1. 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 14 foreign countries under the Ruby Tuesday® brand. At May 31, 2016, we owned and operated 646 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 78 domestic and international franchise Ruby Tuesday restaurants located in 12 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 Notes 7 and 16 to the Consolidated Financial Statements, on August 11, 2016, the Company

’s Board of Directors approved a management plan to close 95 Company-owned restaurants by September 2016.

We also own

ed and operated two Lime Fresh Mexican Grill® (“Lime Fresh”) fast casual restaurants as of May 31, 2016. As further discussed in Note 3 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, one closed on June 14, 2016 and was transferred to the third party buyer while the other is expected to be closed and transferred prior to the end of our second quarter of 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 53

week is added every five or six years. The fiscal years ended May 31, 2016, June 2, 2015, and June 3, 2014 each contained 52 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

During the first quarter of fiscal year 2016, we completed the implementation of a new inventory management system in our company-owned restaurants. In connection with this implementation, we changed our method of accounting for inventory from the lower of cost (first-in, first-out) or market method utilized by our legacy system to the lower of cost or market method using a weighted-average cost method. We believe this change in accounting principle is preferable because we believe it will result in greater precision in the costing of inventories. In addition, the weighted-average cost method better aligns with the functionality of the new inventory management system. We determined that the effects of adopting the average cost method were not material to our Consolidated Financial Statements. Prior to the conversion to the new inventory management system, we were not able to determine the impact of the change to the weighted-average cost method. Therefore, we did not retroactively apply the change to periods prior to fiscal year 2016.

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 to 35 years for buildings and improvements and from three to 15 years for restaurant and other equipment. See Note 5 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 fair value.

When we d

ecide 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

s 7 and 16 to the Consolidated Financial Statements for a further discussion regarding our closures and impairments, including the impairments 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):

	20 1 6				201 5
	Gross Carrying Amount		Accumulated Amortization		Gross Carrying Amount		Accumulated Amortization

Reacquired franchise rights	$	14,096	$	10,903	$	14,417	$	9,871
Favorable leases *		1,408		336		2,059		403
Trade marks		237		158		4,208		862
Acquired franchise agreements		–		–		1,500		677
	$	15,741	$	11,397	$	22,184	$	11,813

* As of

May 31, 2016 and June 2, 2015, we also had $0.6 million and $0.8 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. Prior to its sale on May 31, 2016, trademarks consisted primarily of the Lime Fresh trademark that was acquired as part of the Lime Fresh acquisition in fiscal 2012. 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 date.

Amortization expense of other intangible assets for fiscal

years 2016, 2015, and 2014 totaled $1.8 million, $2.2 million, and $2.5 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 8.4 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 26.1 years. We amortize trademarks on a straight-line basis over the life of the trademarks, typically 10 years. Amortization expense for intangible assets for each of the next five years is expected to be $0.9 million in fiscal year 2017, $0.7 million in

fiscal year 2018, $0.6 million in fiscal year 2019, $0.6 million in fiscal year 2020, and $0.3 million in fiscal year 2021. 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 May 31, 2016 and June 2, 2015, unamortized debt issuance costs associated with our undrawn Credit Facility of $0.7 million as of both dates were included within Prepaid rent and other expenses, and $0.4 million and $1.1 million, respectively, were included within Other assets in our Consolidated Balance Sheets.

As further reflected in Note 6 to the Consolidated Financial Statements, we adopted A

ccounting Standards Update (“ASU”) 2015-03,

Interest-Imputation of Interest

(

Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs

(“ASU 2015-03”) during the first quarter of fiscal year 2016. As a result of the adoption of this guidance, unamortized debt acquisition costs associated with our Senior Notes and mortgage loan obligations of $0.7 million and $0.8 million were included within Current maturities of long-term debt, including capital leases and $2.4 million and $3.2 million were included within Long-term debt and capital leases, less current maturities as of May 31, 2016 and June 2, 2015, respectively.

As shown in the table below, pursuant to the guidance in ASU 2015-03 we have reclassified unamortized debt issu

ance costs associated with our Senior Notes and mortgage loan obligations in our previously reported Consolidated Balance Sheet as of June 2, 2015 as follows (in thousands):

	As presented June 2, 2015		Reclassifications			As adjusted June 2, 2015
Prepaid rent and other expenses	$	13,181	$	(783	)	$	12,398
Other assets		57,554		(3,156	)		54,398
Current maturities of long-term debt,
including capital leases		10,861		(783	)		10,078
Long-term debt and capital leases
less current maturities		234,173		(3,156	)		231,017

Lease

Obligations

Approximately

53% of our 646 Company-owned Ruby Tuesday concept restaurants are located on leased properties. Of these, approximately 73% are land leases only; the other 27% are for both land and building. The initial terms of these leases expire at various dates over the next 20 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 May 31. 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 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 24 months after the date of activation.

We recogni

zed gift card breakage income of $2.1 million, $2.0 million, and $0.6 million during fiscal years 2016, 2015, and 2014, 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 recognized as franchise revenue on the accrual basis. Advertising amounts received from domestic franchisees are considered by us to be reimbursements, recorded on an accrual basis when earned, and have been netted against selling, general, and administrative expenses in the Consolidated Statements of Operations and Comprehensive Loss.

We charge our franchise

es 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 60 days past due.

A further description of our franchise programs is provided in Note 2 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. We estimate the grant date fair value of market-based awards using the Monte-Carlo simulation model. 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 Selling, general, and administrative, net in our Consolidated Statements of Operations and Comprehensive Loss. See Note 10 to the Consolidated Financial Statements for further discussion regarding our share-based employee compensation plans.

Marketing Costs

Except for television and radio advertising production costs which we expense when the advertisement is first shown, we expense marketing costs as incurred. Marketing expenses, net of franchise reimbursements, which are included in Selling, general, and administrative expense in the Consolidated Statements of Operations and Comprehensive Loss, totaled $51.4 million, $49.4 million, and $67.2 million for fiscal years 2016, 2015, and 2014, respectively.

Income Taxes

In November 2015, the FASB issued ASU 2015-17,

Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes

(“ASU 2015-17”). The guidance requires noncurrent presentation of all deferred income tax assets and liabilities. We early adopted ASU 2015-17 on a prospective basis during the fourth quarter of fiscal year 2016. Prior periods were not retroactively adjusted. Based on the adoption of this guidance, all deferred taxes are classified as noncurrent in our Consolidated Balance Sheet as of May 31, 2016.

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

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

Los

Per

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):

	201 6			201 5			201 4
Loss from continuing operations	$	(50,682	)	$	(3,194	)	$	(64,910	)
Income from discontinued operations		–			–			564
Net loss	$	(50,682	)	$	(3,194	)	$	(64,346	)

Weighted average common shares outstanding		60,871			60,580			60,231
Dilutive effect of stock options and restricted stock		–			–			–
Weighted average common and dilutive potential common shares outstanding		60,871			60,580			60,231

Loss per share – Basic
Loss from continuing operations	$	(0.83	)	$	(0.05	)	$	(1.08	)
Income from discontinued operations		–			–			0.01
Net loss per share	$	(0.83	)	$	(0.05	)	$	(1.07	)

Loss per share – Diluted
Loss from continuing operations	$	(0.83	)	$	(0.05	)	$	(1.08	)
Income from discontinued operations		–			–			0.01
Net loss per share	$	(0.83	)	$	(0.05	)	$	(1.07	)

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):

	201 6		201 5		201 4
Stock options		2,407		3,057		2,833
Restricted s tock / Restricted stock units		826		1,352		1,121
Total		3,233		4,409		3,954

Comprehensive

Loss

Comprehensive loss includes net loss adjusted for certain revenue, 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

air 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 1

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

●

Level 2

– Inputs other than quoted prices included within Level 1 that are observable for the asset or liability, either directly or indirectly; and

●

Level 3

– Unobservable inputs in which little or no market data exists which require the reporting entity to develop its own assumptions.

See Note

s 8 and 13 to the Consolidated Financial Statements for a further discussion of our fair value measurements.

Segment Reporting

Operating segments are components of an entity that engage in business activities with discrete financial information available that is regularly reviewed by the chief operating decision maker (“CODM”) in order to assess performance and allocate resources. Our CODM is the Company’s President and Chief Executive Officer. For the periods covered in Part II, Item 8 of this Annual Report on Form 10-K, we have considered our Ruby Tuesday and Lime Fresh concepts to be our reportable operating segments. However, as discussed further in Note 3 to the Consolidated Financial Statements, we substantially exited our Lime Fresh concept during the fourth quarter of fiscal year 2016 with the sale of the assets related to our Company-owned Lime Fresh restaurants and the sale of the Lime Fresh brand's intellectual property and the franchise agreements associated with eight Lime Fresh concept restaurants.

Reclassifications

As shown in the

table below, we reclassified amortization of intangible assets from Other restaurant operating costs to Depreciation and amortization in the Consolidated Statements of Operations and Comprehensive Loss for the prior fiscal years to be comparable with the classification for the fiscal year-ended May 31, 2016. We made this reclassification to more accurately reflect the nature of the expenses in our Consolidated Statements of Operations and Comprehensive Loss. Amounts presented are in thousands.

	As presented – Fiscal year ended June 2, 2015		Reclassifications			As adjusted – Fiscal year ended June 2, 2015
Other restaurant operating costs	$	244,352	$	(2,243	)	$	242,109
Depreciation and amortization		50,148		2,243			52,391

	As presented – Fiscal year ended June 3, 2014		Reclassifications			As adjusted – Fiscal year ended June 3, 2014
Other restaurant operating costs	$	260,447	$	(2,519	)	$	257,928
Depreciation and amortization		54,828		2,519			57,347

Accounting Pronouncements Not Yet Adopted

In 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 12 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 2016-02 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.

In August 2014, the FASB issued ASU 2014-15,

Presentation of Finan

cial Statements – Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern

(“ASU 2014-15”)

The guidance requires an entity to evaluate whether there are conditions or events, in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are issued and to provide related footnote disclosures in certain circumstances. The guidance is effective for the annual period ending after December 15, 2016, and for annual and interim periods thereafter (our

fiscal year 2017). Early application is permitted. We do not believe the adoption of this guidance will have an impact on our Consolidated Financial Statements.

In 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 2014-09 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 2014-09 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 (the first quarter of our fiscal year 2019). Early application is permitted only as of annual reporting periods beginning after December 15, 2016, including interim reporting periods within that reporting period. 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.