Summary of Significant Accounting Policies

The preparation of financial statements in conformity with U.S. generally accepted accounting principles (“GAAP”) requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates.

Description of Business and Principles of Consolidation

Ruby Tuesday, Inc. including its wholly-owned subsidiaries (“RTI,” the “Company,” “we” and/or “our”) develops, operates and franchises casual dining restaurants in the United States, Guam, and

foreign countries under the Ruby Tuesday® brand. At

June 6, 2017,

we owned and operated

543

Ruby Tuesday restaurants concentrated primarily in the Southeast, Northeast, Mid-Atlantic, and Midwest of the United States, which we consider to be our core markets. As of our fiscal year end, there were

domestic and international franchise Ruby Tuesday restaurants located in

states primarily outside of our existing core markets (primarily the Western United States and portions of the Midwest) and in the Asia Pacific Region, Middle East, Canada, Iceland, Eastern Europe, and Central and South America.

As discussed further in Note

to the Consolidated Financial Statements, during fiscal year

2017

we closed

103

Company-owned restaurants,

of which were closed following a comprehensive review of the Company’s property portfolio resulting from perceived limited upside due to market concentration, challenged trade areas, and other factors.

We also owned and operated

two

Lime Fresh Mexican Grill® (“Lime Fresh”) fast casual restaurants as of

May 31, 2016.

As further discussed in Note

to the Consolidated Financial Statements, we entered into an agreement during fiscal year

2016

to sell the assets related to

eight

Company-owned Lime Fresh restaurants. Of the

two

remaining Company-owned Lime Fresh restaurants

not

closed and transferred to the buyer as of

May 31, 2016,

both closed and were transferred to the

third

party buyer during fiscal year

2017.

RTI consolidates its wholly-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Fiscal Year

Our fiscal year ends on the

first

Tuesday following

May 30

and, as a result, a

week is added every

five

six

years. Fiscal year

2017

contained

weeks. The

first

three

quarters of fiscal

2017

each contained

weeks and the

fourth

quarter contained

weeks. In fiscal

2017,

the

week added

$15.7

million to restaurant sales and operating revenue and

$0.02

to diluted earnings per share in our Consolidated Statement of Operations. The fiscal years ended

May 31, 2016

and

June 2, 2015

each contained

weeks.

Cash and Cash Equivalents

Our cash management program provides for the investment of excess cash balances in short-term money market instruments. These money market instruments are stated at cost, which approximates market value. We consider amounts receivable from credit card companies and marketable securities with a maturity of

three

months or less when purchased to be cash equivalents. Book overdrafts are recorded in accounts payable and are included within operating cash flows.

Inventories

Our inventories principally consist of food and beverages and are stated using the weighted average cost method.

Property and Equipment and Depreciation

Property and equipment, net, is reported at cost less accumulated depreciation. Expenditures for major renewals and betterments are capitalized while expenditures for repairs and maintenance are expensed as incurred. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. Estimated useful lives of depreciable assets generally range from

three

years for buildings and improvements and from

three

years for restaurant and other equipment. See Note

to the Consolidated Financial Statements for further discussion regarding our property and equipment.

Impairment or Disposal of Long-Lived Assets

We review our long-lived assets related to each restaurant to be held and used in the business, including any allocated intangible assets subject to amortization, whenever events or changes in circumstances indicate that the carrying amount of a restaurant

may

not

be recoverable. We evaluate restaurants based upon cash flows as our primary indicator of impairment. Assets are reviewed at the lowest level for which cash flows can be identified, which, for property and equipment, net, is the individual restaurant level. If the carrying amount of the restaurant is

not

recoverable, we record an impairment loss for the excess of the carrying amount over the estimated fair value.

When we decide to close a restaurant it is reviewed for impairment and depreciable lives are considered for adjustment. The impairment evaluation is based on the estimated cash flows from continuing use through the expected disposal date and the expected terminal value. Any gain or loss recognized upon disposal of the assets associated with a closed restaurant is recorded as a component of Closures and impairments, net in our Consolidated Statements of Operations and Comprehensive Loss.

See Note

to the Consolidated Financial Statements for a further discussion regarding our closures and impairments, including the impairment of our Lime Fresh trademark.

Other Intangible Assets

Other intangible assets which are included in Other assets, net in the Consolidated Balance Sheets consist of the following (in thousands):

	2017				2016
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Reacquired franchise rights	$	12,744	$	10,582	$	14,096	$	10,903
Favorable leases *		1,029		246		1,408		336
Trademarks		231		162		237		158
	$	14,004	$	10,990	$	15,741	$	11,397

* As of

June 6, 2017

and

May 31, 2016,

we also had

$0.2

million and

$0.6

million, respectively, of unfavorable lease liabilities which resulted from the terms of acquired franchise operating lease contracts being unfavorable relative to market terms of comparable leases on the acquisition date. The majority of these liabilities are included within Other deferred liabilities in our Consolidated Balance Sheets.

The reacquired franchise rights reflected in the table above were acquired as part of certain franchise acquisitions.

The favorable leases resulted from the terms of acquired franchise operating lease contracts being favorable relative to market terms of comparable leases on the acquisition dates.

Amortization expense of other intangible assets for fiscal years

2017,

2016,

and

2015

totaled

$0.9

million,

$1.8

million, and

$2.2

million, respectively. We amortize reacquired franchise rights on a straight-line basis over the remaining term of the franchise operating agreements. The weighted average amortization period of reacquired franchise rights is

8.5

years. We amortize favorable leases as a component of rent expense on a straight-line basis over the remaining lives of the leases. The weighted average amortization period of the favorable leases is

28.6

years. We amortize trademarks on a straight-line basis over the life of the trademarks, typically

years. Amortization expense for intangible assets for each of the next

five

years is expected to be

$0.6

million in fiscal year

2018,

$0.6

million in

fiscal year

2019,

$0.5

million in fiscal year

2020,

$0.3

million in fiscal year

2021,

and

$0.1

million in fiscal year

2022.

Rent expense resulting from amortization of favorable leases, net of the amortization of unfavorable leases, is expected to be insignificant for each of the next

five

years.

We evaluate reacquired franchise rights and favorable leases for impairment as part of our evaluation of restaurant-level impairments.

Debt Acquisition Costs

We defer debt acquisition costs and amortize them over the terms of the related agreements using a method that approximates the effective interest method. As of

June 6, 2017

and

May 31, 2016,

unamortized debt issuance costs

associated with our Senior Credit Facility of

$2.1

million and

$0.7

million, respectively, were included within Prepaid rent and other expenses, and as of

May 31, 2016,

$0.4

million was included within Other assets in our Consolidated Balance Sheets.

Unamortized debt acquisition costs associated with our Senior Notes and mortgage loan obligations of

$0.7

million as of both

June 6, 2017

and

May 31, 2016,

were included within Current maturities of long-term debt, including capital leases and

$1.6

million and

$2.4

million were included within Long-term debt and capital leases, less current maturities as of

June 6, 2017

and

May 31, 2016,

respectively

Lease Obligations

274

of our

543

Company-owned Ruby Tuesday concept restaurants are located on leased properties. Of these, approximately

205

are land leases only;

are for both land and building. The initial terms of these leases expire at various dates over the next

years. At the inception of the lease, each property is evaluated to determine whether the lease will be accounted for as an operating or capital lease. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can be reasonably assured and failure to exercise such option would result in an economic penalty. The primary penalty to which we are subject is the economic detriment associated with our investment into leasehold improvements which might become impaired should we choose

not

to continue the use of the leased property.

These leases

may

also contain required increases in minimum rent at varying times during the lease term and have options to extend the terms of the leases at a rate that is included in the original lease agreement. Some of our leases require the payment of additional (contingent) rent that is based upon a percentage of restaurant sales above agreed upon sales levels for the year. These sales levels vary for each restaurant and are established in the lease agreements. We recognize contingent rental expense (in annual as well as interim periods) prior to the achievement of the specified target that triggers the contingent rental expense, provided that achievement of that target is considered probable.

Certain of our operating leases contain predetermined fixed escalations of the minimum rentals during the term of the lease, which includes option periods where failure to exercise such options would result in an economic penalty. For these leases, we recognize the related rental expense on a straight-line basis over the term of the lease, beginning with the point at which we obtain control and possession of the leased properties, and record the difference between the amounts charged to operations and amounts paid as deferred escalating minimum rent. Any lease incentives received are deferred and subsequently amortized on a straight-line basis over the term of the lease as a reduction to rent expense.

Estimated Liability for Self-Insurance

We self-insure a portion of our expected losses under our employee health care benefits, workers

’ compensation, general liability, and property insurance programs. Specifically with our workers’ compensation and general liability coverages, we have stop loss insurance for individual claims in excess of stated loss amounts. Insurance liabilities are recorded based on

third

-party actuarial estimates of the ultimate incurred losses, net of payments made. The estimates themselves are based on standard actuarial techniques that incorporate both the historical loss experience of the Company and supplemental information as appropriate.

Pensions and Post-Retirement Medical Benefits

We measure and recognize the funded status of our defined benefit and postretirement plans in our Consolidated Balance Sheets as of our fiscal year end. The funded status represents the difference between the projected benefit obligation and the fair value of plan assets.

The projected benefit obligation is the present value of benefits earned to date by plan participants, including the effect of future salary increases and years of service, as applicable. The difference between the projected benefit obligation and the fair value of assets that has

not

previously been recognized as expense is recorded as a component of Accumulated other comprehensive loss. We record a curtailment when an event occurs that significantly reduces the accrual of defined benefits.

Revenue Recognition

Revenue from restaurant sales is recognized when food and beverage products are sold. We present sales net of coupons, discounts, sales tax, and other sales-related taxes. Deferred revenue-gift cards primarily represents our liability for gift cards that have been sold, but

not

yet redeemed, and is recorded at the expected redemption value. When the gift cards are redeemed, we recognize restaurant sales and reduce the deferred revenue. Gift cards sold at a discount are recorded as revenue upon redemption of the associated gift cards at an amount net of the related discount.

Breakage income represents the value associated with the portion of gift cards sold that will most likely never be redeemed. Using gift card redemption history, we have determined that substantially all of our customers utilize their gift cards within

two

years from the date of purchase. Accordingly, we recognize gift card breakage income for non-escheatable amounts beginning

months after the date of activation.

We recognized gift card breakage income of

$2.4

million,

$2.1

million, and

$2.0

million during fiscal years

2017,

2016,

and

2015,

respectively. This income is included as an offset to Other Restaurant Operating Costs in the Consolidated Statements of Operations and Comprehensive Loss.

Franchise development and license fees received are recognized when substantially all of our material obligations under the franchise agreements have been performed and the restaurant has opened for business. Franchise royalties are generally

4.0%

of monthly sales.

Advertising amounts received from domestic franchisees are considered by us to be reimbursements, recorded when earned, and have been netted against marketing expenses in the Consolidated Statements of Operations and Comprehensive Loss.

We charge our franchisees various monthly fees that are calculated as a percentage of the respective franchise

’s monthly sales. Our Ruby Tuesday concept franchise agreements allow us to charge up to a

4.0%

royalty fee, a

1.5%

marketing and purchasing fee, and an advertising fee of up to

3.0%.

We defer recognition of franchise fee revenue for any amounts greater than

days past due.

A further description of our franchise programs is provided in Note

to the Consolidated Financial Statements.

Pre-Opening Expenses

Salaries, personnel training costs, pre-opening rent, and other expenses of opening new facilities are charged to expense as incurred.

Share-Based Employee Compensation Plans

We measure and recognize share-based payment transactions, including grants of employee stock options, restricted stock, and restricted stock units as compensation expense based on the fair value of the equity award on the grant date. We estimate the fair value of service-based stock option awards using the Black-Scholes option pricing model. The fair values of restricted stock and restricted stock unit awards are based on the closing prices of our common stock on the dates prior to the grant date. This compensation expense is recognized over the service period on a straight-line basis for all awards except those awarded to retirement-eligible individuals, which are recognized on the grant date at estimated fair value. We classify share-based compensation expense consistent with all other compensation expenses in General and administrative in our Consolidated Statements of Operations and Comprehensive Loss. See Note

to the Consolidated Financial Statements for further discussion regarding our share-based employee compensation plans.

Marketing Costs

Except for television, radio, internet, and social media advertising production costs which we expense when the advertisement is

first

shown, we expense marketing costs as incurred. Marketing expenses, net of franchise reimbursements, totaled

$54.1

million,

$51.4

million, and

$49.4

million for fiscal years

2017,

2016,

and

2015,

respectively.

Income Taxes

Our deferred income taxes are determined utilizing the asset and liability approach. This method gives consideration to the future tax consequences associated with differences between financial accounting and tax bases of assets and liabilities and operating loss and tax credit carry forwards. Temporary differences represent the cumulative taxable or deductible amounts recorded in the consolidated financial statements in different years than recognized in the tax returns. 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. If, after consideration of all available positive and negative evidence, current available information raises doubt as to the realization of the deferred tax assets, the need for a valuation allowance is addressed. A valuation allowance for deferred tax assets

may

be required if the amount of taxes recoverable through loss carry-back declines, if we project lower levels of future taxable income, or if we have recently experienced pretax losses. Such a valuation allowance is established through a charge to income tax expense which adversely affects our reported operating results. The judgments and estimates utilized when establishing, and subsequently adjusting, a deferred tax asset valuation allowance are reviewed on a periodic basis as regulatory and business factors change.

The effect on the deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. We recognize interest and penalties accrued related to unrecognized tax benefits as components of our income tax expense in the Consolidated Statements of Operations and Comprehensive Loss.

We recognize in our consolidated financial statements the benefit of a position taken or expected to be taken in a tax return when it is more likely than

not

(i.e. a likelihood of more than

50%

) that the position would be sustained upon examination by tax authorities. A recognized tax position is then measured at the largest amount of benefit that is greater than

50%

likely of being realized upon settlement. Changes in judgment that result in subsequent recognition, derecognition or change in a measurement of a tax position taken in a prior annual period (including any related interest and penalties) are recognized as a discrete item in the interim period in which the change occurs.

See Note

to the Consolidated Financial Statements for a further discussion of our income taxes.

Loss Per Share

Basic loss per share is computed by dividing net loss by the weighted average number of common shares outstanding during each period presented. Diluted earnings per share gives effect to stock options and restricted stock outstanding during the applicable periods, except during loss periods as the effect would be anti-dilutive. The following table reflects the calculation of weighted average common and dilutive potential common shares outstanding as presented in the accompanying Consolidated Statements of Operations and Comprehensive Loss (in thousands, except per-share data):

	2017			2016			2015
Net loss	$	(106,140	)	$	(50,682	)	$	(3,194	)

Weighted average common shares outstanding		60,139			60,871			60,580
Dilutive effect of stock options and restricted stock		–			–			–
Weighted average common and dilutive potential common shares outstanding		60,139			60,871			60,580

Basic loss per share	$	(1.76	)	$	(0.83	)	$	(0.05	)
Diluted loss per share	$	(1.76	)	$	(0.83	)	$	(0.05	)

Stock options with an exercise price greater than the average market price of our common stock and certain options, restricted stock, and restricted stock units with unrecognized compensation expense do

not

impact the computation of diluted loss per share because the effect would be anti-dilutive. The following table summarizes on a weighted-average basis stock options, restricted stock, and restricted stock units that were excluded from the computation of diluted loss per share because their inclusion would have had an anti-dilutive effect (in thousands):

	2017		2016		2015
Stock options		2,242		2,407		3,057
Restricted stock / Restricted stock units		640		826		1,352
Total		2,882		3,233		4,409

Comprehensive Loss

Comprehensive loss includes net loss adjusted for certain income, expenses, gains and losses that are excluded from net loss in accordance with U.S. GAAP, such as pension and other postretirement medical plan adjustments. Comprehensive loss is shown as a separate component in the Consolidated Statements of Operations and Comprehensive Loss.

Fair Value of Financial Instruments

Fair value is the price that we would receive to sell an asset or pay to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. For assets and liabilities we record or disclose at fair value, we determine the fair value based upon the quoted market price, if available. If a quoted market price is

not

available, we determine the fair value based upon the quoted market price of similar assets or the present value of expected future cash flows using discount rates appropriate for the duration.

The fair values are assigned a level within the following fair value hierarchy to prioritize the inputs used to measure the fair value of assets or liabilities:

●

Level

– Observable inputs based on quoted prices in active markets for identical assets or liabilities;

●

Level

– Inputs other than quoted prices included within Level

that are observable for the asset or liability, either directly or indirectly; and

●

Level

– Unobservable inputs in which little or

market data exists which require the reporting entity to develop its own assumptions.

See Notes

and

to the Consolidated Financial Statements for a further discussion of our fair value measurements.

Reclassifications

As shown in the table below, we split our previously reported expenses within Selling, general and administrative, net into separately reported General and administrative expenses and Marketing expenses, net in the Consolidated Statements of Operations and Comprehensive Loss for the prior fiscal year to be comparable with the classification for the fiscal year-ended

June 6, 2017.

Additionally, we reclassified an impairment of the Lime Fresh trademark to Closures and impairments, net. Amounts presented are in thousands.

	As presented – Fiscal year ended May 31, 2016		Reclassifications			As adjusted – Fiscal year ended May 31, 2016
Selling, general, and administrative, net	$	109,627	$	(109,627	)	$	–
General and administrative expenses		–		58,191			58,191
Marketing expenses, net		–		51,436			51,436
Closures and impairments, net		62,681		1,999			64,680
Trademark impairment		1,999		(1,999	)		–

	As presented – Fiscal year ended June 2, 2015		Reclassifications			As adjusted – Fiscal year ended June 2, 2015
Selling, general, and administrative, net	$	115,327	$	(115,327	)	$	–
General and administrative expenses		–		65,907			65,907
Marketing expenses, net		–		49,420			49,420

As shown in the table below, we split our previously reported Cash and cash equivalents into separately reported Cash and cash equivalents and Restricted cash

in the Consolidated Balance Sheets for the prior fiscal year to be comparable with the classification for the fiscal year-ended

June 6, 2017.

Amounts presented are in thousands.

	As presented – Fiscal year ended May 31, 2016		Reclassifications			As adjusted – Fiscal year ended May 31, 2016
Cash and cash equivalents	$	67,341	$	(377	)	$	66,964
Restricted cash				377			377

Accounting Pronouncements

Not

Yet Adopted

August 2016,

the FASB issued ASU

2016

15,

Statement of Cash Flows (Topic

230

): Classification of Certain Cash Receipts and Payments

(“ASU

2016

15”

), which provides clarification regarding how certain cash receipts and cash payments should be presented and classified in the statement of cash flows. The guidance addresses

eight

specific cash flow issues with the objective to reduce diversity in practice of how certain transactions are classified within the statement of cash flows. ASU

2016

is effective for annual periods beginning after

December 15, 2017,

and interim periods therein (our fiscal year

2019

). Early application is permitted. We do

not

believe the adoption of this guidance will have a material impact on our Consolidated Financial Statements.

March

2016,

the FASB issued ASU

2016

09,

Compensation - Stock Compensation (Topic

718

): Improvements to Employee Share-Based Payment Accounting

(“ASU

2016

09”

), which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. ASU

2016

is effective for annual periods beginning after

December 15, 2016,

and interim periods therein (our fiscal year

2018

). Early application is permitted. We are currently evaluating the impact of this guidance on our Consolidated Financial Statements.

February 2016,

the FASB issued ASU

2016

02,

Leases (Topic

842

)

(“ASU

2016

02”

), which requires lessees to recognize on the balance sheet a right-of-use asset, representing its right to use the underlying asset for the lease term, and a lease liability for all leases with terms greater than

months. The guidance also requires qualitative and quantitative disclosures designed to assess the amount, timing, and uncertainty of cash flows arising from leases. The standard requires the use of a modified retrospective transition approach, which includes a number of optional practical expedients that entities

may

elect to apply. ASU

2016

is effective for annual periods beginning after

December 15, 2018,

and interim periods therein (our fiscal year

2020

). Early application is permitted. We are currently evaluating the impact of this guidance on our Consolidated Financial Statements.

May 2014,

the FASB and International Accounting Standards Board jointly issued ASU

2014

09,

Revenue from Contracts with Customers (Topic

606

)

("ASU

2014

09"

)

ASU

2014

will replace almost all existing revenue recognition guidance, including industry specific guidance, upon its effective date. The standard's core principle is for a company to recognize revenue when it transfers goods or services to customers in amounts that reflect the consideration to which the company expects to be entitled.

A company

may

also need to use more judgment and make more estimates when recognizing revenue, which could result in additional disclosures. ASU

2014

also provides guidance for transactions that were

not

addressed comprehensively in previous guidance, such as the recognition of breakage income from the sale of gift cards. The standard permits the use of either the retrospective or cumulative effect transition method. The guidance is effective for fiscal years, and interim periods within those years, beginning after

December 15, 2017 (

our fiscal year

2019

), with early application permitted in the

first

quarter of

2017.

We do

not

expect the adoption of this guidance to impact our recognition of Company-owned restaurants sales and operating revenue or our recognition of continuing fees from franchisees, which are based on a percentage of franchise sales. We have

not

yet selected a transition method and are continuing to evaluate the impact of this guidance on our less significant revenue transactions, such as initial franchise license fees.

Additionally, in

March

and

April 2016,

the FASB issued the following amendments to ASU

2014

to clarify the implementation guidance: ASU

2016

08,

Revenue from Contracts with Customers (Topic

606

): Principal versus Agent Considerations (Reporting Revenue Gross versus Net)

and ASU

2016

10,

Revenue from Contracts with Customers (Topic

606

): Identifying Performance Obligations and Licensing

. Under the new guidance, expected gift card breakage income will be required to be recognized proportionately as redemption occurs. Our current accounting policy of recognizing gift card breakage income applying the remote method will

longer be allowed. The timing of transition of this guidance is consistent with the new revenue recognition standard as discussed above. We expect to implement the provisions of ASU

2014

and the related amendments in the same period.