commitments in the normal course of business for twelve months following the issuance date. Accordingly, the accompanying unaudited condensed consolidated financial statements do not include any adjustments that may result from the outcome of these uncertainties.

Revenue Recognition

The following table disaggregates the Company’s revenue by major source in each segment for the thirteen and twenty-six week periods ended September 2, 2023 and August 27, 2022:

	September 2,		August 27,		September 2,		August 27,
	2023		2022		2023		2022
In thousands	(13 weeks)		(13 weeks)		(26 weeks)		(26 weeks)
Retail Pharmacy Segment:
Pharmacy sales	$	3,319,057	$	2,971,236	$	6,616,031	$	6,024,684
Front-end sales		1,124,017		1,231,590		2,291,363		2,492,796
Other revenue		27,853		28,965		55,862		59,667
Total Retail Pharmacy Segment		4,470,927		4,231,791		8,963,256		8,577,147
Pharmacy Services Segment		1,209,858		1,727,241		2,406,012		3,453,098
Intersegment elimination		(34,704)		(57,963)		(70,025)		(114,593)
Total revenue	$	5,646,081	$	5,901,069	$	11,299,243	$	11,915,652

The Retail Pharmacy Segment offered a chain-wide loyalty card program titled wellness+. Individual customers were able to become members of the wellness+ program. Members participating in the wellness+ loyalty card program earned points on a calendar year basis for eligible front-end merchandise purchases and qualifying prescription purchases. The wellness+ program was terminated as of July 1, 2020, with benefits earned as of that date available to be used through the end of calendar year 2020. Beginning in December 2020, the Company granted temporary extensions of benefits to certain previous members that were eligible for a discount as of the end of each previous six month period such that those prior members were eligible to continue to receive that discount on purchases made through the subsequent six months with no additional purchase requirement. New and existing customers who were not already

eligible for program benefits also had the opportunity to earn additional discounts on purchases made through each six month period. A final extension was granted on December 31, 2021 through February 26, 2022 at which point all discounts were terminated.

A new loyalty program, Rite Aid Rewards, was initiated on February 27, 2022. Customers that enroll in the new program earn points for each dollar spent on front of store purchases as well as for eligible pharmacy prescriptions. Points can then be converted into a “Rite Aid Rewards” coupon that can be tendered as payment in a future purchase. Each point is worth $0.002. Customers must accumulate 1,000 points and create an online account in order to convert earned points to a “Rite Aid Rewards” coupon. Unused/unconverted points expire after 90 days. Unredeemed “Rite Aid Rewards” coupons expire 30 days after conversion from points earned.

Points earned pursuant to the Rite Aid Rewards program represent a performance obligation. The value of unredeemed Rite Aid Rewards points is deferred as a contract liability (included in other current liabilities). As members redeem points in the form of a Rite Aid Rewards coupon or when points or unredeemed Rite Aid Rewards coupons expire, the Retail Pharmacy Segment recognizes the redeemed/expired portion of the deferred contract liability into revenue. For the thirteen week period ended September 2, 2023, the Company recognized additional contract deferrals of $707 as a reduction of revenues. The Retail Pharmacy Segment had accrued contract liabilities of $2,560 and $2,030 as of September 2, 2023 and March 4, 2023, respectively.

Recently Adopted Accounting Pronouncements

In March 2020, the Financial Accounting Standards Board (“FASB”) issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. This ASU provides optional expedients and exceptions for applying GAAP to contracts, hedging relationships, and other transactions that reference the London Interbank Offered Rate (“LIBOR”) or another rate affected by reference rate reform if certain criteria are met. In response to the concerns about structural risks of Interbank Offered Rates (“IBORs”) and, particularly, the risk of cessation of LIBOR, regulators have undertaken reference rate reform initiatives to identify alternative reference rates that are more observable or transaction based and less susceptible to manipulation. This ASU provides companies with optional guidance to ease the potential accounting burden associated with transitioning away from reference rates that are expected to be discontinued. In January 2021, the FASB issued ASU 2021-01, which adds implementation guidance to the above ASU to clarify certain optional expedients and exceptions in Topic 848. The Company adopted ASU 2020-04 effective December 1, 2022 and the adoption of this standard did not have a material impact on the Company’s financial position, results of operations and cash flows.