UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-K

(Mark one)

☒ ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the fiscal year ended December 31, 2017~~

For the fiscal year ended December 31, 2018

☐ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 ~~For the transition period from _____ to _____~~

For the transition period from _____ to _____

Commission File Number 001-34082
Kona Grill, Inc.
(Exact Name of Registrant as Specified in Its Charter)

Delaware	20-0216690
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)

15059 North Scottsdale Road, Suite 300
Scottsdale, Arizona 85254
(480) 922-8100
(Address, including zip code, and telephone number, including area code, of principal executive offices)

Securities registered pursuant to Section 12(b) of the Act:

Title of Each Class

Common Stock, par value $0.01 per share

Preferred Stock Purchase Rights

Name of Each Exchange on Which Registered

NASDAQ Global Market

Securities registered pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.

Yes ☐ No ☒

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section15(d) of the Act.

Yes ☐ No ☒

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically ~~and posted on its corporate Web site, if any,~~ every Interactive Data File required to be submitted ~~and posted~~ pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit ~~and post~~ such files). Yes ☒ No ☐

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company , or an emerging growth company. See ~~the~~ definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act~~. (Check one):~~

Large accelerated filer ☐ Accelerated filer ☐ Non-accelerated filer ☐ ☒ Smaller reporting company ☒ Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

The aggregate market value of common stock held by non-affiliates of the registrant as of the last business day of the registrant’s most recently completed second fiscal quarter, June 30, ~~2017~~2018, was approximately $2717,000,000, calculated based on the closing price of the registrant’s common stock as reported by the NASDAQ Global Market. For purposes of this computation, all officers, directors, and 10% beneficial owners of the registrant are deemed to be affiliates. Such determination should not be deemed to be an admission that such officers, directors, or 10% beneficial owners are, in fact, affiliates of the registrant.

As of ~~February~~March 2829, ~~2018~~2019, there were 1013,~~109~~263,~~715~~825 shares of the registrant’s common stock outstanding.

Documents Incorporated by Reference

Portions of the registrant’s definitive proxy statement for the 2018 Annual Meeting of Stockholders, to be filed with the Commission within 120 days after the end of the fiscal year ended December 31, 2017, are incorporated by reference into Part III of this report.None

KONA GRILL, INC. Annual Report on Form 10-K For the Year Ended December 31, ~~2017~~2018 TABLE OF CONTENTS

TABLE OF CONTENTS
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	97
Item 1B.	Unresolved Staff Comments	2120
Item 2.	Properties	2220
Item 3.	Legal Proceedings	2321
Item 4.	Mine Safety Disclosures	2322
PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	2422
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 6.	Selected Financial Data	22
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	39
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 8.	Financial Statements and Supplementary Data	39
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	37
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	39
Item 8.	Financial Statements and Supplementary Data	37
Item 9A.	Controls and Procedures	39
Item 9.	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure	38
Item 9B.	Other Information	40
Item 9A.	Controls and Procedures	38
Item 9B.	Other Information	39
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	40
Item 11.	Executive Compensation	4044
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	4052
Item 13.	Certain Relationships and Related Transactions, and Director Independence	4055
Item 14.	Principal Accountant Fees and Services	4155
PART IV
Item 15.	Exhibits and Financial Statement Schedules	4156
Signatures		43
Item 16.	Form 10-K Summary	57
Signatures		58
Index to Consolidated Financial Statements		F-1

Statements Regarding Forward-Looking Statements

~~The~~These statements may be contained in ~~this~~our ~~report~~filings onwith ~~Form~~the ~~10-K~~SEC, ~~that~~in ~~are~~our ~~not~~press ~~purely~~releases, ~~historical~~in other written communications, and in oral statements made by or with the approval of one of our authorized officers. These statements are forward-looking statements within the meaning of ~~applicable~~the ~~securities~~Private ~~laws.~~Securities ~~Forward-looking~~Litigation ~~statements~~Reform ~~include~~Act ~~statements~~of ~~regarding~~1995, ~~our~~as ~~“expectations~~codified in Section 27A of the Securities Act of 1933,” as amended (the “~~anticipation,~~Securities Act”), ~~“intentions~~and Section 21E of the Securities Exchange Act of 1934,” as amended (the “~~beliefs,~~Exchange Act” orand, together with the Securities Act, the “~~strategies~~Acts”). ~~regarding~~This ~~the~~includes, ~~future~~without limitation, uncertain success of selling our company; uncertain success of certain strategic alternatives in an effort to improve our capital structure; notice by lenders of default under our credit facility under which we currently have $33.2 ~~Forward-looking~~million in secured debt, which provides the lenders with the right to accelerate the due date of such debt, and doubt about our ability to refinance such debt; possibility that we may be required to file for protection in bankruptcy, even if we are successful in effecting a sale of our business or improving our capital structure, which may result in the holders of our common stock receiving no proceeds; expectation that our common stock will be delisted from the Nasdaq Stock Market; financial guidance and projections and statements ~~relating~~with respect to expectations of our future ~~economic~~financial ~~performance~~condition, results of operations, cash flows, plans, ~~and~~targets, goals, objectives, ~~for~~performance, ~~future~~growth ~~operations~~potential, competitive position and ~~projections~~business; ofour ability to: leverage our competitive strengths; deliver comparable sales growth; provide a differentiated experience to customers; outperform the casual dining industry and increase our market share; manage cost pressures, including increasing wage rates, group medical insurance costs and legal expenses, and stabilize margins; grow earnings; remain relevant to consumers; attract and retain qualified management and other ~~financial~~staff; ~~items~~and ~~are~~manage ~~based~~risks onassociated with the magnitude and complexity of regulations in the jurisdictions where our ~~beliefs~~restaurants asare ~~well~~located. asThese ~~assumptions~~forward-looking ~~made~~statements also may be affected by factors outside of our control including: economic and ~~information~~political ~~currently~~conditions ~~available~~that impact consumer confidence and spending; impact of recently enacted tax reform; changes in unemployment rates; the economic health of our landlords and other tenants in retail centers in which our restaurants are located; the economic health of suppliers, licensees, vendors and other third parties providing goods or services to us; adverse weather conditions in regions in which our restaurants are located; and factors that are under the control of government agencies, landlords and other third parties. ~~Actual~~Such ~~results~~forward-looking ~~could~~statements ~~differ~~include ~~materially~~all ~~from~~other ~~those~~statements ~~currently~~that ~~anticipated~~are not historical facts, as awell ~~result~~as ofstatements athat ~~number~~are ofpreceded ~~factors~~by, ~~including~~followed ~~those~~by ~~discussed~~or inthat ~~Item~~include 1Awords or phrases such as “believe,” “~~Risk~~plan,” ~~Factors.~~“will likely result,” “expect,” “intend,” “will continue,” “is anticipated,” “estimate,” “project,” “may,” “could,” “would,” “should” and similar expressions. These statements are based on our current expectations and involve risks and uncertainties which may cause results to differ materially from those set forth in such statements.

In connection with the “safe harbor” provisions of the Acts, we have identified and are disclosing important factors, risks and uncertainties that could cause our actual results to differ materially from those projected in forward-looking statements made by us, or on our behalf. (See Item 1A — Risk Factors.) These cautionary statements are to be used as a reference in connection with any forward-looking statements. The factors, risks and uncertainties identified in these cautionary statements are in addition to those contained in any other cautionary statements, written or oral, which may be made or otherwise addressed in connection with a forward-looking statement or contained in any of our subsequent filings with the SEC. Because of these factors, risks and uncertainties, we caution against placing undue reliance on forward-looking statements. Although we believe that the assumptions underlying forward-looking statements are currently reasonable, any of the assumptions could be incorrect or incomplete, and there can be no assurance that forward-looking statements will prove to be accurate. Forward-looking statements speak only as of the date on which they are made. Except as may be required by law, we do not undertake any obligation to modify or revise any forward-looking statement to take into account or otherwise reflect subsequent events, corrections in underlying assumptions, or changes in circumstances arising after the date that the forward-looking statement was made.

PART I

Item 1.

Business

Overview

Kona Grill, Inc. (referred to herein as the “Company” or “we,” “us,” and “our”) currently owns and operates 4634 restaurants ~~upscale~~in ~~casual~~20 states ~~restaurants~~throughout inthe 23United ~~states~~States and Puerto Rico. In addition, we have ~~three~~two international restaurants that operate under franchise agreements. Our restaurants offer freshly prepared food, attentive service, and an upscale contemporary ambience that create an exceptional, yet affordable dining experience that we believe exceeds many traditional casual dining restaurants with whom we compete. Our restaurants feature ~~a global menu of~~ contemporary American favorites, award-winning sushi and ~~craft~~an ~~cocktails~~extensive selection of alcoholic beverages. Our menu items are prepared from scratch at each restaurant location ~~and incorporate over 40 signature sauces and dressings~~, creating memorable flavor profiles that appeal to a ~~diverse~~wide-range ~~group~~ of customers. Our diverse menu is complemented by a full -service bar offering a broad assortment of wines, craft cocktails, and beers. We believe that our innovative ~~high-quality~~menu ~~recipes~~items, generous portions, and flexible price points provide customers with a compelling value proposition and allow us to attract a diverse customer base.

Our restaurants seat an average of 290 customers and are comprised of multiple dining areas that incorporate modern design elements to create an upscale ambience that reinforces our high standards of food and service. Our main dining area, full-service bar, indoor/outdoor patio, and sushi bar provide a choice of atmospheres and a variety of environments designed to attract new customers and encourage repeat visits from regular customers. WeOur ~~build~~restaurants ~~our~~are ~~restaurants~~generally located in high-activity areas such as retail centers, shopping malls, and lifestyle centers that are situated near commercial office space and residential housing to attract customers throughout the day.

The portability of our concept has been successfully demonstrated in a variety of markets across the United States (U.S.). Our long-term plans include strategically expanding the Kona Grill concept in both domestic and international markets. During 2017, we opened one restaurant in Scottsdale, Arizona and our franchise partners opened the first international Kona Grill restaurants in Vaughan (Toronto), Canada; Dubai, United Arab Emirates and Monterrey, Mexico.Strategy

We grew the number of restaurants significantly from 2013 to 2016 and doubled the size of the Company from 23 restaurants in 2012 to 46 restaurants by 2017. We have currently discontinued developing new restaurants to give our existing base of restaurants the opportunity to mature, conserve our cash resources and have closed certain unprofitable restaurants. We are evaluating strategic alternatives including the sale of the Company, the potential sale of the Company’s assets through a Chapter 11 filing, refinancing or other alternatives, including the closure of additional restaurants.

In March 2019, we announced that our Board of Directors, working together with our management team, engaged Piper Jaffray as our financial advisor to assist with the evaluation of strategic alternatives, including the possible sale of our business. There can be no assurance that the process that we are undertaking will be successful. In addition, we cannot predict the terms or timing of any transaction that we may undertake or whether any such transaction will result in any proceeds for the holders of our common stock.

Additionally, we are in discussions with our secured lenders in an effort to pursue various strategic alternatives. We can give no assurance that we will successfully execute any strategic alternatives we are currently pursuing or any others, and our ability to do so could be adversely affected by numerous factors, including changes in the economic or business environment, financial market volatility, the performance of our business, and the terms and conditions of our credit facility.

We may be required to file for protection in bankruptcy, even if we are successful in effecting a sale of our business or improving our capital structure. Any bankruptcy proceeding may result in the holders of our common stock receiving no proceeds.

It is possible that even a successful implementation of one of the strategic alternatives that we are pursuing will require us to make a filing for protection under Chapter 11 of the U.S. Bankruptcy Code. Our seeking relief under the U.S. Bankruptcy Code, whether or not such relief leads to a quick emergence from Chapter 11, could materially adversely affect the relationships between us and our existing and potential customers, employees, suppliers, and others.

Changes in Senior Management Team

Effective March 31, 2019, Marcus Jundt resigned from our Board of Directors and as Chief Executive Officer. On April 2, 2019, Christi Hing, our Chief Financial Officer, was appointed as the principal executive officer of the Company. On March 29, 2019, Jonathan Tibus was appointed as our Chief Executive Officer effective April 17, 2019. Mr. Tibus is a Managing Director with Alvarez & Marsal North America LLC (“Alvarez & Marsal”). As a Managing Director of Alvarez & Marsal, Mr. Tibus has served as Chief Executive Officer of Real Mex Restaurants, Inc. (Chevy’s, El Torito, Sinigual, Las Brisas); Ignite Restaurant Group, Inc. (Joe’s Crab Shack, Brickhouse Tavern); Last Call Operating Co. (Fox & Hound, Champps). Mr. Tibus has also served as Chief Restructuring Officer of Quiznos and Chief Operating Officer of Max & Erma’s. Mr. Tibus has a bachelor’s degree from Florida State University and an MBA from the University of Florida.

Also, on March 29, 2019, Christopher Wells was appointed as Chief Restructuring Officer of the Company effective April 17, 2019. Mr. Wells is a Managing Director with Alvarez & Marsal. Mr. Wells recently served as Chief Financial Officer of Real Mex Restaurants, Inc. Additionally, Mr. Wells has served in the capacity of Chief Financial Officer in various privately-held roles encompassing the investment management and healthcare industries. Mr. Wells has a bachelor’s degree from the University of Arizona in finance and accounting, is a Certified Public Accountant (CPA) in the state of Arizona, and a Chartered Financial Analyst (CFA).

Competitive Strengths

The restaurant business is intensely competitive with respect to food quality, ~~price-~~value ~~relationships~~proposition, ambiance, service and location. We believe that the key strengths of our business include the following:

	●	Innovative Menu Selections with Mainstream Appeal. We offer a menu of freshly prepared, high quality food that includes a diverse selection of contemporary American favorites and award-winning sushi items to appeal to a wide range of tastes, preferences, and price points. We prepare our dishes from scratch at each restaurant location using original recipes with generous portions and creative and appealing presentations. Our more than 40 signature sauces and dressings create memorable flavor profiles and further differentiate our menu items.
	●	Distinctive Upscale Casual Dining Experience. Our creative menu, personalized service, and contemporary restaurant design blend together to create an inviting upscale casual dining experience. We design our restaurants with a unique layout and utilize modern, eye-catching design elements to enhance the customer experience. Our multiple dining areas provide customers with many distinct dining environments and atmospheres to suit a range of dining occasions. Our open exhibition-style kitchen and sushi bar further emphasize the quality and freshness of our food that are the cornerstones of our concept.

●

Innovative Menu Selections with Mainstream Appeal. We offer a menu of freshly prepared, high quality food that includes a diverse selection of contemporary American favorites and award-winning sushi items to appeal to a wide range of tastes, preferences, and price points. We prepare our dishes from scratch at each restaurant location using original recipes with generous portions and creative and appealing presentations. Our more than 40 signature sauces and dressings create memorable flavor profiles and further differentiate our menu items.

● Significant Bar and Happy Hour Business. Our high-energy bar and patio offer a distinctive atmosphere where customers can enjoy our alcoholic beverage offerings. Our patio is a popular place for customers to enjoy our high-value happy hour and reverse happy hour offerings, where full portions of select items are offered at reduced price points. Our patio, which is enclosed in colder climate locations, provides a year-round sales opportunity and is a key driver in generating business during non-traditional periods. Aggregate revenue during these non-peak periods accounted for 23.3% of our total sales during 2017, which we believe provides us with a competitive advantage.

●

Distinctive Casual Dining Experience. Our creative menu, personalized service, and contemporary restaurant design blend together to create an inviting dining experience. Our restaurants feature a unique layout and utilize modern, eye-catching design elements to enhance the customer experience. Our multiple dining areas provide customers with many distinct dining environments and atmospheres to suit a wide-range of dining occasions. Our open exhibition-style kitchen and sushi bar further emphasize the quality and freshness of our food that are the cornerstones of our concept.

●

Significant Bar and Happy Hour Business. Our high-energy bar and patio offer a distinctive atmosphere where customers can enjoy our alcoholic beverage offerings. Our patio is a popular place for customers to enjoy our high-value happy hour and reverse happy hour offerings, where full portions of select items are offered at reduced price points. Our patio, which is enclosed in colder climate locations, provides a year-round sales opportunity and is a key driver in generating business during non-traditional periods. Aggregate revenue during these non-peak periods accounted for 22.4% of our total sales during 2018, which we believe provides us with a competitive advantage.

●

Personalized Customer Service. Our commitment to make every experience exceptional reinforces our upscale ambience and helps distinguish us from other casual dining restaurants. We train our service personnel to be friendly and knowledgeable about all aspects of the restaurant, which helps us provide personalized customer service that is designed to ensure an enjoyable dining experience and exceed our customers’ expectations. Our kitchen staff completes extensive training to ensure that menu items are precisely prepared to provide a consistent experience. We believe our focus on high service standards underscores our customer-centric philosophy.

● Multiple Daypart Model. Our appetizers, entrees, and sushi offerings provide a flexible selection of items that can be ordered individually or shared allowing customers to dine with us during traditional lunch and dinner meal periods as well as between customary dining periods such as in the late afternoon and late night. The lively ambience of our patio and bar areas provides ~~an energetic ambience as well as provides~~ a unique atmosphere for customers to enjoy before or after they dine with us. Our sushi bar provides another dining venue for customers while offering a wide selection of creative and flavorful menu items for health-conscious customers. We believe that our ability to attract customers throughout the day distinguishes us from many other casual dining chains.

●Restaurant ~~Attractive~~Sales Unit Economics. During 2017, the average unit volume of our comparable base restaurants was $4.1 million. We believe our high average unit volume helps us attract high-quality employees, leverage fixed costs, and makes us a desirable tenant for landlords. We expect the average cash investment for new restaurants to be approximately $2.6 million, net of landlord tenant improvement allowances and excluding preopening expenses. Based on historical experience, restaurants that are subject to ground leases and do not receive landlord tenant improvement allowances may require a significantly higher cash investment, but typically have lower average rental costs over the duration of the lease.Goals

~~Growth~~Our ~~Strategy~~goal for existing restaurants is to increase unit volumes through consistent execution of our food and drink offerings. We are focused on key initiatives designed to drive traffic, increase sales and enhance the customer experience. We have revitalized our legendary happy hour by expanding the number of food and drink offerings, reducing prices and extending the hours that happy hour is available. We are revamping our core menu to bring back certain items that made us successful in the past and right-sizing the menu to allow for consistent and timely delivering of our food and drink offerings. We offer online ordering for the convenience of our customers and have also partnered with several companies for delivery services to drive incremental sales growth. We believe the strength of our differentiated concept and the appeal of our contemporary design will enable us to gain market share over time. Furthermore, we continue to focus on the quality of our service and hospitality with extensive training for our service staff on our menu offerings. During the third quarter of 2018, we launched our Konavore loyalty program to encourage customers to visit our restaurants more frequently. The loyalty rewards program awards a customer one point for every $1 spent. When points are accumulated a reward to be used on future purchases is earned. We also have focused on social marketing and engaging with customers through various social media.

WeOur ~~have~~ability ~~grown significantly over the past several years. Starting in 2017 we have pursued more modest growth~~ to ~~give~~generate ~~our~~sales ~~existing~~throughout ~~base of restaurants~~ the ~~opportunity~~day tois ~~mature.~~a Wekey ~~continue~~strength toof ~~believe that there will be significant long-term opportunities to grow~~ our ~~sales~~concept. ~~and~~The ~~increase~~following ~~our~~table ~~brand~~depicts ~~awareness throughout~~ the ~~United~~amount ~~States~~ and ~~internationally.~~percentage ~~The~~of ~~following~~contribution ~~sets~~for ~~forth~~each ~~the~~daypart ~~key elements~~ of ~~our~~overall ~~growth~~revenues ~~strategy~~during 2018.

Pursue Disciplined Restaurant Growth When Appropriate

Historically, we have reviewed potential sites in both new and existing markets that meet our target customer demographics, real estate, and investment return criteria. We believe the location of our restaurants plays a pivotal role in determining the long-term profitability of each restaurant and, accordingly, we have spent significant time and resources to evaluate each prospective site. We utilize a disciplined site selection process involving our management team and Board of Directors. Our site selection criteria for new restaurants has included selecting sites near high activity areas such as lifestyle centers. In addition, we have focused on areas that have above-average density and income populations, have high customer traffic throughout the day from thriving businesses or retail markets, and are convenient for and appealing to business and leisure travelers. We have also focused on sites that have great visibility and ample parking to support high volumes of traffic.

Over the past four years, we have grown organically through opening new restaurants and doubled the number of domestic restaurants during this time from 23 to 46. Our unit growth rate was 22% in 2016, with eight openings during the year and we had 23% unit growth in 2015 with seven restaurant openings. We opened only one domestic restaurant in 2017. We believe that a modest growth rate over the next few years will allow us to focus our time and attention on restaurant operations and improving financial performance.

We2018 ~~continue~~Sales toby execute our strategy for international market expansion. As there is increased demand for upscale casual dining concepts overseas, we believe there is a significant opportunity to expand our concept in Canada, Latin America, the Middle East and beyond. In 2016, we signed agreements for the development of six Kona Grill restaurants in Mexico and six Kona Grill restaurants in the United Arab Emirates. In April 2017, we signed an agreement for the development of one Kona Grill restaurant in Vaughan (Toronto), Canada. The agreement allows our franchisee the right to develop additional restaurants in the Toronto market for a specified period of time following the opening of the first restaurant. Each of our three international franchise partners opened a Kona Grill restaurant in their respective countries in the second half of 2017.Daypart

Pursue Growth in Existing Restaurant Sales

	Sales		Percent
	(Dollars in thousands)
Lunch (Open to 3 p.m.)	$	39,768		25.5	%
Dinner (5 p.m. to 9 p.m.)		81,493		52.1	%
Non-Peak (3 p.m. to 5 p.m. and 9 p.m. to Close)		34,964		22.4	%
Total All Day	$	156,225		100.0	%

Our goal for existing restaurants is to increase unit volumes through consistent execution of our food and drink offerings; however our same store sales decreased in 2017 after six straight years of growth. We are focused on key initiatives designed to drive traffic, increase sales and enhance the customer experience while building our business for long-term growth. We have enhanced our cocktail and wine list and continue to utilize our Wine Down Wednesday offering to drive customer traffic by offering a 50% discount on bottle wines each Wednesday. We offer online ordering for the convenience of our customers and have also partnered with several companies for delivery services to drive incremental sales growth. We believe the strength of our differentiated concept and the appeal of our contemporary design enables us to gain market share. Furthermore, we continue to focus on the quality of our service and hospitality with extensive training for our service staff on our menu offerings. We continue to grow our customer loyalty program, Konavore™, which has grown to over 338,000 members. We utilize this e-mail based program to communicate new menu offerings, restaurant specific events, and other marketing messages to keep Kona Grill top of mind for consumers. We have also increased our presence in social marketing and engaging with customers through various social media.

Continue Strategic Investments in Personnel and Systems

We believe that successful execution of our growth strategies for our existing restaurants will enable Kona Grill to be a leading upscale casual dining restaurant operator in the U.S. We have made strategic personnel investments and will make incremental investments over the long-term to support the growth of the Kona Grill brand both domestically and internationally. Additionally, we continue to implement software and tools to enhance our business while ensuring that strong financial controls are in place to minimize risks associated with our growth strategy.

Unit Economics

We target a 30% net cash-on-cash return for our restaurants once they reach their mature level of operations. Maturation periods vary from restaurant to restaurant, but generally range from two to four years. The cash-based performance target for our operating restaurant operations does not include field supervision, corporate support expenses, preopening expenses, or non-cash items such as depreciation and amortization; and does not represent a targeted return on investment in our common stock.

Our investment cost for new restaurants varies significantly depending upon the location of the restaurant, the type of lease entered into and the amount of tenant improvement allowance we receive from landlords. We expect the cash investment cost of our prototype restaurant on average to be approximately $2.6 million, net of landlord tenant improvement allowances averaging between $0.7 million and $1.2 million, and excluding cash preopening expenses of approximately $450,000.

Our ability to generate sales throughout the day is a key strength of our concept. The following table depicts the amount and percentage of contribution for each daypart of overall revenues during 2017.

2017 Sales by Daypart

	Sales		Percent
	(Dollars in thousands)
Lunch (Open to 3 p.m.)	$	43,756		24.4	%
Dinner (5 p.m. to 9 p.m.)		93,634		52.3	%
Non-Peak (3 p.m. to 5 p.m. and 9 p.m. to Close)		41,691		23.3	%
Total All Day	$	179,081		100.0	%

Menu

Our menu features a wide selection of appetizers, salads, ~~soups,~~ flatbreads, sandwiches, noodles, sushi, seafood, signature entrees, and desserts. Our appetizers include socially interactive items that can be eaten individually or easily shared among customers. Our signature entrees feature various sauces and offer customers generous portions that are impressive in presentation and in taste. For example, our most popular entrée is the Macadamia Nut Chicken served with shoyu-cream sauce and accompanied by ~~parmesan garlic~~ mashed potatoes and seasonal vegetables. Other favorites include Miso-Sake Sea Bass served with ~~shrimp~~jasmine ~~and pork fried~~ rice and aseared ~~seasonal~~green ~~vegetable~~beans and ~~Pan~~Sweet-~~Seared~~Chili ~~Ahi~~Glazed Salmon served with ~~steamed~~shrimp ~~white~~and pork fried rice, ~~baby~~crispy ~~bok~~soy ~~choy~~brussels sprouts and a sweet chili sauce.

We also offer an extensive assortment of sushi that includes traditional favorites as well as distinctive specialty sushi and sashimi items such as our Voodoo Roll made with spicy crawfish mix and avocado rolled inside of seaweed and topped with a habanero tuna mix ~~and chili masago,~~ or the Bama Roll made with crab mix, cream cheese and jalapeno in soy paper topped with tuna, avocado, fish roe and spicy mayo. Sushi sales accounted for ~~27.2~~28% of our total revenue during ~~2017~~2018.

Our menu, coupled with an expansive selection of sushi, offers ample choices for health-conscious customers. We take great pride in providing our customers the full Kona Grill experience without compromising their dietary needs and restrictions. We offer ~~extensive~~ gluten-free, vegetarian and vegan ~~menus~~options. ~~We also feature a bento box with a variety of selections of protein and side dishes for the enjoyment of our young customers.~~

Each of our restaurants has a dedicated kitchen staff member, whom we refer to as our saucier, to oversee the preparation of more than 40 signature sauces and dressings that are made from scratch using only high-quality ingredients and fresh products. Each sauce is designed according to a proprietary recipe for specific menu items and includes unique flavors and combinations such as our honey cilantro, shoyu-cream, and spicy aioli dipping sauces, and our sesame-soy and honey dijon salad dressings. We believe that these distinctive sauces and dressings provide a unique flavor profile, which further distinguishes Kona Grill from its competitors.

The versatility of our menu enables us to provide customers with dishes that can be enjoyed outside of the traditional lunch and dinner meal periods, as well as to serve our customers’ requirements for a variety of dining occasions, including everyday dining, business lunches, social gatherings and special occasions. We also offer catering, group dining menus, and sushi platters to provide additional opportunities to serve our customers’ needs. In general, our menu is consistent from location to location. We typically update our menu in the spring and the fall and make enhancements to existing items or introduce new items based on customer feedback, which helps ensure that we are meeting the needs of our customers.

Our restaurants also offer an extensive selection of bottled and draft beers, wines by the glass or bottle, sake and an extensive selection of liquors and craft cocktail drinks. Alcoholic beverage sales represented ~~approximately 27.3~~26% of our total revenue during ~~2017~~2018.

Decor and Atmosphere

We design our restaurants to offer customers a unique dining experience in a setting that is relevant for today and tomorrow. Each of our restaurants is designed with a contemporary look that is adaptable to varying real estate opportunities while incorporating signature elements such as multiple dining areas and open floor plan. Customers can expect to find a warm and inviting atmosphere that aligns with our innovative food and drink offerings and high-quality service. The layout of our restaurants focuses on creating multiple dining areas for our customers while maintaining an open atmosphere that allows customers to have a panoramic view of the entire restaurant and exhibition kitchen and sushi bar. We utilize a variety of directional lighting styles and design elements to add warmth to all dining spaces throughout our restaurants.

Regardless of the experience customers are looking for, our restaurant design offers a variety of dining experiences to fit every mood and occasion. Our indoor/outdoor patio with a full-service bar incorporates a high-energy, socially interactive atmosphere for customers to enjoy appetizers or sushi while they wait to dine with us, and serves as a destination for many of our frequent customers during the late afternoon and late-night periods. Certain of our locations offer private dining rooms for parties, special occasions and business events. Additionally, three of our restaurants feature a rooftop patio and we enclose patios in colder climates to maximize utilization of the patio throughout the year. Alternatively, our dining room provides a warm and intimate ambience for special occasions or dinner with friends and family. For sushi enthusiasts, we showcase our highly trained sushi chefs creating their masterpieces at our expansive sushi bar.

Food Preparation, Quality Control, and Purchasing

We believe that we have some of the highest food quality standards in the industry. Our standards are designed to protect food products throughout the preparation process. We provide detailed specifications to suppliers for food ingredients, products, and supplies. We strive to maintain quality and consistency in our restaurants through ~~careful~~ hiring, training and supervision of personnel. We require annual recertification training for all employees, and each employee receives extensive training relating to food and beverage preparation and restaurant operations. We also instruct kitchen managers and staff on safety, sanitation, housekeeping, repair and maintenance, product and service specifications, ordering and receiving products, and quality assurance. ~~All~~Our ~~of our~~ restaurant managers are compliant with Hazard Analysis and Critical Control Point, or HACCP, requirements. We monitor minimum cook temperature requirements and conduct twice-a-day kitchen and food quality inspections to further assure the safety and quality of all of the items we use in our restaurants. We have a ServSafe alcohol certification program, where ~~every~~ front of house ~~employee~~employees isare trained and tested to ensure we are providing responsible alcohol service. Further, to monitor and ensure compliance with required guidelines, we evaluate ~~all of~~ our employees on their ability to maintain sanitary conditions in their respective restaurants.

We source our products and supplies with reputable and high-quality providers that are capable of providing consistent, reliable distribution to all of our restaurants. We have arrangements with national and local distributors and specialty food suppliers who provide high-quality ingredients and perishable food products. These distributors and suppliers are required to comply with food safety guidelines mandated by HACCP, the Food & Drug Administration and local statutes and regulations of the particular state, county or municipality.

Our goal is to maximize purchasing efficiencies and obtain the lowest possible prices for ingredients, products, and supplies, while maintaining the highest quality. We are committed to purchasing high-quality ingredients for our restaurants at reasonable prices. We use fresh ingredients and, as a result, we maintain only modest inventories. We believe that competitively priced alternative distribution sources are available should those channels be necessary. We negotiate national supply contracts and prices for food supply throughout all of our restaurants, monitor quality control and consistency of the food supplied to restaurants, and oversee delivery of food on a nationwide basis. In order to provide the freshest ingredients and products, and to maximize operating efficiencies between purchase and usage, we utilize an automated food cost and inventory system to assist each restaurant’s management team in determining daily order requirements for food ingredients, products, and supplies. The management team orders accordingly from approved suppliers, and all deliveries are inspected to assure that the items received meet our quality specifications and negotiated prices.

Restaurant Operations

Executive and Restaurant Management

Our ~~executive~~senior management team continually monitors restaurant operations to assure the quality of products and services and the maintenance of facilities. We have procedures to enhance efficiency, reduce costs and provide centralized and individual restaurant support systems. Our corporate operations team and directors of operation have primary responsibility for oversight of our restaurants and analyze restaurant-level performance and strategic planning. We currently employ ~~six~~four directors of operations who are each responsible for overseeing the restaurants in a specific region. The directors of operations’ responsibilities include supporting the general managers and helping each restaurant achieve the sales and cash flow targets for their restaurant as well as providing insight for decision making in such areas as food and beverage, people development, and process improvements to enhance the efficiency of operations and the dining experience for our customers.

Our typical restaurant management team consists of a general manager, executive chef, sous chef and two to three additional managers depending upon the sales volume of each restaurant. Our restaurants employ on average approximately 75 non-management employees, many of whom work part-time. The general manager is responsible for the day-to-day operations of the restaurant, including the hiring, training, personnel development, execution of local marketing programs, and operating results. The chefs are responsible for overseeing the preparation of kitchen and sushi items, maintaining product quality, and closely monitoring food costs and department labor costs.

Training

In order to maintain quality and consistency in each of our restaurants, we carefully train and supervise restaurant personnel and adhere to high standards related to personnel performance, food and beverage preparation, and maintenance of our restaurants. ~~All~~Our ~~of our~~ restaurant personnel participate in both initial and ongoing training programs under the direction of our director of training. Each restaurant manager completes a formal training program that is comprised of a mix of online and on-the-job instruction. The training covers all aspects of management philosophy and overall restaurant operations, including supervisory skills, operating and performance standards, accounting procedures, IT systems and employee selection and training necessary for top-quality restaurant operations. The training programs also involve intensive understanding of our menu and other key service protocols.

Recruitment and Retention

Our ~~future growth and~~ success is highly dependent upon ~~our~~the ability to attract, develop, and retain qualified individuals who are capable of successfully managing our high-volume, ~~upscale casual~~ restaurants. We believe that our high unit volume, the image and atmosphere of the Kona Grill concept, and career advancement and employee benefit programs enable us to attract high quality management and restaurant personnel. We offer restaurant management personnel competitive wages and benefits, including medical insurance and participation in our 401(k) plan with a company match. We motivate and prepare our restaurant personnel by providing them with opportunities for increased responsibility and advancement ~~through a formal management development program~~. Furthermore, the management team of each restaurant shares in a bonus tied to the sales and overall profitability of their restaurant. We believe that our compensation package for managers and restaurant employees is comparable to or better than those provided by other ~~upscale~~ casual dining restaurants. We believe our compensation policies help us attract quality personnel.

Information Systems

We believe that our management information systems enable us to increase the speed and accuracy of order-taking and pricing, efficiently schedule labor to better serve customers, monitor labor costs, assist in product purchasing and menu mix management, promptly access financial and operating data, and improve the accuracy and efficiency of restaurant-level information and reporting.

We utilize an integrated information system to manage the flow of information within each of our restaurants and between each restaurant and our corporate office. This system includes a point-of-sale (POS) local area network that helps facilitate the operations of the restaurant by recording sales transactions and printing orders in the appropriate locations within the restaurant. Additionally, we utilize the POS system to authorize, batch, and transmit credit card transactions, record employee time clock information, and produce a variety of management reports. The POS is integrated with food cost and labor scheduling software as well as our accounting system and incorporates a redundancy and back-up emergency operating plan on a temporary basis if the system experiences downtime.

We transmit electronically select information that is captured from the POS system to our corporate office on a daily basis. This information flow enables senior management to monitor operating results with daily and weekly sales analysis, detailed labor and food cost information, and comparisons between actual and budgeted operating results. We continually evaluate both our restaurant information systems and corporate office information systems to enhance operations. ~~We believe our information systems are secure and scalable as we continue to build our brand.~~

Advertising and Marketing

Our ongoing advertising and marketing strategy consists of a loyalty program, social media, grass-root local marketing, various public relations activities and word-of-mouth recommendations. We believe that these mediums are key components in driving customer trial and repeat usage. We have invested, and expect to continue to invest, in marketing and branding efforts, primarily to increase revenue and expand brand awareness. In addition, we use various social media platforms and our website, www.konagrill.com, to promote brand awareness.

We implement a coordinated public relations effort in conjunction with each new restaurant opening. Approximately 60 days before a scheduled restaurant opening, we collaborate with the local media to publicize our restaurant and generate awareness of our brand. This effort is usually supplemented by targeted marketing campaigns, social media and other marketing efforts, including hosting a high-profile event in which we invite local leaders and community members as part of our preopening practice activities to introduce our concept to the local market. In addition, we use various social media platforms and our website, www.konagrill.com, to promote brand awareness.

Competition

The restaurant industry is highly competitive. Key competitive factors in the industry include the taste, quality, and price of food and drink offerings, quality and speed of customer service, brand name recognition, attractiveness of facilities, restaurant location, customer convenience and overall dining experience.

We believe we compete favorably with respect to each of these factors, as follows:

● We offer a ~~global~~broad menu of contemporary American favorites, award-winning sushi items and specialty cocktails; ● We strive to maintain quality and consistency in each of our restaurants through the careful training and supervision of restaurant personnel and adherence to high standards related to personnel performance, food and beverage preparation, and maintenance of our restaurants;

●

Our innovative menu with attractive price points, attentive service, and contemporary restaurant design with multiple environments blend together to create our upscale casual dining experience and enables us to attract a broad customer demographic.

●

We offer online ordering through our website, catering and group dining menus, and partner with third parties for delivery service of our food and drink offerings.

7Although we believe we compete favorably with respect to each of these factors, there are a substantial number of restaurants and food service providers that compete directly and indirectly with us, many of which have significantly greater financial resources, higher revenue, and greater economies of scale. The restaurant business is often affected by changes in consumer tastes and discretionary spending patterns; national and regional employment statistics; demographic trends; weather conditions; the cost and availability of raw materials, labor, and energy; purchasing power; governmental regulations; and local competitive factors. Any change in these or other related factors or negative publicity relating to food safety could adversely affect our restaurant operations. Accordingly, we must constantly evolve and refine the critical elements of our restaurant concept over time to protect their longer-term competitiveness. Additionally, there is competition for highly qualified restaurant management employees and for attractive locations suitable for high volume restaurants.

Although we believe we compete favorably with respect to each of these factors, there are a substantial number of restaurants and food service providers that compete directly and indirectly with us, many of which have significantly greater financial resources, higher revenue, and greater economies of scale. The restaurant business is often affected by changes in consumer tastes and discretionary spending patterns; national and regional employment statistics; demographic trends; weather conditions; the cost and availability of raw materials, labor, and energy; purchasing power; governmental regulations; and local competitive factors. Any change in these or other related factors or negative publicity relating to food safety could adversely affect our restaurant operations. Accordingly, we must constantly evolve and refine the critical elements of our restaurant concept over time to protect their longer-term competitiveness. Additionally, there is competition for highly qualified restaurant management employees and for attractive locations suitable for upscale, high volume restaurants.

Trademarks

We have registered the service marks “Kona Grill” and “Konavore” with the United States Patent and Trademark Office and “Kona Grill” in certain foreign jurisdictions. We believe that our trademarks and other proprietary rights, such as our distinctive menu offerings and signature sauce recipes, have significant value and are important to the marketing of our concept. We have protected in the past and will continue to vigorously protect our proprietary rights. We cannot predict, however, whether steps taken by us to protect our proprietary rights will be adequate to prevent misappropriation of these rights or the use by others of restaurant features based upon, or otherwise similar to, our concept. It may be difficult for us to prevent others from copying elements of our concept and any litigation to enforce our rights will likely be costly. In addition, other local restaurant companies with names similar to ours may try to prevent us from using our marks in those locales.

Government Regulation

Each of our restaurants is subject to licensing and regulation by state and local departments and bureaus of alcohol control, health, sanitation, zoning, and fire and to periodic review by state and municipal authorities for areas in which the restaurants are located. ~~In addition, we are subject to local land use, zoning, building, planning, and traffic ordinances and regulations in the selection and acquisition of suitable sites for developing new restaurants.~~ Delays in obtaining, or denials of, or revocation or temporary suspension of, necessary licenses or approvals could have a material adverse impact on our restaurant ~~development~~operations.

Alcoholic beverage control regulations require each of our restaurants to apply to a state authority and, in certain locations, county and municipal authorities for a license and permit to sell alcoholic beverages on the premises. Typically, licenses must be renewed annually and may be subject to penalties, temporary suspension or revocation for cause at any time. Alcoholic beverage control regulations impact many aspects of the daily operations of our restaurants, including the minimum age of patrons and employees, hours of operation, inventory control and handling, and storage and dispensing of alcoholic beverages. We have not encountered any material problems relating to alcoholic beverage licenses or permits to date. The failure of a restaurant to obtain or retain its liquor license would adversely affect that restaurant’s operations and profitability.

We are subject to “dram shop” statutes in most of the states in which we operate. Those statutes generally provide a person who has been injured by an intoxicated person the right to recover damages from an establishment that wrongfully served alcoholic beverages to such person. We carry liquor liability coverage as part of our existing comprehensive general liability insurance which we believe is consistent with coverage in the full-service restaurant industry. Even though we carry liquor liability insurance, a judgment against us under a “dram shop” statute in excess of our liability coverage could have a material adverse effect on our operations.

Our operations are also subject to federal and state laws governing such matters as wages, working conditions, citizenship requirements, and overtime. Several states have set minimum wage rates higher than the current federal level. A significant number of hourly personnel at our restaurants are paid at rates related to state and federal minimum wage laws and, accordingly, state minimum wage increases implemented during the last several years have increased our labor costs. Increases in the minimum wage rate or the cost of workers’ compensation insurance, changes in tip-credit provisions, employee benefit costs (including costs associated with mandated health insurance coverage), or other costs associated with employees could adversely affect our operating results. To our knowledge, we are in compliance in all material respects with applicable federal, state, and local laws affecting our business.

Employees

As of ~~February~~March 2831, ~~2018~~2019, we employed 32,~~638~~968 people of whom 32,~~588~~936 worked in our restaurants and 5032 were employed at our corporate office. None of our employees are covered by a collective bargaining agreement. We have never experienced a major work stoppage, strike, or labor dispute. We consider our relations with our employees to be favorable.

Access to Information

Our website is located at www.konagrill.com. The information on our website is not part of this filing. Through our website, we make available free of charge our annual report on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements, and any amendments to those reports filed or furnished to the Securities and Exchange Commission. These reports are available as soon as reasonably practicable after we electronically file these reports with the SEC. We also post on our website the charters of our Audit, Compensation, and Nominating Committees; Code of Business Conduct and Ethics; Code of Ethics for the Chief Executive Officer and Senior Financial Officers; Insider Trading Policy and any other corporate governance materials required by SEC or NASDAQ regulations. These documents are also available in print to any stockholder requesting a copy from our corporate secretary at our executive offices.

Item 1A. Risk Factors

Risks Related to Our Business

~~The~~We ~~impact~~are ~~general~~currently ~~economic~~evaluating ~~conditions~~strategic ~~have~~alternatives onincluding, ~~consumer~~but ~~discretionary~~not ~~spend~~limited ~~could~~to, ~~negatively~~the ~~affect~~sale ~~our~~of ~~business~~the ~~and~~Company, ~~results~~but ofmay ~~operations~~not be successful in effecting a sale transaction.

~~Purchases~~In atMarch ~~our~~2019, ~~restaurants~~we ~~are~~announced ~~discretionary~~that ~~for~~our ~~consumers~~Board ~~and~~of weDirectors, ~~are~~working ~~therefore~~together ~~susceptible~~with toour ~~economic~~management ~~slowdowns.~~team, Weengaged ~~believe~~Piper ~~that~~Jaffray ~~consumers~~as ~~generally~~our ~~are~~financial ~~more~~advisor ~~willing~~ to ~~make~~assist ~~discretionary~~with ~~purchases~~the ~~during~~evaluation ~~favorable~~of ~~economic~~strategic ~~conditions. Economic and political uncertainty~~alternatives, ~~financial~~including ~~market volatility and unpredictability, and~~ the ~~oversupply~~possible sale of ~~restaurants~~our ~~in the U~~business.S There can ~~all~~be ~~negatively~~no ~~affect~~assurance ~~customer~~that ~~traffic~~the ~~and~~process ~~sales~~that ~~throughout~~we ~~our~~are ~~industry.~~undertaking Ifwill ~~the~~be ~~economy~~successful. ~~experiences~~In ~~a downturn or continued uncertainties~~addition, ~~our~~we ~~customers~~cannot ~~may~~predict ~~further~~the ~~reduce~~terms ~~their~~or ~~level~~timing of ~~discretionary~~any ~~spending,~~transaction ~~impacting~~that ~~the~~we ~~frequency~~may ~~with~~undertake ~~which~~or ~~they~~whether ~~choose~~any tosuch ~~dine~~transaction ~~out~~will orresult ~~the~~in ~~amount~~any ~~they~~proceeds ~~spend~~for onthe ~~meals~~holders ~~while~~of ~~dining~~our ~~out.~~common stock.

~~There~~Additionally, iswe ~~also~~are ain ~~risk~~discussions ~~that~~with ifour ~~uncertain~~secured ~~economic~~lenders ~~conditions~~in ~~persist for~~ an ~~extended~~effort ~~period~~to ofpursue ~~time~~various orstrategic ~~worsen,~~alternatives. We ~~consumers~~can ~~might~~give ~~make~~no ~~long-lasting~~assurance ~~changes~~that towe ~~their~~will ~~discretionary~~successfully ~~spending~~execute ~~behavior,~~any ~~including~~strategic ~~dining~~alternatives ~~out~~we ~~less~~are ~~frequently.~~currently ~~The~~pursuing ~~ability~~or ofany ~~the~~others, ~~U.S.~~and ~~economy~~our ability to ~~handle~~do ~~this~~so ~~uncertainty~~could ~~is likely to~~ be adversely affected by ~~many~~numerous ~~national and international~~ factors ~~that are beyond our control. These factors~~, including ~~national,~~changes ~~regional~~in ~~and~~the ~~local~~economic ~~politics~~or ~~and~~business ~~economic conditions~~environment, ~~disposable~~financial ~~consumer~~market ~~income and consumer confidence~~volatility, ~~also affect discretionary consumer spending. Continued uncertainty in or a worsening of~~ the ~~economy,~~performance ~~generally or in a number~~ of our ~~markets~~business, and ~~our customers’ reactions to these trends could adversely affect our revenues and cause us to, among other things, reduce~~ the ~~number~~terms and ~~frequency~~conditions of ~~new~~our ~~restaurant~~credit ~~openings, close restaurants and delay remodeling of existing locations~~facility.

~~Our~~We ~~sales~~may ~~and~~be ~~ability~~required to ~~generate~~file ~~profits~~for ~~could~~protection bein ~~adversely~~bankruptcy, ~~affected~~even if ~~comparable~~we ~~restaurant~~are ~~sales~~successful ~~are~~in ~~less~~effecting ~~than~~a wesale ~~expect,~~of ~~and~~our webusiness or improving our capital structure. Any bankruptcy proceeding may ~~not~~result ~~successfully~~in ~~increase~~the ~~comparable~~holders ~~restaurant~~of ~~sales~~our orcommon ~~they~~stock ~~may~~receiving ~~decrease.~~no proceeds.

~~While~~It ~~future~~is ~~sales~~possible ~~growth~~that ~~will~~even ~~depend~~a ~~substantially~~successful onimplementation ~~opening~~of ~~new~~one ~~restaurants,~~of ~~changes~~the instrategic ~~comparable~~alternatives orthat ~~same-store~~we ~~restaurant~~are ~~sales~~pursuing will ~~also~~require ~~affect~~us ~~our sales growth and will continue~~ to bemake a ~~critical~~filing ~~factor~~for inprotection ~~generating~~under ~~future~~Chapter ~~profits.~~11 ~~This~~of isthe ~~because~~U.S. ~~the~~Bankruptcy ~~profit~~Code. ~~margin~~Our onseeking ~~comparable~~relief ~~restaurant~~under ~~sales~~the isU.S. ~~generally~~Bankruptcy ~~higher~~Code, aswhether ~~comparable~~or ~~restaurant~~not ~~sales~~such ~~increases~~relief ~~enable~~leads ~~fixed costs~~ to ~~be spread over~~ a ~~higher~~quick ~~sales~~emergence ~~base.~~from ~~Conversely~~Chapter 11, ~~declines~~could inmaterially ~~comparable~~adversely ~~restaurant~~affect ~~sales can have a significant adverse effect on profitability due to~~ the ~~loss~~relationships ofbetween ~~the~~us ~~positive~~and ~~impact~~our onexisting ~~profit~~and ~~margins~~potential ~~associated~~customers, ~~with~~employees, ~~comparable~~suppliers, ~~restaurant~~and ~~sales increases~~others.

9We are currently pursuing certain strategic alternatives in an effort to improve our capital structure, but these efforts may not be successful.

~~Our~~We ~~comparable~~currently ~~restaurant~~have ~~sales~~$33.2 ~~decreased~~million in ~~2017~~secured debt pursuant to our Second Amended and Restated Credit Agreement (“credit facility”) that is due in January 2020 unless earlier accelerated because of an event of default. Because the Company did not a) pay its quarterly principal payment due March 31, 2019; b) furnish the lenders audited financial statements within 90 days after ~~six~~the ~~consecutive~~end ~~years~~of fiscal 2018; and c) provide certain compliance certificates by April 1, 2019, the Company received a reservation of ~~increases~~rights letter indicating that the Company is in default in the performance of its obligations under the credit facility and the lenders have the right to accelerate the due date of such debt. As of the date of this report, the Company has not received an acceleration notice from its secured lenders. Furthermore, given our ~~units~~recent ~~continue~~same instore ~~operation~~sales ~~and~~declines, ~~new~~we ~~restaurants~~are ~~enter~~doubtful that we can obtain debt refinancing on terms acceptable to the ~~comparable~~Company. We ~~base~~can give no assurance that we will successfully execute any strategic alternatives we are currently pursuing or any others, itand ~~may~~our ability to do so could be ~~more~~adversely ~~difficult~~affected toby ~~achieve~~numerous ~~significant~~factors, ~~increases~~including changes in ~~comparable~~the ~~restaurant~~economic ~~sales.~~or ~~Further~~business environment, financial market volatility, the ~~impact~~performance of ~~the~~our ~~factors~~business, ~~noted~~and ~~below~~the ~~may~~terms ~~lower~~and ~~our~~conditions ~~expectations~~of ~~for~~the ~~comparable~~credit ~~restaurant~~facility, ~~sales:~~as amended.

● changes in consumer preferences and discretionary spending, including weaker consumer spending in periods of economic difficulty or uncertainty and shift of consumer spending away from shopping malls to more on-line shopping;7

●We ~~consumer~~may ~~understanding~~be ~~and~~required ~~acceptance~~to offile ~~the~~for ~~Kona~~protection ~~Grill~~in ~~experience~~bankruptcy, ~~and~~even ~~perception~~if we are successful in effecting a sale of our business or improving our capital structure. Any bankruptcy proceeding may result in the ~~Kona~~holders ~~Grill~~of ~~brand;~~our common stock receiving no proceeds.

●In ~~weather~~the event that we cannot refinance the Company or otherwise obtain new capital, ~~road~~or ~~construction~~in the event that no third party acquires our secured debt and ~~other~~renegotiates ~~factors~~its ~~limiting~~terms, ~~access~~the Company may be required to file for Chapter 11 protection of the U.S. Bankruptcy Code. . Our seeking relief under the U.S. Bankruptcy Code, whether or not such relief leads to a quick emergence from Chapter 11, could materially adversely affect the relationships between us and our ~~restaurants~~existing and potential customers, employees, suppliers, and others, and could result in little or no recovery to our existing security holders.

●You ~~competition,~~should ~~either~~not ~~from~~rely ~~our~~on ~~competitors~~historical results in ~~the~~our restaurant ~~industry,~~sales or ~~from~~ our ~~own~~average ~~restaurants~~unit ~~within~~volumes ~~the~~as ~~same~~an ~~market~~indication ~~in the event customers who frequent one~~ of our ~~restaurants~~future ~~begin~~results toof ~~visit~~operations ~~one~~because ofthey ~~our~~may ~~new~~fluctuate ~~restaurants instead;~~significantly.

●A ~~our~~number ~~ability~~of tofactors ~~increase~~have ~~menu~~historically ~~prices~~affected, ~~without~~and ~~adversely~~will ~~impacting~~continue ~~customer traffic~~ to ~~such~~affect, aour ~~degree~~restaurant ~~that~~sales ~~the~~and ~~impact~~average ofunit ~~the~~volumes, ~~decrease~~including, inamong ~~customers~~other ~~equals or exceeds the benefit of the menu price increase;~~factors:

● ~~any~~our ~~“trade~~ability ~~down” by customers or other reduction in average check per person in response~~ to ~~price~~execute ~~increases, which could reduce or eliminate the benefit of the price increase on comparable restaurant sales; executing~~ our ~~strategies~~business ~~effectively, including development~~ strategy, ~~menu improvement initiatives and marketing and branding strategies, each of which may not have the impact we expect~~effectively;

● ~~turnover~~our ofability ~~key~~to ~~operations~~obtain ~~and~~consistent ~~restaurant~~supplies ~~personnel~~from vendors;

● ~~negative publicity relating to food safety or quality~~competition; ~~and~~

● ~~changes~~consumer intrends ~~government~~and ~~regulation.~~confidence;

As● aintroduction ~~result, it is possible that we will not achieve our targeted comparable restaurant sales or that the change in comparable restaurant sales could be negative. If this were to happen, sales~~ and ~~profitability~~customer ~~would~~acceptance ~~be adversely affected and our stock price would likely decline. Further, many~~ of ~~our~~new ~~competitors~~menu ~~have~~items; ~~substantially greater financial, marketing~~ and other resources than we do to withstand prolonged periods of declines in comparable restaurant sales and regional and national restaurant companies continue to expand their operations into our current market areas, thereby increasing competition for market share.

We● ~~depend~~regional ~~upon high levels of consumer traffic at the sites where our restaurants are located~~ and ~~any~~national ~~adverse~~macroeconomic change in consumer activity could negatively affect our restaurant sales and have required us to record an impairment charge for restaurants performing below expectations, and may result in future impairmentsconditions.

Our ~~restaurants~~restaurant ~~are~~sales ~~primarily located in high-activity areas such as retail centers, shopping malls,~~ and ~~lifestyle~~average ~~centers.~~unit Wevolumes ~~depend~~may onnot ~~high~~increase ~~consumer~~at ~~traffic~~ rates atachieved these centers to attract customers to our restaurants. In general, such visit frequencies are significantly affected by many factors, including national, regional or local economic conditions, anchor tenants closing in ~~retail~~prior ~~centers~~fiscal oryears ~~shopping malls in which we operate, changes in consumer preferences~~ or ~~shopping~~may ~~patterns,~~decrease ~~changes~~below inlevels ~~demographic~~achieved ~~and economic patterns~~ in neighborhoods and trade areas where our restaurants are located, higher frequency of online shopping, changes in discretionary consumer spending, changes in gasoline prices, or otherwise. Several shopping malls experienced declining consumer traffic in recent years. IfChanges ~~visitor~~in ~~rates~~our torestaurant ~~these~~sales ~~centers~~and ~~continue~~average ~~to decline, our~~ unit volumes could ~~decline~~cause ~~and adversely affect our results of operations. We recorded long-lived asset impairment charges of $9.3 million and $12.5 million, for~~ the ~~years~~price ~~ended December 31, 2017, and 2016 respectively. Such amounts are included in "Asset impairment charge" in the Consolidated Statements~~ of ~~Comprehensive~~our ~~Loss.~~common ~~See~~stock ~~Note 2 in the Notes~~ to ~~the~~fluctuate ~~Consolidated Financial Statements for further details on the impairment charges~~substantially. ~~We may be required to record impairment charges in the future if our restaurants perform below expectations.~~

10The impact general economic conditions have on consumer discretionary spend could negatively affect our business and results of operations.

~~Our~~Purchases ~~failure~~at our restaurants are discretionary for consumers and we are therefore susceptible to ~~satisfy~~economic slowdowns. We believe that consumers generally are more willing to make discretionary purchases during favorable economic conditions. Economic and political uncertainty, financial ~~covenants~~market volatility and~~/or~~ ~~repayment~~unpredictability, ~~requirements~~and ~~under~~the oversupply of restaurants in the U.S can all negatively affect customer traffic and sales throughout our ~~credit~~industry. ~~facility~~If ~~could~~the ~~harm~~economy experiences a downturn or continued uncertainties, our ~~financial~~customers ~~condition~~may further reduce their level of discretionary spending, impacting the frequency with which ~~could~~they ~~materially~~choose ~~adversely~~to ~~affect~~dine ~~our~~out ~~financial~~or ~~performance~~the amount they spend on meals while dining out.

WeThere ~~have~~is aalso ~~secured credit facility consisting of~~ a ~~$25~~risk ~~million~~that ~~revolver~~if ~~and~~uncertain aeconomic ~~$15~~conditions ~~million~~persist ~~term~~for ~~loan~~an ~~(collectively,~~extended ~~the~~period ~~“credit facility”). As~~ of ~~December~~time ~~31,~~or ~~2017~~worsen, weconsumers ~~had~~might ~~$37.8~~make ~~million~~long-lasting ~~outstanding~~changes ~~under the credit facility. The credit facility requires us~~ to ~~maintain~~their ~~certain~~discretionary ~~financial~~spending ~~covenants. At December 31~~behavior, ~~2017,~~including wedining ~~were~~out ~~not~~less infrequently. ~~compliance~~The ~~with~~ability ~~these~~of ~~covenants and~~ the ~~credit~~U.S. ~~facility~~economy ~~was subsequently amended~~ to ~~alter~~handle ~~the~~this ~~financial~~uncertainty ~~covenants~~is solikely ~~that the financial covenants were met as of December 31, 2017. However, any failure~~ to ~~maintain~~be ~~these~~affected ~~financial~~by ~~covenants~~many ornational ~~have~~and ~~sufficient~~international ~~liquidity~~factors tothat ~~repay~~are ~~principal~~beyond ~~payments~~our ~~when~~control. ~~due~~These orfactors, ~~the~~including ~~then~~national, ~~outstanding~~regional ~~balance~~and atlocal ~~the~~politics ~~expiration~~and ofeconomic ~~the credit facility~~conditions, ordisposable ~~upon~~consumer ~~violation~~income ofand ~~the~~consumer ~~covenants~~confidence, ~~would~~also ~~materially adversely~~ affect ~~our~~discretionary ~~financial~~consumer ~~condition and performance~~spending. ~~There~~Continued ~~can~~uncertainty bein noor ~~assurance~~a ~~that~~worsening inof the ~~future~~economy, ~~the~~generally ~~Company~~or ~~will be~~ in ~~compliance~~a ~~with~~number ~~all covenants or that its lenders would waive any violations~~ of ~~such~~our ~~covenants.~~markets, ~~Non-compliance~~and ~~with~~our ~~debt~~customers’ ~~covenants~~reactions byto ~~the~~these ~~Company~~trends could ~~have~~adversely aaffect ~~material~~our ~~adverse~~revenues ~~effect~~and oncause ~~the~~us ~~Company’s business~~to, ~~results~~among ofother ~~operations~~things, ~~and~~close ~~financial~~restaurants ~~condition~~ and ~~impact~~delay ~~our~~remodeling ~~ability~~of toexisting ~~continue as a going concern~~locations.

~~Our failure to meet operating performance expectations could result in serious doubt about our ability to remain a going concern.~~8

~~The~~Our ~~financial~~sales statements included in this report have been prepared assuming the Company will continue as a going concern. The Company has incurred losses resulting in an accumulated deficit of $79.7 million, has a net working capital deficit of $7.6 million and outstanding debt of $37.8 million as of December 31, 2017. These conditions together with recent debt covenant violations and subsequent debt covenant waivers and debt amendments, raise substantial doubt about the Company’s ability to ~~continue~~generate asprofits acould ~~going~~be ~~concern.~~adversely ~~The~~affected ~~ability~~if tocomparable ~~continue~~restaurant assales aare ~~going~~less ~~concern~~than iswe ~~dependent upon the Company generating profitable operations~~expect, ~~improving liquidity~~ and ~~reducing~~we ~~costs~~may tonot ~~meet~~successfully ~~its~~increase ~~obligations~~comparable ~~and repay its liabilities arising from normal business operations when they become due. The Company has evaluated its plans to alleviate this doubt, which will include slowing new~~ restaurant ~~development~~sales, implementing cost-savings initiatives and evaluating potential closure of underperforming restaurants. While the Company believes that its existing cash and cash equivalents as of December 31, 2017, coupled with its anticipated cash flow generated from operations, will be sufficient to meet its anticipated cash requirements, there can be no assurance that the Company will be successful in its plans to increase profitability or tothey ~~obtain alternative financing on acceptable terms, when required or if at all. If such plans are not realized, the Company~~ may ~~be forced to limit its business activities or be unable to continue as a going concern, which will have a material adverse effect on our results of operations and financial condition~~decrease. These financial statements included in this report do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

~~Our~~Changes ~~future~~in ~~financial~~comparable ~~growth~~or ~~depends~~same-store inrestaurant ~~part~~sales onhave negatively affected our ~~ability~~sales growth and will continue to ~~open~~be ~~new~~a ~~restaurants~~critical ~~and~~factor ~~operate~~in ~~them~~generating ~~profitably~~future profits. This is because the profit margin on comparable restaurant sales is generally higher, ~~and~~as ifcomparable werestaurant ~~are~~sales ~~unable~~increases enable fixed costs to ~~successfully~~be ~~execute~~spread ~~this~~over ~~strategy~~a higher sales base. Conversely, ~~our~~declines ~~results~~in comparable restaurant sales can have a significant adverse effect on profitability due to the loss of ~~operations~~the ~~could~~positive beimpact ~~adversely~~on ~~affected~~profit margins associated with comparable restaurant sales increases.

Our ~~financial~~comparable ~~success~~restaurant ~~depends~~sales indecreased ~~part~~by on12.3% ~~management’s~~in ~~ability~~2018 toand ~~execute~~5.9% ~~our~~in ~~growth~~2017 ~~strategy.~~after ~~One~~six ~~key~~consecutive ~~element~~years of ~~our~~comparable ~~growth~~restaurant ~~strategy~~sale ~~is opening new restaurants~~increases. ~~After~~As ~~opening~~our ~~eight~~units ~~restaurants~~continue ~~during~~in ~~2016~~operation, weit ~~opened~~may ~~only~~be ~~one~~difficult ~~restaurant~~to ~~during~~achieve ~~2017.~~significant ~~Our~~increases ~~current~~in ~~plans~~comparable ~~are~~restaurant ~~for~~sales. ~~modest~~Further, ~~growth over~~ the ~~next~~impact ~~few~~of ~~years~~the asfactors wenoted ~~focus~~below onmay ~~improving~~lower ~~the profitability of~~ our ~~existing~~expectations ~~restaurants.~~for ~~Our~~comparable ~~ability~~restaurant ~~to open new restaurants and operate them profitably is dependent upon a number of factors, many of which are beyond our control, including~~sales:

● ~~finding~~changes ~~quality~~in ~~sites~~consumer preferences and discretionary spending, ~~competing~~including ~~effectively~~weaker toconsumer ~~obtain~~spending ~~quality~~in ~~sites~~periods of economic difficulty or uncertainty and ~~reaching~~shift ~~acceptable~~of ~~agreements~~consumer spending away from shopping malls to ~~lease~~more ~~sites~~on-line shopping;

● ~~complying~~consumer ~~with~~understanding ~~applicable~~and ~~zoning,~~acceptance ~~land~~of ~~use~~the ~~and~~Kona ~~environmental~~Grill ~~regulations~~experience and ~~obtaining,~~perception ~~for~~of anthe ~~acceptable~~Kona ~~cost,~~Grill ~~required permits and approvals~~brand;

● ~~having~~weather, ~~adequate~~road ~~capital for~~ construction and ~~opening~~other ~~costs~~factors ~~and~~limiting ~~efficiently~~access ~~managing the time and resources committed~~ to ~~building~~our ~~and opening each new restaurant;~~restaurants

● ~~timely~~competition, ~~hiring~~either ~~and~~from ~~training~~our ~~and~~competitors ~~retaining~~in the ~~skilled~~restaurant ~~management~~industry, ~~and~~or from grocery stores or other ~~employees~~service ~~necessary~~providers towho ~~meet~~offer ~~staffing~~similar ~~needs~~menu items;

● ~~successfully~~our ~~promoting~~ability ~~our~~to ~~concept~~increase ~~and~~menu ~~competing~~prices without adversely impacting customer traffic to such a degree that the impact of the decrease in ~~new~~customers ~~markets~~equals or exceeds the benefit of the menu price increase;

● ~~acquiring~~any ~~food~~“trade ~~and~~down” by customers or other ~~supplies~~reduction ~~for~~in ~~new~~average ~~restaurants~~check ~~from~~per ~~local~~person ~~suppliers~~in response to price increases, which could reduce or eliminate the benefit of the price increase on comparable restaurant sales; executing our strategies effectively, including menu improvement initiatives and marketing and branding strategies, each of which may not have the impact we expect;

● ~~addressing~~turnover ~~unanticipated~~of ~~problems~~key oroperations, ~~risks~~corporate ~~that~~and ~~may arise during the development or opening of a new~~ restaurant ~~or entering a new market.~~personnel;

We● ~~have~~our ~~opened~~ability ~~and intend~~ to ~~open~~maintain ~~restaurants~~consistent inservice ~~markets~~standards in ~~which we have no prior operating experience and in which~~ our ~~brand may not be well-known. These new markets may have different competitive conditions, consumer tastes, and discretionary spending patterns than~~ restaurants ~~in our existing markets. Accordingly, sales at restaurants opening in new markets may take longer to achieve or may not achieve average unit volumes comparable with our existing restaurants.~~

11● negative publicity relating to food safety or quality; and

~~Additionally,~~● achanges new restaurant typically experiences a “ramp-up” period of approximately 18 months or more before it achieves our targeted level of performance. This is due to the costs associated with opening a new restaurant, as well as higher operating costs caused by start-up and other temporary inefficiencies associated with opening new restaurants. For example, there are a number of factors which may impact the amount of time and money we commit to the construction and development of new restaurants, including landlord delays, shortages of skilled labor, labor disputes, shortages of materials, delays in ~~obtaining necessary permits, local~~ government ~~regulations and weather interference~~regulation. Once the restaurant is open, how quickly it achieves a desired level of profitability is impacted by many factors, including the level of market familiarity and acceptance when we enter new markets, as well as the availability of experienced staff and the time required to negotiate reasonable prices for services and other supplies from local suppliers. Our business and profitability may be adversely affected if the “ramp-up” period for a new restaurant lasts longer than we expect.

To As ~~the~~a ~~extent~~result, it is possible that we ~~open~~will ~~new~~continue ~~restaurants~~to experience declines in our comparable restaurant sales. If this were to happen, wesales ~~may~~and profitability would be adversely affected, byand ~~delays~~our orstock ~~problems~~price ~~associated~~would ~~with~~likely ~~securing~~decline. ~~suitable~~Further, ~~restaurant~~many ~~locations~~of ~~and~~our ~~leases~~competitors ~~and~~have bysubstantially ~~other~~greater ~~factors~~financial, ~~some~~marketing and other resources than we do to withstand prolonged periods of ~~which~~declines ~~are~~in ~~beyond~~comparable ~~our~~restaurant ~~control~~sales and ~~the~~regional ~~timing~~and ofnational ~~which~~restaurant iscompanies ~~difficult~~continue to ~~forecast~~expand ~~accurately~~their operations into our current market areas, thereby increasing competition for market share.

~~Due~~We independ ~~part~~upon tohigh ~~the~~levels ~~unique nature~~ of ~~each~~consumer ~~proposed~~traffic ~~restaurant~~at ~~location, we cannot predict~~ the ~~timing~~sites orwhere ~~ultimate~~our ~~success~~restaurants ofare ~~our~~located ~~site~~and ~~selection~~any ~~process~~adverse orchange ~~our~~in ~~ability~~consumer toactivity ~~open~~could ~~new~~negatively ~~restaurants~~affect onour arestaurant ~~timely~~sales ~~basis~~and ~~after~~have werequired ~~have~~us ~~identified~~to ~~sites.~~record ~~Our~~an ~~long-term~~impairment ~~goal~~charge isfor torestaurants ~~strategically~~performing ~~expand~~below ~~the~~expectations, ~~Kona~~and ~~Grill~~may ~~concept~~result in ~~both~~future ~~new and existing markets~~impairments.

~~There~~Our ~~can~~restaurants beare noprimarily ~~assurance~~located ~~that~~in ~~any~~high-activity ~~unit~~areas ~~growth~~such ~~goal~~as ~~will~~retail becenters, ~~realized~~shopping ~~because~~malls, ~~our~~and ~~ability~~lifestyle centers. We depend on high consumer traffic rates at these centers to ~~open~~attract ~~new~~customers to our restaurants. ~~depends~~In ~~upon~~general, asuch ~~number~~visit offrequencies are significantly affected by many factors, ~~many~~including ofnational, regional or local economic conditions, anchor tenants closing in retail centers or shopping malls in which we operate, changes in consumer preferences or shopping patterns, changes in demographic and economic patterns in neighborhoods and trade areas where our restaurants are ~~beyond~~located, higher frequency of online shopping, changes in discretionary consumer spending, changes in gasoline prices, or otherwise. Several shopping malls experienced declining consumer traffic in recent years. If visitor rates to these centers continue to decline, our ~~control~~unit volumes could decline and adversely affect our results of operations. We recorded long-lived asset impairment charges of $18.3 million and $9.3 million, ~~including~~for the ~~following:~~years ended December 31, 2018, and 2017 respectively. Such amounts are included in "Asset impairment charge" in the Consolidated Statements of Operations. See Note 2 in the Notes to the Consolidated Financial Statements for further details on the impairment charges. We continue to monitor the recoverability of the carrying value of the assets of several other restaurants on an ongoing basis. For those restaurants, if expected performance improvements are not realized, additional impairment charges may be recognized in future periods. Additionally, due to the fact that strategic alternatives are being evaluated, which includes a potential Chapter 11 filing, additional impairment and/or store closures could have a significant impact on the consolidated financial statements.

~~● the availability and cost of suitable restaurant locations for development and our ability to compete successfully for those locations;~~9

●Our ~~difficulty~~failure ~~negotiating~~to ~~leases~~satisfy ~~with~~financial ~~acceptable~~covenants ~~terms;~~and/or repayment requirements under our credit facility could harm our financial condition which could materially adversely affect our financial performance.

●We ~~cash~~have ~~flow~~a ~~generated~~secured bycredit facility consisting of a $20.0 million revolver and a $15.0 million term loan (collectively, the “credit facility”). As of December 31, 2018, we had $33.2 million outstanding under the credit facility. The credit facility requires us to maintain certain financial covenants. At December 31, 2018, we were in compliance with these covenants. On April 2, 2019, we received a Notice of Default and Reservation of Rights Letter for failure to pay our ~~existing~~quarterly ~~restaurants;~~principal payment due March 31, 2019, failure to provide audited financial statements within 90 days of fiscal year end, and failing to provide a covenant compliance certificate that was due April 1, 2019. As a result, the Company is in default in the performance of its obligations under the credit facility and the lenders have the right to accelerate the due date of such debt. The failure to maintain compliance with these financial covenants combined with insufficient liquidity to repay the debt balance when due materially adversely affects our financial condition and performance.

●There ~~delay~~can be no assurance that in the future the Company will be in compliance with all covenants or ~~cancellation~~that its lenders would waive any violations of ~~new~~such ~~site~~covenants. ~~development~~Non-compliance with debt covenants by ~~developers~~the ~~and~~Company ~~landlords,~~could ~~which~~have ~~may~~a ~~become~~material ~~increasingly~~adverse ~~common~~effect ~~during~~on ~~periods~~the Company’s business, results of ~~economic~~operations ~~uncertainty;~~and financial condition and could impact our ability to continue as a going concern.

●Our ~~difficulty~~failure ~~managing~~to ~~construction~~meet ~~and~~operating ~~development~~performance ~~costs~~expectations ofhas ~~new~~raised ~~restaurants~~substantial atdoubt ~~affordable~~about ~~levels,~~our ~~particularly~~ability into ~~competitive~~remain ~~markets;~~a going concern.

●The ~~labor~~financial ~~shortages~~statements orincluded ~~disputes~~in ~~experienced~~this byreport have been prepared assuming the Company will continue as a going concern. The Company has incurred losses resulting in an accumulated deficit of $111.9 million, has a net working capital deficit of $45.9 million and outstanding debt of $33.2 million as of December 31, 2018. On April 2, 2019, we received a Notice of Default and Reservation of Rights Letter for failure to pay our ~~landlords~~quarterly principal payment due March 31, 2019, failure to provided audited financial statements within 90 days of fiscal year end, and failing to provide a covenant compliance certificate that was due April 1, 2019. As a result, the Company is in default in the performance of its obligations under the credit facility and the lenders have the right to accelerate the due date of such debt. These conditions together with the debt covenant violations, raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company generating profitable operations, improving liquidity and reducing costs to meet its obligations and repay its liabilities arising from normal business operations when they become due. The Company has evaluated its plans to alleviate this doubt, which include evaluating strategic alternatives while also implementing initiatives to drive sales and reduce costs and the potential closure of underperforming restaurants. There can be no assurance that the Company will be successful in its plans to increase revenue, increase profitability or ~~outside~~to ~~contractors;~~obtain alternative financing on acceptable terms. If such plans are not realized, the Company may be forced to limit its business activities or be unable to continue as a going concern, which will have a material adverse effect on our results of operations and financial condition. These financial statements included in this report do not include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

●Any ~~unforeseen~~deterioration ~~engineering~~in general economic conditions could have a material adverse impact on our landlords or ~~environmental~~on ~~problems~~businesses ~~with~~neighboring ~~the~~our ~~leased~~locations, ~~premises;~~which could adversely affect our revenues and results of operations.

●Any deterioration in general economic conditions could result in our ~~ability~~landlords being unable to ~~secure~~obtain ~~governmental~~financing ~~approvals~~or ~~and~~remain ~~permits~~in good standing under their existing financing arrangements which could result in their failure to satisfy obligations to us under leases, including ~~liquor~~failures ~~licenses~~to fund or reimburse agreed-upon tenant improvement allowances. Any such failure could adversely impact our operations. Our restaurants are generally located in retail developments with nationally recognized co-tenants, ~~construction~~which ~~permits~~help increase overall customer traffic into those retail developments. Some of our co-tenants have or may cease operations in the future or have deferred openings or fail to open in a retail development after committing to do so. These failures may lead to reduced customer traffic and a general deterioration in the surrounding retail centers in which our restaurants are located and may contribute to lower customer traffic at our restaurants. If these retail developments experience high vacancy rates, we could experience decreases in customer traffic. As a result, our results of operations could be adversely affected, and ~~occupancy~~could ~~permits;~~result in further reductions in staff levels, additional impairment charges, and potential restaurant closures.

~~● obstacles to hiring and training qualified operating personnel in the local market, especially in highly competitive hiring environment;~~10

●Closing ~~inclement weather~~restaurants, ~~impact~~terminating ofleases ~~climate~~or ~~change,~~the ~~natural~~inability ~~disasters~~to ~~and~~renegotiate ~~other~~leases ~~calamities;~~could ~~and~~adversely impact our cash flow.

●We ~~general~~enter into long-term leases, usually with ten year terms. Since January 1, 2018 and through the current date, we have closed 12 restaurants and terminated two leases for restaurants not yet opened. As we close restaurants because of poor economic ~~conditions~~performance, we may be required to expend significant financial resources to terminate such leases. Furthermore, the Company is negotiating amending the terms of certain of the Company’s leases to improve restaurant level operation results. The failure to successfully renegotiate these leases would have an adverse impact on the Company’s cash flow. Further, poor operating results at any one restaurant or a group of restaurants could materially affect the financial performance for a particular period and perception of our company, making the investment risks related to any one location more significant than those associated with larger restaurant companies who have substantially greater financial and other resources.

~~Any~~We ~~deterioration~~depend inupon ~~general~~our ~~economic~~executive ~~conditions~~officers ~~could~~and ~~have~~may anot ~~material~~be ~~adverse~~able ~~impact~~to onretain ~~our~~or ~~landlords~~replace orthese onindividuals ~~businesses~~or ~~neighboring~~recruit ~~our~~additional ~~locations~~personnel, which could ~~adversely~~harm ~~affect~~ our ~~revenues and results of operations~~business.

~~Any~~The ~~deterioration~~loss inof ~~general~~the ~~economic~~services ~~conditions~~of ~~could~~any ~~result~~of in our ~~landlords~~executive ~~being~~officers ~~unable~~could tohave ~~obtain~~a ~~financing~~material oradverse ~~remain~~effect inon ~~good~~our ~~standing~~business ~~under~~and ~~their~~prospects, ~~existing~~as ~~financing~~we ~~arrangements~~may ~~which~~not ~~could~~be ~~result~~able ~~in their failure~~ to ~~satisfy~~find ~~obligations~~suitable toindividuals ~~us under leases, including failures~~ to ~~fund~~replace orsuch ~~reimburse~~personnel ~~agreed-upon~~on ~~tenant~~a ~~improvement~~timely ~~allowances~~basis. ~~Any~~In addition, any such ~~failure~~departure could ~~adversely~~be ~~impact~~viewed ~~our operations. Our restaurants are generally located~~ in ~~retail~~a ~~developments~~negative ~~with~~light ~~nationally~~by ~~recognized~~investors ~~co-tenants~~and analysts, which ~~help~~could ~~increase~~cause ~~overall~~our ~~customer~~common ~~traffic~~stock ~~into~~price ~~those~~to ~~retail developments~~decline. ~~Some~~To ofthe ~~our~~extent ~~co-tenants~~that ~~have~~our orbusiness ~~may~~expands, ~~cease~~our ~~operations~~future insuccess ~~the~~will ~~future~~depend orgreatly ~~have~~on ~~deferred~~our ~~openings~~continued orability ~~fail~~ to ~~open~~attract inand aretain ~~retail~~highly ~~development~~skilled ~~after~~and ~~committing~~qualified toexecutive-level ~~do so~~personnel. ~~These~~Our ~~failures~~inability ~~may lead~~ to ~~reduced~~attract ~~customer traffic~~ and aretain ~~general~~qualified ~~deterioration~~executive officers in the ~~surrounding~~future ~~retail~~could ~~centers~~impair ~~in which~~ our ~~restaurants~~growth ~~are located~~ and ~~may~~harm ~~contribute to lower customer traffic at~~ our ~~restaurants~~business. ~~If these retail developments experience high vacancy rates, we could experience decreases in customer traffic. As a result, our results of operations could be adversely affected.~~

12Failure to attract, retain and motivate effective leaders and the loss of key personnel could negatively impact our business.

~~Closing~~Our future success is highly dependent upon our ability to attract and retain key management and operations personnel. We must be able to attract, retain and motivate a sufficient number of qualified management and operations personnel, including culinary and training personnel, directors of operations, general managers and executive chefs. Our executive officers provide a vision for our company, execute our business strategy, and maintain consistency in the operating standards of our restaurants. orThe ~~terminating~~ability ~~leases~~of ~~could~~key ~~adversely~~management ~~impact~~and operations personnel to maintain consistency in the quality and diversity of our ~~cash~~menu ~~flow~~offerings as well as service and hospitality for customers is a critical factor in our future success. Any failure to attract, retain, and motivate key personnel may harm our reputation and result in a loss of business.

WeAdverse ~~enter~~weather ~~into long-term leases~~conditions, ~~usually~~impact ~~with~~of ~~ten~~climate ~~year~~change ~~terms.~~and Tonatural ~~the~~disasters ~~extent~~could ~~that~~adversely weaffect ~~must~~our ~~close~~results ~~a restaurant because~~ of ~~poor~~operations. ~~economic performance~~Additionally, ~~or to the extent that~~ we domay not ~~develop a restaurant for which we have signed a lease, we may~~ be ~~required~~able to ~~expend~~obtain ~~significant~~insurance ~~financial resources to terminate such lease. Further, poor operating results~~ at ~~any~~reasonable ~~one~~rates ~~restaurant or a delay or cancellation in the planned opening of a restaurant could materially affect the financial performance~~ for anatural ~~particular~~disasters ~~period~~ and ~~perception~~other ofevents ~~our~~which ~~company,~~are ~~making~~beyond ~~the~~our ~~investment risks related to any one location more significant than those associated with larger restaurant companies who have substantially greater financial and other resources~~control.

~~Due~~Adverse toweather conditions can impact customer traffic at our ~~small~~restaurants, ~~base~~cause the temporary underutilization of ~~existing~~outdoor ~~restaurants~~patio seating and ~~the~~in ~~significant~~more ~~expenses~~severe ~~required~~cases tosuch ~~open~~as ~~new~~hurricanes, ~~restaurants~~tornadoes and other natural disasters, ~~any~~cause ~~decision~~temporary toclosures, ~~either~~sometimes ~~reduce~~for orprolonged ~~accelerate~~periods, ~~the~~which ~~pace~~would negatively impact our revenue. Increasing frequency and unpredictability of ~~openings~~adverse weather conditions due to climate change may ~~cause~~result ~~our~~in ~~future~~decreased ~~operating~~customer ~~results~~traffic. Changes in weather could result in interruptions to ~~fluctuate~~the ~~significantly~~availability of utilities, and ~~affect~~shortages or interruption in the supply of food items and other supplies, which could increase our ~~comparative~~costs ~~financial~~and ~~performance~~negatively impact our operations.

~~Our~~Additionally, ~~preopening~~although ~~expenses~~we ~~have~~insure ~~historically~~our ~~been~~restaurants ~~significant.~~against ~~The~~wind, ~~amount~~flood, ofand ~~such~~other ~~expenses~~disasters, ~~incurred~~we inmay ~~any~~not ~~one~~be ~~year~~able orto ~~quarter~~obtain isinsurance ~~dependent~~for onthese ~~the~~types ~~number~~ of ~~restaurants~~events ~~expected~~for toall ~~be opened during that time period. We expect the cash investment cost~~ of our ~~prototype~~restaurants ~~restaurant~~at onreasonable ~~average to be approximately $2~~rates.6 ~~million,~~A ~~net~~devastating ofnatural ~~landlord~~disaster ~~tenant~~or ~~improvement~~other ~~allowances~~event ~~averaging between $0.7 million and $1.2 million and excluding approximately $450,000 on average~~ in ~~cash preopening expenses. Actual costs may vary significantly depending upon a variety of factors, including~~ the ~~site~~vicinity ~~and size~~ of ~~the~~one ~~restaurant and conditions in the local real estate and employment markets. The combination~~ of our ~~relatively small number of existing~~ restaurants, ~~the~~could ~~significant~~result ~~investment~~in ~~associated~~substantial ~~with~~losses ~~each new restaurant,~~ and ~~the~~have ~~sales~~a ~~volumes~~material ofadverse ~~our~~effect ~~new~~on ~~restaurants may cause~~ our results of operations ~~to fluctuate significantly~~.

Adverse weather conditions, impact of climate change and natural disasters could adversely affect our results of operations. Additionally, we may not be able to obtain insurance at reasonable rates for natural disasters and other events which are beyond our control.11

~~Adverse~~Our ~~weather~~international ~~conditions~~franchisees ~~can~~may ~~impact~~strain ~~customer traffic at~~ our ~~restaurants,~~infrastructure ~~cause the temporary underutilization of outdoor patio seating~~ and ~~in more severe cases such as hurricanes~~resources, ~~tornadoes and other natural disasters, cause temporary closures, sometimes for prolonged periods,~~ which ~~would~~could ~~negatively~~adversely ~~impact~~affect our ~~revenue.~~ability ~~Increasing frequency and unpredictability of adverse weather conditions due~~ to ~~climate~~manage change may result in decreased customer traffic. Changes in weather could result in interruptions to the availability of utilities, and shortages or interruption in the supply of food items and other supplies, which could increase our ~~costs~~existing ~~and negatively impact our operations~~restaurants.

~~Additionally,~~Managing ~~although~~our weexisting ~~insure~~operations along with supporting our international franchise partners with their restaurants ~~against~~increase ~~wind,~~demands ~~flood,~~on ~~and~~our ~~other~~available ~~disasters~~cash resources, weas ~~may~~well ~~not~~as bedemands ~~able~~on toour ~~obtain~~management ~~insurance~~team, ~~for~~resources, ~~these~~financial ~~types~~controls ofand ~~events~~information ~~for~~systems. ~~all~~These ofincreased demands may adversely affect our ~~restaurants~~ability atto ~~reasonable~~manage ~~rates.~~and Awhen ~~devastating~~appropriate, ~~natural~~remodel ~~disaster~~our orexisting ~~other~~restaurants. ~~event~~If inwe ~~the~~fail ~~vicinity~~to ofcontinue ~~one~~to ofimprove our ~~restaurants~~infrastructure ~~could~~or ~~result~~to inmanage ~~substantial~~other ~~losses~~factors ~~and~~necessary ~~have~~for aus ~~material~~to ~~adverse~~meet ~~effect~~our onobjectives, our operating results ofcould ~~operations~~be adversely affected.

~~Our~~We ~~domestic~~may ~~and~~not ~~international~~be ~~franchise~~successful ~~growth~~in ~~may~~our ~~strain~~international ~~our~~franchise ~~infrastructure~~initiative ~~and~~or ~~resources,~~such ~~which~~expansion ~~could~~may adversely affect our ~~ability~~financial ~~to manage our existing restaurants~~performance.

~~Managing~~We ~~our~~have ~~existing~~expanded ~~operations~~into international markets, initially in the United Arab Emirates and ~~planning~~Canada ~~for~~where ~~long-term~~we ~~growth~~have ~~along~~executed franchise development agreements. In 2018, we terminated an agreement with ~~supporting~~respect ~~our~~to Mexico. We are not currently actively pursuing international ~~franchise~~franchisees ~~partners~~although ~~with~~the ~~their~~Company ~~new~~would ~~restaurant~~consider ~~openings~~inquiries ~~will~~where ~~increase~~appropriate. ~~demands~~Even onif ~~our~~a ~~available~~prospective ~~cash~~international ~~resources~~franchisee did approach the Company, asthere ~~well~~are asa ~~demands~~number onof ~~our~~considerations ~~management~~in ~~team,~~pursuing ~~restaurant~~an ~~management~~international ~~systems~~development agreement. It takes time for us to review franchise partners and ~~resources,~~negotiate ~~financial~~franchise ~~controls~~agreements and ~~information~~for ~~systems~~our partners to find quality real estate and construct the restaurants. ~~These~~We ~~increased~~then ~~demands~~would ~~may~~need ~~adversely~~to ~~affect~~train the local team on our ~~ability~~food and hospitality standards to ~~open~~ensure ~~new~~a ~~restaurants~~successful execution of our strategy. We may incur more expenses than originally anticipated and our investment may take additional time to ~~manage~~come ~~and~~to ~~when~~fruition. ~~appropriate~~Furthermore, ~~remodel~~there ~~our~~is ~~existing~~a ~~restaurants.~~risk Ifthat we ~~fail~~may tonot ~~continue~~be tosuccessful ~~improve~~in our ~~infrastructure~~international orbusiness todevelopment ~~manage~~efforts. ~~other~~In ~~factors~~that ~~necessary~~case, ~~for~~we usmay not be able to ~~meet~~recover ~~our~~all ~~expansion~~of ~~objectives~~the investments incurred. Additionally, our ~~growth~~international ~~rate~~franchise ~~and~~units ~~operating~~could ~~results~~result ~~could~~in besignificant ~~adversely~~distraction ~~affected~~or diversion of resources from our existing operations in the U.S.

13There is no assurance that the franchised restaurants in foreign markets will gain market acceptance or be able to operate on a profitable basis. Our international operations are subject to many of the same risks associated with our domestic operations, as well as a number of additional risks. These include, among other things, international economic and political conditions, and differing cultures and consumer preferences.

WeOur ~~may~~international ~~not~~expansion becould ~~successful~~negatively inaffect our ~~international~~brand ~~franchise~~or ~~initiative~~could result in sanctions or ~~such~~liability ~~expansion~~for ~~may~~violations ~~adversely~~of ~~affect~~regulations ~~our~~or ~~financial~~legal ~~performance~~actions.

WeOur ~~are~~business ~~expanding~~expansion into international markets, ~~initially~~could increate ~~Mexico,~~new ~~the~~risks ~~United~~to ~~Arab~~our ~~Emirates~~brand and ~~Canada~~reputation. ~~where~~We webelieve ~~have~~that ~~executed~~we ~~development~~will ~~agreements.~~be ~~Similar~~able to ~~other~~select ~~brands~~high-caliber ~~with an~~ international ~~presence,~~operating wepartners ~~are~~with ~~utilizing~~significant aexperience; ~~franchise model for development outside of the U.S.~~however, ~~providing~~there ~~training~~is ~~and~~risk ~~operational~~that ~~support to~~ our ~~partners~~brand ~~without~~value ~~committing,~~ or ~~putting~~financial atresults ~~risk,~~could ~~capital~~be ~~for~~harmed ~~restaurant~~by ~~construction~~factors inoutside ~~these~~of ~~international markets. It takes time for us to identify franchise partners and negotiate franchise agreements and for~~ our ~~partners~~control, toincluding, ~~find~~but ~~quality~~not ~~real~~limited ~~estate and construct the restaurants. We then need~~ to ~~train the local team on our food and hospitality standards to ensure a successful execution of our strategy.~~ :

As● wedifficulties ~~continue~~in toachieving ~~pursue our international market expansion, we may not be fully aware of~~ the ~~significant~~consistency ~~development efforts involved and barriers to entry into these markets. Accordingly, even though we are attempting to manage the necessary capital investment through the utilization~~ of ~~the~~product ~~franchise~~quality ~~model, we may incur more expenses than originally anticipated~~ and ~~our~~service ~~investment~~as ~~may~~compared ~~take additional time~~ to ~~come~~restaurants ~~to fruition. Furthermore, there is a risk that~~ we ~~may~~operate ~~not be successful~~ in ~~our international business development efforts. In that case, we may not be able to recover all of~~ the ~~investments incurred. Additionally, our attempt to expand internationally could result in significant distraction or diversion of resources from our existing operations in the~~ U.S. ;

~~There~~● ischanges ~~no assurance that we will find the proper franchisees~~ to successfully expand internationally, or that the franchised restaurants in foreign markets will gain market acceptance or be able to operate on a profitable basis. Our international operations are subject to many of the same risks associated with our ~~domestic~~recipes ~~operations, as well as a number of additional risks. These include, among other things, international economic~~ and ~~political~~beverages ~~conditions,~~due ~~and~~to ~~differing~~cultural ~~cultures and consumer preferences.~~differences;

~~Our~~● ~~international~~inability ~~expansion~~to ~~and~~obtain ~~global~~adequate ~~brand~~and ~~development~~reliable ~~efforts~~supplies ~~could~~of ~~negatively~~ingredients ~~affect~~and ~~our~~products ~~brand~~necessary orto ~~could~~execute ~~result~~our indiverse ~~sanctions~~menu; ~~or liability for violations of regulations or legal actions.~~and

~~Our~~● business expansion into international markets could create new risks to our brand and reputation. We believe that we will be able to select high-caliber international operating partners with significant experience; howeverdifferences, ~~there~~changes ~~is risk that our brand value~~ or ~~financial~~uncertainties ~~results~~in ~~could~~economic, ~~be harmed by factors outside of our control~~regulatory, ~~including~~legal, ~~but~~social ~~not~~and ~~limited~~political ~~to:~~conditions.

~~● difficulties in achieving the consistency of product quality and service as compared to restaurants we operate in the U.S.;~~12

●Further, ~~changes~~we must comply with regulations and legal requirements, including those related to the protection of our ~~recipes~~trademarks, trade secrets and ~~beverages~~other ~~due~~intellectual property - see “Our failure to ~~cultural~~protect ~~differences;~~our trademarks, service marks, or trade secrets could negatively affect our competitive position and the value of the Kona Grill brand” below. We will have additional exposure to foreign tax laws and regulations. Additionally, we will need to comply with both domestic laws affecting U.S. businesses that operate internationally and foreign laws in the countries in which we have franchise partners, such as the Foreign Corrupt Practices Act, under which we have not had exposure prior to our international expansion. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions. Also, we may become subject to lawsuits or other legal actions resulting from the acts or omissions of our operating partners and, even though we may have taken reasonable steps to protect against such liabilities, including by obtaining contractual indemnifications and insurance coverage, there is no assurance that we will not incur liability that is not covered by such protection, or incur costs and expenses as a result of our operating partners’ conduct even when we are not legally liable. Any of these risks could harm our business, results of operations and financial condition.

●Our ~~inability~~failure to ~~obtain~~protect ~~adequate~~trademarks, ~~and~~service ~~reliable~~marks, ~~supplies~~or oftrade ~~ingredients~~secrets ~~and~~could ~~products~~negatively ~~necessary~~affect ~~to execute~~ our ~~diverse~~competitive ~~menu;~~position and the value of the Kona Grill brand.

●Our ~~differences~~business prospects depend in part on our ability to develop favorable consumer recognition of the Kona Grill name. Although Kona Grill is a federally registered trademark, ~~changes~~our trademarks and service marks could be imitated in ways that we cannot prevent. Alternatively, third parties may attempt to cause us to change our name or ~~uncertainties~~not operate in ~~economic~~a certain geographic region if our name is confusingly similar to their name. In addition, ~~regulatory~~we rely on trade secrets, ~~legal~~proprietary know-how, ~~social~~concepts, and ~~political~~recipes. ~~conditions~~Our methods of protecting this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could interfere with our use of this information. Defending these claims may be costly and, if unsuccessful, may prevent us from continuing to use this proprietary information in the future, and may result in a judgment or monetary damages. Additionally, we do not maintain confidentiality and non-competition agreements with all of our executives, key personnel, or suppliers. If competitors independently develop or otherwise obtain access to our trade secrets, proprietary know-how, or recipes, the appeal of our restaurants could be reduced and our business could be harmed.

~~Further~~Furthermore, as we ~~expand~~have ~~our~~not ~~brand~~registered ~~internationally,~~all ~~we must comply with regulations and legal requirements, including those related to the protection~~ of our trademarks, ~~trade secrets~~ and ~~other intellectual property - see “Our failure to protect our trademarks,~~ service marks, orthroughout ~~trade~~the ~~secrets~~world ~~could~~as ~~negatively~~doing ~~affect~~so ~~our~~may ~~competitive~~not ~~position~~be ~~and~~feasible ~~the~~because ~~value~~ of ~~the~~associated ~~Kona~~costs ~~Grill~~or ~~brand”~~various ~~below. We will have additional exposure to~~ foreign ~~tax~~trademark ~~laws~~law ~~and regulations~~prohibitions. ~~Additionally,~~Our weinability ~~will need~~ to ~~comply~~effectively ~~with~~protect ~~both~~our ~~domestic~~intellectual ~~laws~~property ~~affecting~~domestically ~~U.S.~~or ~~businesses that operate~~ internationally ~~and~~may ~~foreign~~result ~~laws~~ in ~~the~~limiting ~~countries in which we expand~~ our ~~restaurants,~~ability ~~such as the Foreign Corrupt Practices Act, under which we have not had exposure prior~~ to ~~our~~globally ~~international~~expand expansion. Failure to comply with any such legal requirements could subject us to monetary liabilities and other sanctions. Also, we may become subject to lawsuits or other legal actions resulting from the acts or omissions of our ~~operating~~brand ~~partners~~thereby ~~and,~~adversely ~~even~~affecting though we may have taken reasonable steps to protect against such liabilities, including by obtaining contractual indemnifications and insurance coverage, there is no assurance that we will not incur liability that is not covered by such protection, or incur costs and expenses as a result of our ~~operating partners’ conduct even when we are not legally liable. Any of these risks could harm our business, results of operations and~~ financial ~~condition~~performance.

14Our business could be adversely impacted if our information technology and computer systems do not perform properly or if we fail to protect our customers’ or our employees’ information. Additionally, the inappropriate use of social media vehicles could harm our reputation and adversely impact our business.

~~Failure~~We rely heavily on information technology to ~~attract~~conduct our business, ~~retain~~including point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and ~~motivate~~various ~~effective~~other ~~leaders~~processes and procedures. Our ability to efficiently manage our business depends significantly on the ~~loss~~reliability and capacity of ~~key~~these ~~personnel~~systems. Any material failure, interruption of service, or compromised data security, problems with maintenance, upgrading or transitioning to replacement systems or a breach in security of these systems could ~~negatively~~cause ~~impact~~delays in customer service and reduce efficiency in our ~~business~~operations and could otherwise adversely affect our operations. While we take data security very seriously and expend significant resources to ensure that our information technology operates securely and effectively, any security breaches could result in disruptions to operations or unauthorized disclosure of confidential information, and significant capital investments might be required to remediate such security breaches.

~~Our~~Additionally, ~~future~~we ~~success~~rely ison ~~highly~~search ~~dependent~~engine ~~upon~~marketing ~~our~~and ~~ability~~social media platforms to attract and retain ~~key~~customers ~~management~~as ~~and~~part ~~operations~~of ~~personnel.~~our Wemarketing ~~must~~efforts. beA ~~able~~variety toof ~~attract,~~risks ~~retain~~are ~~and~~associated ~~motivate~~with athe ~~sufficient~~use ~~number~~ of ~~qualified~~social ~~management and operations personnel~~media, including ~~culinary~~the ~~and~~improper ~~training~~disclosure ~~personnel, directors~~ of ~~operations~~proprietary information, ~~general~~negative ~~managers~~comments ~~and~~about ~~executive chefs. Our executive officers provide a vision for~~ our company, ~~execute~~exposure ~~our~~of ~~business~~personally ~~strategy~~identifiable information, ~~and~~fraud, ~~maintain~~or ~~consistency~~outdated ~~in the operating standards of our restaurants~~information. The ~~ability~~inappropriate use of ~~key~~social ~~management~~media ~~and~~vehicles ~~operations~~by ~~personnel to maintain consistency in the quality and diversity of~~ our ~~menu offerings as well as service and hospitality for~~ customers isor aemployees ~~critical~~could ~~factor~~increase in our ~~future~~costs, ~~success.~~lead ~~Any failure~~ to ~~attract,~~litigation ~~retain,~~or ~~and~~result ~~motivate~~in ~~key~~negative ~~personnel~~publicity ~~may~~that ~~harm~~could damage our reputation ~~and result in a loss of business~~.

~~Our failure to protect our trademarks, service marks, or trade secrets could negatively affect our competitive position and the value of the Kona Grill brand.~~13

~~Our~~A ~~business~~data ~~prospects~~security ~~depend~~breach ininvolving ~~part on our ability to develop favorable consumer recognition of the Kona Grill name. Although Kona Grill is~~ a ~~federally~~customer’s ~~registered~~or ~~trademark,~~employee’s ~~our~~personal ~~trademarks~~data ~~and service marks~~ could behave ~~imitated in ways that we cannot prevent. Alternatively, third parties may attempt to cause us to change our name or not operate in~~ a ~~certain~~material ~~geographic~~adverse ~~region~~effect ifon our ~~name is confusingly similar to their name. In addition~~business, we rely on trade secrets, proprietary know-how, concepts, and recipes. Our methods of protecting this information may not be adequate. Moreover, we may face claims of misappropriation or infringement of third parties’ rights that could ~~interfere~~adversely ~~with~~affect our ~~use~~reputation ~~of this information. Defending these claims may be costly~~ and, ifcould ~~unsuccessful, may prevent us from continuing to use this proprietary information in the future, and may~~ result in alitigation ~~judgment~~against orus ~~monetary damages. Additionally, we do not maintain confidentiality and non-competition agreements with all of our executives, key personnel,~~ or ~~suppliers. If competitors independently develop or otherwise obtain access to our trade secrets, proprietary know-how, or recipes,~~ the ~~appeal~~imposition of ~~our~~penalties, ~~restaurants~~which could beadversely ~~reduced~~affect ~~and~~ our ~~business~~financial ~~could be harmed~~performance.

~~Furthermore~~We receive and maintain certain personal information about our customers and employees. For example, we ~~have~~transmit ~~not~~confidential ~~registered~~credit ~~all~~card information in connection with credit card transactions, and we are required to collect and maintain certain personal information in connection with our employment practices, including the administration of our ~~trademarks~~benefit plans. The collection and ~~service~~use ~~marks~~of ~~throughout~~this information by us is regulated at the ~~world~~federal and state levels, and the regulatory environment related to information security and privacy is increasingly demanding. In addition, our ability to accept credit cards as ~~doing~~payment soin ~~may~~our ~~not~~restaurants beand ~~feasible~~for ~~because~~on-line ofgift ~~associated~~card ~~costs~~orders ordepends ~~various~~on ~~foreign~~us ~~trademark~~remaining ~~law~~compliant ~~prohibitions~~with standards set by the PCI Security Standards Council. ~~Our~~If ~~inability~~our tosecurity ~~effectively~~and ~~protect~~information systems are compromised or our ~~intellectual~~employees ~~property~~or ~~domestically~~authorized third parties fail to comply with these laws and regulations and this information is obtained by unauthorized persons or ~~internationally~~used ~~may~~inappropriately, it could adversely affect our reputation and could result in ~~limiting~~litigation ~~our~~against ~~ability~~us toor ~~globally~~the ~~expand~~imposition ~~our~~of ~~brand~~penalties, ~~thereby~~which ~~adversely~~could ~~affecting~~have a material adverse effect on our financial performance.

~~Our~~These ~~business~~standards ~~could~~require becertain ~~adversely~~levels ~~impacted~~of ifsystem security and procedures to protect our customers’ credit card and other personal information. ~~technology~~We utilize both internal resources and ~~computer~~external ~~systems~~consultants doto ~~not~~reduce ~~perform~~the ~~properly~~likelihood of any security failures or ifbreaches. However, we ~~fail~~can toprovide ~~protect~~no ~~our~~assurance ~~customers’~~that orthese ~~our~~security ~~employees’~~measures ~~information~~will be successful. ~~Additionally~~If these security measures are not successful, ~~the~~we ~~inappropriate~~may ~~use~~become subject to litigation against us or the imposition of ~~social~~regulatory ~~media~~penalties, ~~vehicles~~which could result in negative publicity and significantly harm our reputation, any of which could have a material adverse effect on our financial performance. As privacy and ~~adversely~~information ~~impact~~security laws and regulations change, we may incur additional costs to ensure that we remain in compliance, which could have a material adverse effect on our ~~business~~financial performance.

WeRisks ~~rely~~Related ~~heavily on information technology~~ to conduct our business, including point-of-sale processing in our restaurants, management of our supply chain, collection of cash, payment of obligations and various other processes and procedures. Our ability to efficiently manage our business depends significantly on the ~~reliability~~Restaurant and capacity of these systems. Any material failure, interruption of service, or compromised data security, problems with maintenance, upgrading or transitioning to replacement systems or a breach in security of these systems could cause delays in customer service and reduce efficiency in our operations and could otherwise adversely affect our operations. While we take data security very seriously and expend significant resources to ensure that our information technology operates securely and effectively, any security breaches could result in disruptions to operations or unauthorized disclosure of confidential information, and significant capital investments might be required to remediate such security breaches. Industry

~~Additionally,~~Changes wein ~~rely~~food onsupply ~~search engine marketing~~ and ~~social~~costs ~~media~~could ~~platforms~~adversely toaffect ~~attract and retain customers as part of~~ our ~~marketing~~results ~~efforts. A variety~~ of risks are associated with the use of social media, including the improper disclosure of proprietary information, negative comments about our company, exposure of personally identifiable information, fraud, or outdated informationoperations. ~~The inappropriate use of social media vehicles by our customers or employees could increase our costs, lead to litigation or result in negative publicity that could damage our reputation.~~

15Our profitability depends in part on our ability to anticipate and react to changes in food and supply costs and to maintain a consistent supply from our food and beverage vendors. A reduction or delay of food and beverage supply would have a material adverse impact on our operations. Like all restaurant companies, we are susceptible to increases in food costs as a result of factors beyond our control, such as general economic conditions, seasonal fluctuations, weather conditions, demand, food safety concerns, product recalls and government regulations. Although we can purchase certain commodities under contract, we currently do not use financial management strategies or have long-term contracts in place for the majority of commodities to reduce our exposure to price fluctuations. Changes in vendor payment terms, or the price or availability of seafood, poultry, beef, grains, dairy or produce could affect our ability to offer a broad menu and price offering to customers and could reduce our operating margins and adversely affect our results of operations. We may not be able to anticipate and react to changing food costs through our purchasing practices and menu price adjustments in the future, and failure to do so could negatively impact our sales and results of operations.

AChanges ~~data~~in ~~security~~governmental ~~breach~~regulation ~~involving~~may aadversely ~~customer’s~~affect ~~or employee’s personal data could have a material adverse effect on~~ our ~~business,~~ability ~~could~~to ~~adversely~~maintain ~~affect~~ our ~~reputation~~existing and ~~could~~future ~~result in litigation against us or the imposition of penalties, which could adversely affect our financial performance~~operations.

WeIncreases ~~receive~~in ~~and~~the ~~maintain~~minimum ~~certain~~wage ~~personal~~are ~~information~~having ~~about~~an ~~our~~impact ~~customers~~on ~~and~~certain ~~employees.~~of ~~For~~our ~~example~~markets, weforcing ~~transmit~~our ~~confidential~~labor ~~credit~~costs ~~card~~up ~~information~~considerably. inWe ~~connection~~are ~~with~~subject ~~credit~~to ~~card~~the ~~transactions,~~Fair ~~and~~Labor weStandards ~~are~~Act ~~required~~(which togoverns ~~collect~~such ~~and~~matters ~~maintain~~as ~~certain~~minimum ~~personal~~wages, ~~information~~overtime inand ~~connection~~other working conditions), along with ~~our~~the ~~employment~~Americans ~~practices,~~with ~~including~~Disabilities Act, the ~~administration~~Immigration Reform and Control Act of ~~our~~1986, ~~benefit~~various ~~plans.~~family ~~The~~leave ~~collection~~mandates and ~~use~~a variety of ~~this~~other ~~information~~laws byenacted, usor isrules ~~regulated~~and atregulations ~~the~~promulgated by federal, ~~and~~ state ~~levels,~~ and ~~the~~local ~~regulatory~~governmental ~~environment~~authorities ~~related~~that togovern ~~information~~these ~~security~~ and ~~privacy~~other isemployment ~~increasingly~~matters, ~~demanding.~~including Intip ~~addition~~credits, ~~our~~working ~~ability~~conditions, tosafety ~~accept~~standards ~~credit~~and ~~cards~~immigration asstatus. ~~payment~~We expect increases in ~~our~~payroll ~~restaurants~~expenses as a result of federal and ~~for~~state ~~on-line~~mandated ~~gift~~increases ~~card~~in ~~orders~~the ~~depends~~minimum onwage, usand ~~remaining~~although ~~compliant~~such ~~with~~increases ~~standards~~are ~~set~~not byexpected ~~the~~to ~~PCI~~be ~~Security~~material, ~~Standards~~we ~~Council.~~cannot Ifassure ~~our~~you ~~security~~that ~~and~~there ~~information~~will ~~systems~~not ~~are~~be ~~compromised~~material orincreases ~~our~~in ~~employees~~the orfuture. ~~authorized~~Enactment ~~third~~and ~~parties~~enforcement ~~fail~~of tovarious ~~comply~~federal, ~~with~~state ~~these~~and local laws, rules and regulations on immigration and ~~this~~labor ~~information~~organizations ismay ~~obtained~~adversely byimpact ~~unauthorized~~the ~~persons~~availability and costs of labor for our restaurants in a particular area or ~~used~~across ~~inappropriately,~~the itUnited States. Other labor shortages or increased employee turnover could ~~adversely~~also ~~affect~~increase labor costs. In addition, our ~~reputation~~vendors ~~and~~may ~~could~~be ~~result~~affected inby ~~litigation~~higher ~~against~~minimum uswage standards or ~~the~~availability ~~imposition~~ of ~~penalties~~labor, which ~~could~~may ~~have~~increase athe ~~material~~price ~~adverse~~of ~~effect~~goods onand ~~our~~services ~~financial~~they ~~performance~~supply to us.

These standards require certain levels of system security and procedures to protect our customers’ credit card and other personal information. We utilize both internal resources and external consultants to reduce the likelihood of any security failures or breaches. However, we can provide no assurance that these security measures will be successful. If these security measures are not successful, we may become subject to litigation against us or the imposition of regulatory penalties, which could result in negative publicity and significantly harm our reputation, any of which could have a material adverse effect on our financial performance. As privacy and information security laws and regulations change, we may incur additional costs to ensure that we remain in compliance, which could have a material adverse effect on our financial performance.14

~~Risks~~We ~~Related~~offer eligible full-time salaried employees and eligible variable-hour employees the opportunity to enroll in healthcare coverage subsidized by us. We adopted a qualifying plan under the ~~Restaurant~~Affordable ~~Industry~~Care Act for our eligible variable-hour employees, which has increased our labor costs. It is also possible that changes in the healthcare plans we offer could make us less attractive to our current or potential employees. Additionally, the Affordable Care Act has imposed additional administrative costs on us, and those costs may increase over time. The costs and other effects of the Affordable Care Act and potential changes to healthcare requirements cannot be determined with certainty, but they may have a material adverse effect on our financial and operating results.

~~Changes~~We inare ~~food~~also subject to laws and ~~supply~~regulations, which vary from jurisdiction to jurisdiction, relating to nutritional content and menu labeling. Compliance with these laws and regulations may lead to increased costs and operational complexity, changes in sales mix and profitability, and increased exposure to governmental investigations or litigation. We cannot reliably anticipate any changes in customer behavior if we alter our recipes to comply with such laws and regulations. This could ~~adversely~~have ~~affect~~adverse effects on our sales or results of operations.

~~Our~~Furthermore, ~~profitability~~we ~~depends~~are insubject ~~part~~to onfederal ~~our~~and ~~ability~~state toenvironmental ~~anticipate~~regulations, and ~~react~~although tothese ~~changes~~have innot ~~food~~had ~~and~~a ~~supply~~material ~~costs.~~negative ~~Like~~effect ~~all~~on ~~restaurant~~our ~~companies~~operations, we ~~are~~cannot ~~susceptible~~ensure tothat ~~increases~~there inwill ~~food~~not ~~costs~~be as a ~~result~~material ofnegative ~~factors~~effect ~~beyond~~in ~~our~~the ~~control,~~future. ~~such~~In asparticular, ~~general~~the ~~economic~~U.S. ~~conditions,~~has ~~seasonal~~increased ~~fluctuations,~~focus ~~weather~~on ~~conditions,~~environmental ~~demand,~~matters ~~food~~such ~~safety~~as ~~concerns~~climate change, ~~product~~greenhouse ~~recalls~~gases and ~~government~~water ~~regulations~~conservation. ~~Although~~This weincreased ~~can~~focus ~~purchase~~may ~~certain~~lead ~~commodities~~to ~~under~~new ~~contract,~~initiatives wedirected ~~currently~~at doregulating ~~not~~an ~~use~~as ~~financial~~yet ~~management~~unspecified ~~strategies~~array orof ~~have~~environmental ~~long-term~~matters. ~~contracts~~These inefforts ~~place~~could ~~for~~result ~~the~~in ~~majority~~increased oftaxation ~~commodities~~or toin ~~reduce~~future ~~our~~restrictions ~~exposure~~on toor ~~price~~increases ~~fluctuations.~~in ~~Changes~~costs inassociated ~~the~~with ~~price~~food orand ~~availability~~other ofrestaurant ~~seafood~~supplies, ~~poultry,~~transportation ~~beef,~~costs ~~grains~~and utility costs, ~~dairy~~any orof ~~produce~~which could ~~affect~~decrease our ~~ability~~operating toprofits ~~offer~~and/or anecessitate ~~broad~~future ~~menu~~investments ~~and~~in ~~price~~our ~~offering~~restaurant tofacilities ~~customers~~ and ~~could~~equipment ~~reduce~~to ~~our~~achieve ~~operating~~compliance. ~~margins~~Further, ~~and~~more ~~adversely~~stringent ~~affect~~and ~~our~~varied ~~results~~requirements of ~~operations.~~local Weand ~~may~~state ~~not~~governmental bebodies ~~able~~with torespect ~~anticipate and react~~ to ~~changing~~zoning, ~~food~~land ~~costs~~use ~~through~~and ~~our~~environmental ~~purchasing~~factors ~~practices~~could ~~and~~delay, ~~menu~~prevent ~~price~~or ~~adjustments~~make incost prohibitive the ~~future,~~continuing ~~and~~operations ~~failure~~of toan doexisting sorestaurant ~~could~~or ~~negatively~~the ~~impact~~development ~~our~~of ~~sales~~new ~~and~~restaurants ~~results~~in ofparticular ~~operations~~locations.

~~Changes~~The impact of current laws and regulations, the effect of future changes in ~~governmental~~laws ~~regulation~~or ~~may~~regulations ~~adversely~~that ~~affect~~impose additional requirements and the consequences of litigation relating to current or future laws and regulations, or our ~~ability~~inability to ~~maintain~~respond effectively to significant regulatory or public policy issues, could increase our ~~existing~~compliance and ~~future~~other ~~operations~~costs of doing business and therefore have an adverse effect on our results of operations. Failure to ~~open~~comply ~~new~~with ~~restaurants~~the laws and regulatory requirements of federal, state and local authorities could result in, among other things, revocation of required licenses, administrative enforcement actions, fines and civil and criminal liability. Compliance with these laws and regulations can be costly and can increase our exposure to litigation or governmental investigations or proceedings.

WeRegulations ~~are~~affecting ~~subject to~~ the ~~Fair~~operation ~~Labor Standards Act (which governs such matters as minimum wages, overtime and other working conditions), along with the Americans with Disabilities Act, the Immigration Reform and Control Act~~ of 1986, various family leave mandates and a variety of other laws enacted, or rules and regulations promulgated by federal, state and local governmental authorities that govern these and other employment matters, including tip credits, working conditions, safety standards and immigration status. We expect increases in payroll expenses as a result of federal and state mandated increases in the minimum wage, and although such increases are not expected to be material, we cannot assure you that there will not be material increases in the future. Enactment and enforcement of various federal, state and local laws, rules and regulations on immigration and labor organizations may adversely impact the availability and costs of labor for our restaurants ~~in a particular area or across the United States. Other labor shortages or increased employee turnover~~ could ~~also~~ increase ~~labor~~operating costs~~. In addition~~, restrict our ~~vendors~~growth, ~~may be affected by higher minimum wage standards~~ or ~~availability~~require ofus ~~labor, which may increase the price of goods and services they supply~~ to ussuspend operations.

16Each of our restaurants must obtain licenses from regulatory authorities allowing it to sell liquor, beer, and wine, and each restaurant must obtain a food service license from local health authorities. Each restaurant’s liquor license must be renewed annually and may be revoked or suspended at any time for cause, including violation by us or our employees of any laws and regulations relating to the minimum drinking age, over serving, advertising, wholesale purchasing, and inventory control. Each restaurant is also subject to local health inspections. Failure to pass one or multiple inspections may result in temporary or permanent suspension of operations and could significantly impact our reputation. In certain states, including states where we have existing restaurants or where we may open restaurants in the future, the number of liquor licenses available is limited and licenses are traded at market prices. Liquor, beer, and wine sales comprise a significant portion of our sales, representing 25.6% of our sales during 2018. Therefore, if we are unable to maintain our existing licenses, or if we choose to open a restaurant in those states, the cost of a new license could be significant. Obtaining and maintaining licenses is an important component of each of our restaurant’s operations, and the failure to obtain or maintain food and liquor licenses and other required licenses, permits, and approvals would adversely impact our restaurants and our growth strategy.

We offer eligible full-time salaried employees and eligible variable-hour employees the opportunity to enroll in healthcare coverage subsidized by us. We adopted a qualifying plan under the Affordable Care Act for our eligible variable-hour employees, which has increased our labor costs. It is also possible that recent changes in the healthcare plans we offer could make us less attractive to our current or potential employees. Additionally, the Affordable Care Act has imposed additional administrative costs on us, and those costs may increase over time. The costs and other effects of the Affordable Care Act and potential changes to healthcare requirements cannot be determined with certainty, but they may have a material adverse effect on our financial and operating results.15

WeA ~~are~~failure ~~also subject~~ to ~~laws~~maintain ~~and~~food ~~regulations,~~safety ~~which~~throughout ~~vary~~the ~~from~~supply ~~jurisdiction~~chain ~~to jurisdiction, relating to nutritional content~~ and ~~menu~~food-borne ~~labeling.~~illness ~~Compliance~~concerns ~~with these laws and regulations~~ may lead to increased costs and operational complexity, changes in sales mix and profitability, and increased exposure to governmental investigations or litigation. We cannot reliably anticipate any changes in customer behavior if we alter our recipes to comply with such laws and regulations. This could have an adverse ~~effects~~effect on our ~~sales or results of operations~~business.

~~Furthermore,~~Food wesafety ~~are~~is ~~subject~~a totop ~~federal~~priority, and ~~state~~we ~~environmental~~dedicate ~~regulations,~~substantial ~~and~~resources ~~although~~to ~~these~~ensuring ~~have~~that ~~not~~our ~~had~~guests aenjoy ~~material~~safe, ~~negative~~quality ~~effect~~food onproducts. ~~our operations~~However, wefood ~~cannot~~safety ~~ensure~~issues ~~that~~could ~~there~~be ~~will~~caused ~~not~~at bethe apoint ~~material~~of ~~negative~~source ~~effect~~or inby ~~the~~food ~~future.~~suppliers Inor ~~particular~~distributors and, ~~the~~as ~~U.S.~~a ~~has~~result, ~~increased~~may ~~focus~~be onout ~~environmental~~of ~~matters~~our ~~such~~control. asIn ~~climate change~~addition, ~~greenhouse~~regardless ~~gases~~of ~~and~~the ~~water~~source ~~conservation.~~or ~~This~~cause, ~~increased~~any ~~focus~~report ~~may~~of ~~lead~~food-borne toillnesses ~~new~~such ~~initiatives~~as ~~directed~~E. atcoli, ~~regulating~~hepatitis anA, astrichinosis ~~yet~~or ~~unspecified~~salmonella, ~~array~~and ofother ~~environmental~~food ~~matters.~~safety ~~These~~issues ~~efforts~~including ~~could~~food ~~result~~tampering inor ~~increased~~contamination, ~~taxation~~at orone inof ~~future~~our ~~restrictions~~restaurants oncould oradversely ~~increases~~affect inthe ~~costs~~reputation ~~associated~~of ~~with~~our ~~food~~brand and ~~other~~have ~~restaurant~~a ~~supplies,~~negative ~~transportation~~impact ~~costs~~on ~~and~~our ~~utility~~sales. ~~costs,~~Even ~~any~~instances of ~~which~~food-borne ~~could~~illness, ~~decrease~~food ~~our~~tampering ~~operating~~or ~~profits~~food ~~and/or~~contamination ~~necessitate~~occurring ~~future~~solely ~~investments~~at inrestaurants of our ~~restaurant~~competitors ~~facilities~~could ~~and~~result ~~equipment~~in tonegative ~~achieve~~publicity ~~compliance.~~about ~~Further,~~the ~~more~~food ~~stringent~~service industry generally and ~~varied~~adversely ~~requirements~~impact ofour ~~local~~sales and ~~state~~could ~~governmental~~result ~~bodies~~in ~~with~~stricter ~~respect~~government ~~to zoning~~regulation, ~~land~~which ~~use~~could ~~and~~increase ~~environmental~~our ~~factors~~costs. ~~could~~The ~~delay,~~occurrence ~~prevent~~of orfood-borne ~~make~~illnesses ~~cost~~or ~~prohibitive~~food ~~the~~safety ~~continuing~~issues ~~operations~~could ofalso anadversely ~~existing~~affect ~~restaurant~~the orprice ~~the~~and ~~development~~availability of ~~new~~affected ~~restaurants~~ingredients, resulting in ~~particular~~higher ~~locations.~~costs and lower margins.

~~The~~Negative ~~impact~~publicity ofsurrounding ~~current~~our ~~laws~~restaurants ~~and regulations, the effect of future changes in laws~~ or ~~regulations that impose additional requirements and~~ the ~~consequences~~consumption of ~~litigation~~beef, ~~relating~~seafood, topoultry, ~~current~~ or ~~future~~produce ~~laws and regulations~~generally, or ~~our~~shifts ~~inability~~in toconsumer ~~respond effectively to significant regulatory or public policy issues~~tastes, could ~~increase~~negatively ~~our~~impact ~~compliance~~the ~~and~~popularity ~~other costs~~ of ~~doing business and therefore have an adverse effect on~~ our ~~results of operations. Failure to comply with the laws and regulatory requirements of federal~~restaurants, ~~state~~our ~~and local authorities could result in~~sales, ~~among other things, revocation of required licenses, administrative enforcement actions, fines~~ and ~~civil and criminal liability. Compliance with these laws and regulations can be costly and can increase~~ our ~~exposure~~results toof ~~litigation or governmental investigations or proceedings~~operations.

~~Regulations~~The ~~affecting~~popularity of our restaurants in general, and our menu offerings in particular, are key factors to the ~~operation~~success of our operations. Negative publicity resulting from poor food quality, illness, injury, or other health concerns, whether related to one of our restaurants ~~could~~or ~~increase~~to the beef, seafood, poultry, or produce industries in general (such as negative publicity concerning salmonella, E-coli, hepatitis A, mercury poisoning and other food-borne illnesses), or operating ~~costs~~problems related to one or more of our restaurants, ~~restrict~~could make our ~~growth~~brand and menu offerings less appealing to consumers. In addition, other shifts in consumer preferences away from the kinds of food we offer, whether because of dietary or ~~require~~other ushealth concerns or otherwise, would make our restaurants less appealing and adversely affect our sales and results of operations. If our restaurants are unable to ~~suspend~~compete successfully with other restaurants in new and existing markets, our results of operations will be harmed and we may not achieve profitability.

~~Each~~Litigation ofconcerning our ~~restaurants~~food ~~must obtain licenses from regulatory authorities allowing it to sell liquor~~quality, ~~beer,~~employment ~~and wine~~practices, ~~and each restaurant must obtain a food service license from local health authorities. Each restaurant’s~~ liquor ~~license must be renewed annually and may be revoked or suspended at any time for cause~~liability, ~~including violation by us or our employees of any laws~~ and ~~regulations~~other ~~relating~~issues tocould the minimum drinking age, over serving, advertising, wholesale purchasing, and inventory control. Each restaurant is also subject to local health inspections. Failure to pass one or multiple inspections may result in temporary or permanent suspension of operations and could significantly impact our reputation. In certain states, including states where we have existing restaurants or where we may open restaurants in the future, the number of liquor licenses available is limited and licenses are traded at market prices. Liquor, beer, and wine sales comprise a significant ~~portion~~expenses ~~of our sales, representing 27.3% of our sales during 2017. Therefore, if we are unable~~ to ~~maintain~~us ~~our~~and ~~existing licenses, or if we choose to open a restaurant in those states, the cost of a new license~~ could bedivert ~~significant.~~resources ~~Obtaining~~from ~~and maintaining licenses is an important component of each of~~ our ~~restaurant’s~~ operations~~, and the failure to obtain or maintain food and liquor licenses and other required licenses, permits, and approvals would adversely impact our restaurants and our growth strategy~~.

17Like other restaurants, we may receive complaints or litigation from, and potential liability to, our customers involving food-borne illness or injury or other operational issues. We may also be subject to complaints or allegations from, and potential liability to, our former, existing, or prospective employees involving our restaurant employment practices and procedures. We are currently engaged in litigation in Minnesota with respect to that state’s tip pooling statutes. A negative result in this Minnesota tip pooling case could have a material adverse effect on the Company. There can be no assurance that any adverse ruling or settlement in that matter would not have a material impact on the Company’s cash position and operations. In addition, we are subject to state “dram shop” laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to such person. Recent litigation against restaurant chains has resulted in significant judgments, including punitive damages, under “dram shop” statutes. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, if at all. Regardless of whether any claims against us are valid or whether we are liable, our sales may be adversely affected by publicity resulting from such claims. Such claims may also be expensive to defend and may divert time and money away from our operations and adversely affect our business.

~~A failure to maintain food safety throughout the supply chain and food-borne illness concerns may have an adverse effect on our business.~~16

~~Food~~Labor ~~safety~~shortages ~~is a top priority, and we dedicate substantial resources to ensuring that our guests enjoy safe, quality food products. However, food safety issues could be caused at the point of source~~ or byincreases food suppliers or distributors and, as a result, may be out of our control. In addition, regardless of the source or cause, any report of food-borne illnesses such as E. coli, hepatitis A, trichinosis or salmonella, and other food safety issues including food tampering or contamination, at one of our restaurants could adversely affect the reputation of our brand and have a negative impact on our sales. Even instances of food-borne illness, food tampering or food contamination occurring solely at restaurants of our competitors could result in ~~negative~~labor ~~publicity~~costs ~~about the food service industry generally and adversely impact our sales and~~ could ~~result~~slow ~~in stricter government regulation, which could increase~~ our ~~costs.~~growth ~~The occurrence of food-borne illnesses~~ or ~~food safety issues could also~~ adversely affect ~~the~~our ~~price and availability of affected ingredients, resulting in higher costs and lower margins~~business.

~~Negative~~Our ~~publicity~~success ~~surrounding~~depends ~~our~~in ~~restaurants~~part oron ~~the~~our ~~consumption~~ability ofto ~~beef~~attract, ~~seafood~~motivate, ~~poultry,~~and orretain ~~produce~~a ~~generally~~sufficient number of qualified employees, orincluding ~~shifts~~restaurant inmanagers ~~consumer~~and ~~tastes~~kitchen managers, ~~could~~necessary ~~negatively~~to ~~impact~~continue ~~the~~our ~~popularity~~operations. This ability is especially critical to our company because of our relatively small number of existing restaurants. If we are unable to recruit and retain a sufficient number of qualified employees, our ~~sales,~~business and ~~our~~growth ~~results~~strategy ofcould ~~operations~~be adversely affected.

~~The~~Competition ~~popularity~~for ofqualified ~~our~~restaurant ~~restaurants~~employees in ~~general,~~current ~~and~~or ~~our~~prospective ~~menu~~markets ~~offerings~~could inrequire ~~particular,~~us ~~are key factors~~ to ~~the~~pay ~~success~~higher ofwages ~~our~~and ~~operations.~~benefits, ~~Negative~~which ~~publicity~~could ~~resulting~~result ~~from~~in ~~poor~~higher ~~food~~labor ~~quality,~~costs. ~~illness,~~In ~~injury~~addition, orwe ~~other~~have ~~health~~a ~~concerns,~~substantial ~~whether~~number ~~related~~of tohourly ~~one~~employees ofwho ~~our~~are ~~restaurants~~paid orrates tobased upon the ~~beef,~~federal ~~seafood, poultry,~~ or ~~produce~~state ~~industries~~minimum inwage ~~general~~and ~~(such~~who asrely ~~negative~~on ~~publicity~~tips ~~concerning~~for ~~salmonella,~~a ~~E-coli,~~significant ~~hepatitis~~portion A,of ~~mercury~~their ~~poisoning~~income. ~~and other food~~Government-~~borne~~mandated ~~illnesses),~~increases orin ~~operating~~minimum ~~problems~~wages, ~~related~~overtime topay, ~~one~~health orand ~~more~~other ~~of our restaurants~~benefits, ~~could~~or ~~make~~increased ~~our~~tax ~~brand~~reporting and ~~menu~~tax ~~offerings~~payment ~~less~~requirements ~~appealing~~for toemployees ~~consumers.~~who Inreceive ~~addition~~gratuities, ~~other~~or ~~shifts~~a reduction in ~~consumer preferences away from~~ the ~~kinds~~number of ~~food~~states wethat ~~offer,~~allow ~~whether~~tips ~~because~~to ofbe ~~dietary~~credited ortoward ~~other~~minimum ~~health~~wage ~~concerns or otherwise~~requirements, ~~would~~could ~~make~~increase our ~~restaurants~~labor ~~less~~costs. ~~appealing~~We ~~and~~may ~~adversely~~be ~~affect~~unable ~~our~~to ~~sales~~generate ~~and~~enough ~~results~~operating ofefficiencies ~~operations.~~or Ifincrease our ~~restaurants~~menu ~~are~~prices ~~unable~~proportionately toin ~~compete~~order ~~successfully~~to ~~with~~mitigate ~~other~~these ~~restaurants~~increased costs, in ~~new~~which ~~and~~case ~~existing markets,~~ our ~~results~~operating ofmargins ~~operations~~would ~~will~~ be ~~harmed~~adversely ~~and we may not achieve profitability~~affected.

~~Litigation~~Risks ~~concerning~~Related ~~our food quality, employment practices, liquor liability, and other issues could result in significant expenses~~ to usOwnership ~~and~~of ~~could~~Our ~~divert~~Common ~~resources from our operations.~~Stock

~~Like~~The ~~other~~market ~~restaurants,~~price wefor ~~may receive complaints or litigation from, and potential liability to,~~ our ~~customers~~common ~~involving~~stock ~~food-borne illness or injury or other operational issues. We~~ may ~~also~~ be ~~subject to complaints or allegations from, and potential liability to, our former, existing, or prospective employees involving our restaurant employment practices and procedures~~volatile. We are currently engaged in litigation in Minnesota with respect to that state’s tip pooling statutes. Although the Company is in the early stages of discovery and does not expect the result of such complaint to have a material adverse effect on the Company, there is no assurance that any adverse ruling or settlement in that matter would not have a material impact on the Company’s cash position and operations. In addition, we are subject to state “dram shop” laws and regulations, which generally provide that a person injured by an intoxicated person may seek to recover damages from an establishment that wrongfully served alcoholic beverages to such person. Recent litigation against restaurant chains has resulted in significant judgments, including punitive damages, under “dram shop” statutes. While we carry liquor liability coverage as part of our existing comprehensive general liability insurance, we may still be subject to a judgment in excess of our insurance coverage and we may not be able to obtain or continue to maintain such insurance coverage at reasonable costs, if at all. Regardless of whether any claims against us are valid or whether we are liable, our sales may be adversely affected by publicity resulting from such claims. Such claims may also be expensive to defend and may divert time and money away from our operations and adversely affect our business.

~~Labor~~Many ~~shortages~~factors orcould ~~increases~~cause inthe ~~labor~~market ~~costs~~price ~~could~~of ~~slow~~ our ~~growth~~common orstock ~~adversely~~to ~~affect~~rise ~~our~~and ~~business.~~fall, including the following:

~~Our~~● ~~success depends in part on~~ our ~~ability~~common tostock ~~attract,~~being ~~motivate,~~delisted ~~and~~from ~~retain~~the aNASDAQ ~~sufficient~~Stock number of qualified employees, including restaurant managers and kitchen managers, necessary to continue our operations. This ability is especially critical to our company because of our relatively small number of existing restaurants. If we are unable to recruit and retain a sufficient number of qualified employees, our business and growth strategy could be adversely affected.Market;

18● the possibility that our company could file for Chapter 11 bankruptcy protection;

~~Competition~~● ~~for~~failure ~~qualified restaurant employees in current or prospective markets could require us~~ to ~~pay~~continue ~~higher~~as ~~wages and benefits, which could result in higher labor costs. In addition, we have~~ a ~~substantial~~going number of hourly employees who are paid rates based upon the federal or state minimum wage and who rely on tips for a significant portion of their income. Government-mandated increases in minimum wages, overtime pay, health and other benefits, or increased tax reporting and tax payment requirements for employees who receive gratuities, or a reduction in the number of states that allow tips to be credited toward minimum wage requirements, could increase our labor costs. We may be unable to generate enough operating efficiencies or increase our menu prices proportionately in order to mitigate these increased costs, in which case our operating margins would be adversely affected.concern;

~~Risks~~● ~~Related~~actual toor ~~Ownership~~anticipated offluctuations ~~Our~~in ~~Common~~our ~~Stock~~quarterly or annual financial results;

~~The~~● ~~market~~the ~~price~~financial ~~for~~guidance we may provide to the public, any changes in such guidance and projections, or our ~~common~~failure ~~stock~~to ~~may~~meet besuch ~~volatile.~~guidance and projections;

~~Many~~● ~~factors~~the ~~could~~secured ~~cause~~lenders ~~the~~pursue ~~market~~their ~~price~~rights ofgiven ~~our~~that ~~common~~the ~~stock~~Company tohas ~~rise~~events ~~and~~of ~~fall,~~default ~~including~~under ~~the~~its ~~following:~~credit agreement;

● ~~actual~~failure orto ~~anticipated~~maintain ~~fluctuations~~certain financial covenants and remain in ~~our~~compliance ~~quarterly~~with orthese ~~annual~~covenants ~~financial~~under ~~results;~~our credit facility.

● the ~~financial~~failure ~~guidance~~of ~~and~~industry ~~growth~~or ~~projections~~securities weanalysts ~~may~~to ~~provide~~maintain tocoverage ~~the~~of ~~public~~our company, ~~any~~ changes in ~~such~~financial ~~guidance~~estimates ~~and~~by ~~projections~~any industry or securities analysts that follow our company, or our failure to meet such ~~guidance and projections~~estimates;

● ~~failure~~changes toin ~~maintain~~the ~~certain~~market ~~financial~~valuations ~~covenants~~of ~~and~~other ~~remain~~companies in ~~compliance~~the ~~with~~restaurant ~~these covenants under our credit facility.~~industry;

● ~~the~~actual ~~failure of industry~~ or ~~securities~~anticipated ~~analysts~~variations ~~to maintain coverage of our company, changes~~ in ~~financial~~comparable ~~estimates~~restaurant bysales ~~any industry~~ or ~~securities~~operating ~~analysts~~results; ~~that~~whether ~~follow~~in our ~~company,~~operations or ~~our~~those ~~failure~~of toour ~~meet such estimates~~competitors;

● changes in ~~the~~consumer ~~market~~preferences ~~valuations~~or ~~of other companies in the restaurant industry~~spending;

● ~~actual~~various market factors or ~~anticipated~~perceived ~~variations~~market infactors, ~~comparable~~including ~~restaurant~~rumors, ~~sales~~whether or ~~operating~~not ~~results;~~correct, ~~whether~~involving inus, our ~~operations~~customers, orour ~~those~~strategic ofpartners, or our competitors;

● ~~changes~~sales, inor ~~consumer~~anticipated ~~preferences~~sales, orof ~~spending~~large blocks of our stock, including short selling by investors;

● ~~various~~additions ~~market factors~~ or ~~perceived~~departures ~~market~~of ~~factors,~~key ~~including rumors, whether or not correct, involving us, our customers, our strategic partners, or our competitors~~personnel;

● ~~sales,~~regulatory or ~~anticipated~~political ~~sales, of large blocks of our stock, including short selling by investors~~developments;

● ~~additions~~litigation orand ~~departures~~governmental ofor ~~key~~regulatory ~~personnel~~investigations;

● ~~regulatory~~acquisitions or ~~political~~strategic ~~developments~~alliances by us or by our competitors; and

● ~~litigation~~general economic, political, and ~~governmental~~financial ormarket ~~regulatory~~conditions ~~investigations;~~or events.

●Due ~~acquisitions~~to orthe ~~strategic~~volatility ~~alliances~~of byour usstock orprice, bywe also may become the target of securities litigation. Securities litigation could result in substantial costs and divert our ~~competitors;~~management’s attention and resources from the business as well as depress the price of our common stock.

~~● general economic, political, and financial market conditions or events.~~17

~~Due~~Our tocurrent ~~the~~principal ~~volatility~~stockholders ofown ~~our~~a ~~stock~~large ~~price,~~percentage ~~we also may become the target~~ of ~~securities litigation. Securities litigation could result in substantial costs and divert~~ our ~~management’s~~voting ~~attention~~stock, ~~and~~which ~~resources~~allows ~~from~~them ~~the~~to ~~business~~control assubstantially ~~well~~all asmatters ~~depress~~requiring ~~the~~stockholder ~~price of our common stock~~approval.

19Three individuals, including a director and two former directors, one of whom was also formerly our Chief Executive Officer and Executive Chairman, together currently own 39.4% of our outstanding common stock. Furthermore, these two former directors have indicated that it is their intent to pursue certain actions as a group with the intent of influencing the control of the Company. As a result, these investors may have significant influence over a decision to enter into any corporate transaction and may have the ability to prevent any transaction that requires the approval of stockholders, regardless of whether or not our other stockholders believe that such transaction is in their own best interests. Such concentration of voting power could have the effect of delaying, deterring, or preventing a change of control or other business combination, which could in turn have an adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the then-prevailing market price for their shares of common stock.

~~Our~~We ~~current~~expect ~~principal~~that ~~stockholders~~our ~~own~~common astock ~~large~~will ~~percentage~~be ofdelisted ~~our~~from ~~voting~~The ~~stock~~NASDAQ Global Market, which ~~allows~~delisting ~~them~~could hinder your ability to ~~control~~obtain ~~substantially~~accurate ~~all~~quotations ~~matters~~on ~~requiring~~the ~~stockholder~~price ~~approval~~of our common stock, or dispose of our common stock in the secondary market.

~~Two~~The ofCompany ~~our~~was ~~independent~~recently ~~directors~~made ~~and~~aware ~~our~~by ~~chief~~The ~~executive~~Nasdaq ~~officer~~Stock ~~together~~Market ~~currently~~(“Nasdaq”) ~~own~~that ~~27.4%~~if ofthe ~~our~~Company did ~~outstanding~~not ~~common~~pay ~~stock.~~its AsNasdaq aannual ~~result,~~fee ~~these~~by ~~investors~~April ~~may~~12, ~~have~~2019, ~~significant~~the ~~influence~~Company ~~over~~would abe ~~decision~~sent toa ~~enter~~termination ~~into~~letter ~~any~~delisting ~~corporate transaction and may have~~ the ~~ability~~Company’s tocommon ~~prevent~~stock ~~any~~effective April ~~transaction that requires the approval of stockholders~~25, ~~regardless~~2019. The ofCompany ~~whether~~did or not ~~our~~pay ~~other~~its ~~stockholders~~annual ~~believe~~fee ~~that~~by ~~such~~April ~~transaction~~12, is2019 inand ~~their~~expects ~~own~~that ~~best~~it ~~interests.~~will ~~Such~~be ~~concentration~~delisted ofas ~~voting power could have the effect of delaying, deterring, or preventing~~ a ~~change~~result of ~~control~~such ornonpayment ~~other~~on ~~business~~April ~~combination~~25, which could in turn have an adverse effect on the market price of our common stock or prevent our stockholders from realizing a premium over the then-prevailing market price for their shares of common stock2019.

When our common stock is delisted from The ~~large~~NASDAQ Global Market, trading in our common stock could thereafter be conducted in FINRA’s OTC Bulletin Board or in the over-the-counter markets in the so-called pink sheets. In such event, the liquidity of our common stock would likely be impaired, not only in the number of shares ~~eligible~~which ~~for~~could ~~public~~be ~~sale~~bought ~~could~~and ~~depress~~sold, ~~the~~but ~~market~~also ~~price~~through delays in the timing of the transactions, and there would likely be a reduction in our coverage by security analysts and the news media, thereby resulting in lower prices for our common stock than might otherwise prevail.

The market price for our common stock could decline as a result of sales of a large number of shares of our common stock in the market, and the perception that these sales could occur may depress the market price. As of December 31, 2017, we had outstanding 10,109,715 shares of common stock, all of which shares are either freely tradable or otherwise eligible for sale under Rule 144 under the Securities Act of 1933. In addition, we have 1,661,126 shares available for issuance under our stock award and employee stock purchase plans. We have filed registration statements under the securities laws to register the common stock to be issued under these plans. As a result, shares issued under these plans will be freely tradable without restriction unless acquired by affiliates of our company, who will be subject to the volume and other limitations of Rule 144. 18

~~Provisions~~The inlarge ~~our~~number ~~certificate~~ of ~~incorporation,~~shares ~~our~~eligible ~~bylaws,~~for ~~and~~public ~~Delaware~~sale ~~law~~ could ~~make~~depress itthe ~~more~~market ~~difficult~~price ~~for~~of aour ~~third~~common ~~party to acquire us, discourage a takeover, and adversely affect existing stockholders~~stock.

~~Our~~The ~~certificate~~market ofprice ~~incorporation,~~for our ~~bylaws,~~common ~~and~~stock ~~the~~could ~~Delaware~~decline ~~General~~as ~~Corporation~~a ~~Law~~result ~~contain~~of ~~provisions~~sales ~~that~~of ~~may~~a ~~have~~large ~~the~~number ~~effect~~ of ~~making~~shares ~~more~~of ~~difficult,~~our ~~delaying,~~common orstock ~~deterring~~in ~~attempts~~the bymarket, ~~others~~and tothe ~~obtain~~perception ~~control~~that ofthese ~~our~~sales ~~company,~~could ~~even~~occur ~~when these attempts~~ may bedepress ~~viewed~~the tomarket beprice. inAs ~~the~~of ~~best~~December ~~interests~~31, of2018, ~~stockholders.~~we ~~These~~had ~~include~~outstanding ~~provisions~~13,263,825 onshares ~~our~~of ~~maintaining~~common astock, ~~classified~~all ~~Board~~ of ~~Directors~~which ~~and~~shares ~~limiting~~are ~~the~~either ~~stockholders’~~freely ~~powers~~tradable toor ~~remove~~otherwise ~~directors~~eligible orfor ~~take~~sale ~~action~~under byRule ~~written~~144 ~~consent~~under ~~instead~~the ofSecurities atAct aof ~~stockholders’ meeting~~1933. ~~Delaware~~In ~~law~~addition, ~~also~~we ~~imposes~~have ~~conditions~~1,950,749 onshares ~~the~~available ~~voting~~for ofissuance ~~“control~~under ~~shares”~~our ~~and~~stock onaward ~~certain~~and ~~business~~employee ~~combination~~stock ~~transactions~~purchase ~~with “interested stockholders~~plans.” InWe ~~addition,~~have ~~our~~filed ~~certificate~~registration ofstatements ~~incorporation~~under ~~authorizes~~the ~~our~~securities ~~Board~~laws ofto ~~Directors,~~register ~~without~~the ~~stockholder~~common ~~approval,~~stock to ~~issue~~be ~~one~~issued orunder ~~more~~these ~~series~~plans. ofAs ~~preferred~~a ~~stock~~result, ~~which~~shares ~~could~~issued ~~have~~under ~~voting~~these ~~and~~plans ~~conversion~~will ~~rights~~be ~~that~~freely ~~adversely~~tradable ~~affect~~without orrestriction ~~dilute~~unless ~~the~~acquired ~~voting~~by ~~power~~affiliates of ~~the~~our ~~holders~~company, ofwho ~~common~~will ~~stock.~~be ~~These~~subject ~~provisions~~to ~~may~~the ~~also~~volume ~~limit~~and ~~the~~other ~~ability~~limitations of ~~stockholders to approve transactions that they may deem to be in their best interests~~Rule 144.

WeProvisions ~~have~~in aour ~~stockholder~~certificate ~~rights~~of ~~plan~~incorporation, ~~(known~~our asbylaws, aand ~~“poison~~Delaware ~~pill”)~~law ~~which~~ could ~~affect our common stock price and~~ make it more difficult for a ~~potential~~third ~~acquirer~~party to ~~purchase~~acquire ~~a large portion of our securities~~us, todiscourage ~~initiate~~ a ~~tender offer or a proxy contest~~takeover, orand toadversely ~~acquire~~affect usexisting stockholders.

InOur ~~September~~certificate ~~2016~~of incorporation, our ~~Board~~bylaws, ofand ~~Directors~~the ~~adopted~~Delaware aGeneral ~~Stockholder~~Corporation ~~Rights~~Law ~~Plan~~contain provisions that may have the effect of making more difficult, ~~commonly~~delaying, ~~known~~or asdeterring aattempts ~~“poison~~by ~~pill~~others to obtain control of our company,” ~~with~~even awhen ~~term~~these ~~through~~attempts ~~September~~may ~~2019~~be viewed to be in the best interests of stockholders. ~~This~~These ~~poison~~include ~~pill~~provisions ~~may~~on ~~discourage,~~our ~~delay~~maintaining a classified Board of Directors and limiting the stockholders’ powers to remove directors or ~~prevent~~take aaction ~~third~~by ~~party~~written ~~from~~consent ~~acquiring~~instead of at a ~~large~~stockholders’ ~~portion~~meeting. Delaware law also imposes conditions on the voting of ~~our~~“control ~~securities~~shares” and on certain business combination transactions with “interested stockholders.” In addition, ~~initiating~~our acertificate ~~tender~~of ~~offer~~incorporation orauthorizes ~~proxy~~our ~~contest~~Board of Directors, without stockholder approval, to issue one or ~~acquiring~~more usseries ~~through~~of anpreferred ~~acquisition~~stock, ~~merger~~which orcould ~~similar~~have ~~transaction~~voting ~~even~~and ifconversion ~~our~~rights ~~stockholders~~that ~~might~~adversely ~~receive~~affect aor ~~premium~~dilute ~~for~~the ~~their~~voting ~~stock~~power ~~over~~of the ~~then-current~~holders ~~market~~of ~~price~~common instock. These provisions may also limit the ~~event~~ability of ~~such~~stockholders ~~transaction~~to approve transactions that they may deem to be in their best interests.

Since we do not expect to pay any dividends for the foreseeable future, holders of our common stock may be forced to sell their stock in order to obtain a return on their investment.

We do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future. Instead, we plan to reinvest any earnings to finance our restaurant operations and growth plans. Accordingly, stockholders must rely on sales of their common stock after price appreciation, which may never occur, as the only way to realize any return on their investment. As a result, investors seeking cash dividends should not purchase our common stock.

20If we are unable to maintain effective internal control over financial reporting in the future, the accuracy and timeliness of our financial reporting may be adversely affected.

IfPursuant to Section 404 of the Sarbanes-Oxley Act, we are ~~unable~~required to ~~maintain~~furnish ~~effective~~a report on our internal control over financial reporting. inThe ~~the~~report ~~future~~contains, ~~the~~among ~~accuracy~~other ~~and~~matters, ~~timeliness~~an assessment of the effectiveness of our internal control over financial reporting ~~may~~as beof ~~adversely~~the ~~affected~~end of each fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management.

Pursuant to Section 404 of the Sarbanes-Oxley Act, we are required to furnish a report on our internal control over financial reporting. The report contains, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of each fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. 19

While we have determined that our internal control over financial reporting was effective as of December 31, ~~2017~~2018, with the exception of the material weakness identified in Item 9a below related to income taxes, as indicated in our Management's Annual Report on Internal Control over Financial Reporting included in this Annual Report on Form 10-K, we must continue to monitor and assess our internal control over financial reporting. If our management identifies one or more material weaknesses in our internal control over financial reporting and such weakness remains uncorrected at fiscal year-end, we will be unable to assert such internal control is effective at fiscal year-end. If we are unable to assert that our internal control over financial reporting is effective at fiscal year-end, we could lose investor confidence in the accuracy and completeness of our financial reports, which could have a material adverse effect on our reputation and the price of our common stock.

Item 1B. Unresolved Staff Comments

Not applicable.

21Item 2. Properties

~~Item~~We 2currently operate 34 restaurants in 20 states and Puerto Rico. ~~Properties~~Each of our restaurants and our corporate office are located in a leased facility. As of December 31, 2018, our restaurant leases had expiration dates ranging from 2019 to 2029, typically with options to renew for at least a five-year period. The average interior square footage of our restaurants is approximately 7,200 square feet. Many of our restaurants also have either enclosed patios or outdoor patios that are utilized when weather conditions permit. The following table sets forth our current restaurant locations and corporate office.

We currently operate 46 restaurants in 23 states and Puerto Rico. Each of our restaurants and our corporate office are located in a leased facility. As of December 31, 2017, our restaurant leases had expiration dates ranging from 2018 to 2029, typically with options to renew for at least a five-year period. The average interior square footage of our restaurants is approximately 7,200 square feet. Many of our restaurants also have either enclosed patios or outdoor patios that are utilized when weather conditions permit. The following table sets forth our current restaurant locations and corporate office.

State	City	Location	Year Opened
Arizona	Scottsdale	Scottsdale Fashion Square	1998
Missouri	Kansas City	Country Club Plaza	2002
Nevada	Las Vegas	Boca Park Fashion Village	2003
Colorado	Denver	Cherry Creek Mall	2004
Nebraska	Omaha	Village Pointe	2004
Indiana	Carmel	Clay Terrace	2004
Texas	San Antonio	The Shops at La Cantera	2005
Texas	Dallas	North Park Mall	2006
Illinois	Lincolnshire	Lincolnshire Commons	2006
Texas	Houston	Houston Galleria	2006
Illinois	Oak Brook	Oak Brook Promenade	2006
Texas	Austin	The Domain	2007
Michigan	Troy	Big Beaver Road	2007
Louisiana	Baton Rouge	Perkins Rowe	2007
Arizona	Gilbert	San Tan Village	2008
New Jersey	Woodbridge	Woodbridge Conference Center	2009
Minnesota	Eden Prairie	Windsor Plaza	2009
Florida	Tampa	MetWest International	2009
Maryland	Baltimore	Downtown Baltimore	2010
Idaho	Boise	The Village at Meridian	2013
Texas	El Paso	Fountains at Farah	2014
Florida	Sarasota	University Town Center	2014
Georgia	Alpharetta	Avalon	2014
Ohio	Columbus	Easton Town Center	2014
Puerto Rico	San Juan	Mall of San Juan	2015
Texas	Plano	West Plano Village	2015
Virginia	Arlington	Rosslyn-Ballston Corridor	2015
Ohio	Cincinnati	Liberty Center	2015
Texas	Friendswood	Baybrook Mall	2015
Alabama	Huntsville	Bridge Street Town Centre	2016
Hawaii	Honolulu	International Market Place	2016
Minnesota	Minnetonka	Ridgedale Center	2016
Texas	San Antonio	North Star Mall	2016
Arizona	Scottsdale	Scottsdale Quarter	2017
Arizona	Scottsdale	Corporate Office at Scottsdale Quarter	2017

State	City	Location	Year Opened
Arizona	Scottsdale	Scottsdale Fashion Square	1998
Arizona	Chandler	Chandler Fashion Center	2001
Missouri	Kansas City	Country Club Plaza	2002
Nevada	Las Vegas	Boca Park Fashion Village	2003
Colorado	Denver	Cherry Creek Mall	2004
Nebraska	Omaha	Village Pointe	2004
Indiana	Carmel	Clay Terrace	2004
Texas	San Antonio	The Shops at La Cantera	2005
Texas	Dallas	North Park Mall	2006
Illinois	Lincolnshire	Lincolnshire Commons	2006
Texas	Houston	Houston Galleria	2006
Illinois	Oak Brook	Oak Brook Promenade	2006
Texas	Austin	The Domain	2007
Michigan	Troy	Big Beaver Road	2007
Connecticut	Stamford	Stamford Town Center	2007
Louisiana	Baton Rouge	Perkins Rowe	2007
Arizona	Gilbert	San Tan Village	2008
Arizona	Phoenix	City North	2008
Virginia	Richmond	West Broad Village	2009
New Jersey	Woodbridge	Woodbridge Conference Center	2009
Minnesota	Eden Prairie	Windsor Plaza	2009
Florida	Tampa	MetWest International	2009
Maryland	Baltimore	Downtown Baltimore	2010
Idaho	Boise	The Village at Meridian	2013
Texas	The Woodlands	The Woodlands Town Center	2013
Texas	Fort Worth	West 7th	2014
Texas	El Paso	Fountains at Farah	2014
Florida	Sarasota	University Town Center	2014
Georgia	Alpharetta	Avalon	2014
Ohio	Columbus	Easton Town Center	2014
Puerto Rico	San Juan	Mall of San Juan	2015
Texas	Plano	West Plano Village	2015
Virginia	Arlington	Rosslyn-Ballston Corridor	2015
Florida	Miami	Dolphin Mall	2015
Ohio	Cincinnati	Liberty Center	2015
Nevada	Las Vegas	Fashion Show Mall	2015
Texas	Friendswood	Baybrook Mall	2015
Alabama	Huntsville	Bridge Street Town Centre	2016
Hawaii	Honolulu	International Market Place	2016
Tennessee	Franklin	CoolSprings Galleria	2016
Virginia	Fairfax	Fair Oaks Mall	2016
Minnesota	Minnetonka	Ridgedale Center	2016
California	Irvine	Irvine Spectrum Center	2016
Florida	Winter Park	Lakeside Crossing	2016
Texas	San Antonio	North Star Mall	2016
Arizona	Scottsdale	Scottsdale Quarter	2017
Arizona	Scottsdale	Corporate Office at Scottsdale Quarter	2017

22Item 3. Legal Proceedings

~~Item~~We 3are engaged in various legal actions, which arise in the ordinary course of our business. ~~Legal~~Although ~~Proceedings~~there can be no assurance as to the ultimate disposition of these matters, it is the opinion of our management, based upon the information available at this time, that the expected outcome of these matters, individually or in the aggregate, could have a material adverse effect on the results of operations or financial condition of our company.

WeOn ~~are~~July ~~engaged~~27, in2017, ~~various~~a ~~legal~~class ~~actions~~action complaint was filed against Kona Sushi, ~~which~~Inc., ~~arise~~a wholly-owned subsidiary of the Company, by Mitchell Boots, individually and on behalf of a Proposed Rule 23 Class, in the ~~ordinary~~United ~~course~~States District Court for Minnesota claiming, among other things, that the Company violated Minnesota gratuity/tip pooling laws with respect to certain classes of ~~our~~restaurant ~~business~~employees. ~~Although~~The ~~there~~plaintiff ~~can~~has bebrought noclaims ~~assurance~~on asbehalf of a putative Minnesota class and a putative national class of employees. On October 25, 2017, the plaintiff amended the complaint to withdraw the ~~ultimate~~national ~~disposition~~class claims and other common law claims, leaving one claim on behalf of ~~these~~a ~~matters~~putative Minnesota class, itand added a second named Plaintiff, Tracy Fortman. The parties participated in mediation on August 3, 2018, which concluded without resolution. Therefore, the matter is proceeding in accordance with the ~~opinion~~court-scheduled ofdates. ~~our~~As ~~management,~~we ~~based~~intend ~~upon~~to diligently defend this matter we believe the ~~information~~possible ~~available~~loss or range of loss cannot be determined at this time, ~~that~~and ~~the~~therefore ~~expected~~we ~~outcome~~have not accrued any costs associated with this matter as of ~~these~~December ~~matters~~31, ~~individually~~2018. orGiven in the ~~aggregate~~Company’s current liquidity, ~~will~~a ~~not~~negative result in this matter could have a material adverse effect on the ~~results~~Company’s ofcash ~~operations~~position, or financial condition ofand ~~our company~~operations.

On ~~December~~September 1314, ~~2012~~2018, ~~Frank~~The ~~Neal~~Irvine ~~Goss~~Company filed a ~~lawsuit~~complaint ~~against~~for ~~Kona~~damages ~~Grill~~in ~~Macadamia,~~the ~~Inc.,~~Superior aCourt ~~wholly-owned~~for ~~subsidiary of~~ the ~~Company~~State ~~(“Macadamia”)~~of ~~and~~California ~~Anthony~~for ~~DeAngelo in~~ the ~~Circuit~~County ~~Court~~ of ~~Jackson~~Orange ~~County~~alleging, ~~Kansas~~among ~~City~~other things, ~~Missouri. The claim revolves around a fight~~ that ~~Goss~~the ~~and~~Company ~~DeAngelo~~breached ~~allegedly~~its ~~had~~written ~~outside~~contract ofrelating to the Company’s ~~Kansas~~decision ~~City~~to ~~restaurant~~close onits ~~March~~restaurant 1,in ~~2011~~Irvine, ~~which~~California isas ~~claimed~~discussed ~~to have resulted~~ in ~~physical~~Note ~~injury~~10 to the ~~plaintiff.~~Consolidated ~~The~~Financial ~~plaintiff also claims that Macadamia failed to take certain actions that allegedly would have prevented the fight~~Statements. A ~~default~~mandatory ~~judgment~~settlement ofconference ~~approximately~~is ~~$3.5~~scheduled ~~million was entered on December 18, 2013 against Macadamia, but was subsequently set aside by order of the Circuit Court on April 7, 2014. On August 17, 2015, we filed a Motion~~ for Summary Judgment requesting judgment in our favor on all claims asserted against us by the plaintiff. On August 18, 2015, the plaintiff filed for a voluntary dismissal of the claim without prejudice; however, on April 2219, ~~2016, the plaintiff re-filed the claim in the Circuit Court~~2019. ~~A trial date was scheduled for June 12, 2017.~~ The ~~plaintiff~~estimated ~~filed~~lease ~~for~~termination ~~a motion of continuance on June 2, 2017~~ and ~~the~~exit ~~motion~~costs ~~was~~are ~~granted.~~further Indescribed ~~January~~in ~~2018,~~Note a10 ~~confidential~~to ~~general release was signed by~~ the ~~plaintiff.~~Consolidated OnFinancial ~~January 29, 2018, the Circuit Court dismissed the case with prejudice~~Statements.

On ~~July~~February 271, ~~2017~~2019, James Kuhn, the Company’s ~~received~~former aChief ~~letter~~Executive ~~from~~Officer, ancommenced ~~attorney~~a ~~purporting~~civil toaction ~~represent~~in ~~two stockholders of~~ the ~~Company. The~~United ~~letter~~States ~~relates~~District toCourt afor ~~proposal to amend~~ the ~~Company’s~~District ~~2012~~of ~~Stock~~Maryland, ~~Award~~related ~~Plan~~to (the ~~“Plan”)~~termination ~~that~~of ~~was~~his ~~brought~~employment ~~before~~by the Company~~’s shareholders at its 2015 annual stockholders’ meeting~~. The ~~letter~~lawsuit ~~claims~~alleges that, ~~although~~among ~~the~~other ~~Plan~~things, ~~amendment~~the ~~received~~Company ~~affirmative~~breached ~~votes from stockholders holding 57~~Mr.7% ofKuhn’s ~~the~~executive ~~shares~~employment ~~present~~agreement and ~~entitled~~seeks certain payments to ~~vote~~which onMr. ~~the~~Kuhn ~~proposal,~~alleges ithe was ~~not~~entitled ~~duly~~upon ~~approved~~termination byof ~~the appropriate voting standard~~employment. The Company ~~investigated~~filed ~~the~~its ~~claims~~response ~~made~~denying inMr. ~~the~~Kuhn’s ~~letter~~claims ~~and~~on ~~determined~~February ~~that~~22, ~~the~~2019. ~~Plan~~On ~~amendment~~February ~~did~~28, ~~not~~2019, ~~receive sufficient votes to adopt~~ the ~~amendment~~Company inalso ~~accordance~~commenced ~~with~~a ~~the~~separate ~~Company’s~~action ~~bylaws~~against Mr. ~~The~~Kuhn ~~Company~~in ~~has~~the ~~determined~~United ~~which~~States ~~stock~~District ~~options~~Court ~~granted~~for by the ~~Company~~District ~~since~~of ~~April~~Arizona ~~2015~~for ~~were~~Mr. ~~not~~Kuhn’s ~~within~~breach ~~the number~~ of ~~shares~~his ~~reserved~~fiduciary ~~under~~duties ~~the~~owed ~~Plan prior~~ to the ~~2015~~Company ~~amendment~~under ~~(the~~Arizona ~~“Excess Stock Options”)~~law. ~~All~~As of the ~~Excess~~litigation ~~Stock Options were issued~~ in ~~2016~~the ~~and~~two ~~2017~~cases tohas anonly ~~aggregate~~recently ofcommenced ~~13 employees~~ and ~~directors~~we atintend ~~exercise~~to ~~prices~~diligently ofdefend ~~$14~~Mr.26 ~~and~~Kuhn’s ~~$8.15~~claims ~~per~~against ~~share, far in excess of~~ the ~~current trading price of $2.05. The~~ Company, ~~also~~we ~~determined~~believe ~~that none of~~ the ~~Excess~~possible ~~Stock~~loss ~~Options have been exercised. The Company has entered into amendments with each of the 11 holders of Excess Stock Options who are still employees~~ or ~~directors~~range of ~~the~~loss ~~Company. The amendments specify that such Excess Stock Options~~ cannot be ~~exercised~~determined ~~until~~at ~~further~~this ~~stockholder~~time, ~~approval~~and istherefore ~~obtained~~we ~~for~~have annot ~~amendment~~accrued toany ~~the~~costs ~~Plan~~associated ~~that~~with ~~increases~~this ~~the~~matter ~~authorized~~as ~~shares.~~of ~~Therefore~~December 31, ~~the Company believes it has taken appropriate corrective action~~2018. The Company does not expect ~~that~~the ~~its~~result ~~receipt~~ of ~~the~~Mr. ~~demand~~Kuhn’s ~~letter~~action orto ~~the claims made therein will~~ have a ~~materially~~material adverse effect on ~~its~~the ~~financial condition or results of operation~~Company. However, ~~the~~there ~~Nasdaq~~is ~~Marketplace~~no ~~Rules~~assurance ~~require~~ that ~~listed~~any ~~companies~~adverse ~~obtain~~ruling ~~stockholder approval prior to issuing securities under equity incentive plans when such plans are established~~ or ~~materially~~settlement ~~amended. Depending upon the validity of the claims made~~ in ~~the~~this ~~demand~~matter ~~letter,~~would ~~Nasdaq~~not ~~may~~have ~~provide us with~~ a ~~deficiency~~material ~~letter~~impact ~~and~~on ~~require that we present Nasdaq with a plan of compliance to correct~~ the ~~asserted~~Company’s ~~violation,~~cash ifposition ~~Nasdaq~~and ~~does not agree that necessary corrective action has been taken~~operations.

Also on July 27, 2017, a class action complaint was filed against Kona Sushi, Inc., a wholly-owned subsidiary of the Company, by Mitchell Boots, individually and on behalf of a Proposed Rule 23 Class, in the United States District Court for Minnesota claiming, among other things, that the Company violated Minnesota gratuity/tip pooling laws with respect to certain classes of restaurant employees. The plaintiff has brought claims on behalf of a putative Minnesota class and a putative national class of employees. On October 25, 2017, the plaintiff amended the complaint to withdraw the national class claims and other common law claims, leaving one claim on behalf of a putative Minnesota class, and added a second named Plaintiff, Tracy Fortman. On January 9, 2018, a pre-trial scheduling order was issued by the District Court, setting pre-trial dates and setting a trial date of January 1, 2019. The Company is in the early stages of discovery and does not expect the result of such complaint to have a material adverse effect on the Company. However, there is no assurance that any adverse ruling or settlement in that matter would not have a material impact on the Company’s cash position and operations.21

On ~~November~~February 2921, ~~2017~~2019, ~~Continental~~the ~~Atrium~~Company ~~Corporation~~received ~~filed~~ a ~~complaint~~summons ~~for damages~~ in the ~~Superior~~District Court ~~for the State~~ of ~~California~~Clark County for the ~~County~~State of ~~Los~~Nevada, ~~Angeles~~ alleging, among other things, that the Company breached its ~~written~~lease ~~contract~~by ~~relating~~closing toits ~~the Company’s decision in April 2017 to not move forward with the construction of a~~ restaurant in ElLas ~~Segundo~~Vegas, ~~as discussed in Note 10 below (the “Complaint”)~~Nevada. The ~~Complaint~~estimated alleges that beginning no later than August 15, 2017, the Company has failed to pay rent and other amounts owed to the plaintiff. A case management conference is scheduled for April 30, 2018. As of December 31, 2017, we had $1.0 million in lease termination and exit costs ~~recorded~~are further described in ~~accrued~~Note ~~expenses~~10 into the ~~accompanying~~ Consolidated ~~Balance~~Financial ~~Sheets associated with this matter~~Statements.

Item 4. Mine Safety Disclosures

Not applicable.

23PART II

~~PART~~Item II5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

~~Item 5.~~ Market ~~for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities~~Information

Our common stock has traded on the NASDAQ Global Market ~~Information~~under the symbol KONA since our initial public offering on August 16, 2005.

~~Our~~On ~~common~~March ~~stock~~29, ~~has~~2019, ~~traded on~~ the ~~NASDAQ~~closing ~~Global~~sale ~~Market~~price ~~under~~of ~~the symbol KONA since~~ our ~~initial~~common ~~public~~stock ~~offering~~was on$0.91 per ~~August 16, 2005~~share. ~~The~~On ~~following~~March ~~table~~31, ~~sets~~2019, ~~forth~~there ~~high~~were ~~and~~20 ~~low~~holders ~~sale~~of ~~prices~~record of our common stock ~~for each calendar quarter indicated as reported on the NASDAQ Global Market~~.

	High		Low
2017
First quarter	$	12.85	$	5.80
Second quarter	$	6.35	$	3.25
Third quarter	$	4.30	$	1.50
Fourth quarter	$	3.95	$	1.70
2016
First quarter	$	16.71	$	12.09
Second quarter	$	14.08	$	10.34
Third quarter	$	14.09	$	9.99
Fourth quarter	$	13.50	$	10.05

Recent Sales of Unregistered Securities

~~On February 28, 2018, the closing sale price of our common stock was $1~~None.~~80 per share. On February 28, 2018, there were 17 holders of record of our common stock.~~

~~Recent~~Dividend ~~Sales of Unregistered Securities~~Policy

~~None~~We have not paid any dividends to holders of our common stock since our initial public offering and do not anticipate that we will pay any dividends to holders of our common stock in the foreseeable future, but instead we currently plan to retain any earnings to finance our restaurant operations and the growth of our business. Payments of any cash dividends in the future, however, is within the discretion of our Board of Directors and will depend on our financial condition, results of operations, and capital and legal requirements as well as other factors deemed relevant by our Board of Directors.

~~Dividend~~Issuer ~~Policy~~Purchase of Equity Securities

WeIn ~~have~~October ~~not~~2016, ~~paid~~our ~~any~~Board ~~dividends~~of toDirectors ~~holders~~authorized ofan ~~our~~additional ~~common~~ stock ~~since~~repurchase ~~our~~of ~~initial~~up ~~public offering and do not anticipate that we will pay any dividends~~ to ~~holders~~$5 million of ~~our~~outstanding common stock. inWe ~~the~~completed ~~foreseeable future, but instead we currently plan to retain any earnings to finance our restaurant operations and~~ the ~~growth~~$5 ofmillion ~~our~~stock ~~business.~~repurchase ~~Payments~~program ~~of any cash dividends~~ in ~~the~~February ~~future,~~2017 ~~however,~~with ~~is within~~ the ~~discretion~~purchase ~~of our Board of Directors~~ and ~~will~~retirement ~~depend on our financial condition, results~~ of ~~operations~~532,376 ~~and capital and legal requirements as well as other factors deemed relevant by our Board of Directors~~shares.

~~Issuer~~Item ~~Purchase~~6. Selected ofFinancial ~~Equity Securities~~Data

InNot ~~November 2015, our Board of Directors authorized a repurchase program of up to $10 million of outstanding common stock~~applicable. ~~We completed the $10 million stock repurchase program in June 2016 with the purchase and retirement of 832,937 shares under the 2015 authorization.~~

In October 2016, our Board of Directors authorized an additional stock repurchase of up to $5 million of outstanding common stock. We completed the $5 million stock repurchase program in February 2017 with the purchase and retirement of 532,376 shares.22

24Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

~~Item~~The 7following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. ~~Management’s~~This ~~Discussion~~discussion contains forward-looking statements that involve risks, uncertainties, and ~~Analysis~~assumptions. Our actual results may differ materially from those currently anticipated as a result of ~~Financial~~a ~~Condition~~variety of factors, including those set forth under Item 1A, “Risk Factors” and ~~Results~~elsewhere ofin ~~Operations~~this report.

The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes contained elsewhere in this report. This discussion contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those currently anticipated as a result of a variety of factors, including those set forth under Item 1A, “Risk Factors” and elsewhere in this report.Overview

~~Overview~~We grew the number of restaurants significantly from 2013 to 2016 and doubled the size of the Company from 23 restaurants in 2012 to 46 restaurants by 2017. We have discontinued expansion of new restaurants to give our existing base of restaurants the opportunity to mature, conserve our cash resources and closed 12 unprofitable restaurants. We are evaluating strategic alternatives including the sale of the Company, the potential sale of the Company’s assets through a Chapter 11 filing, refinancing or other alternatives, including the closure of additional restaurants. In March 2019, we hired Piper Jaffray to assist with the evaluation of strategic alternatives. There can be no assurance that the process that we are undertaking will be successful. In addition, we cannot predict the terms or timing of any transaction that we may undertake or whether any such transaction will result in any proceeds for the holders of our common stock.

WeUnless ~~currently~~the ~~own~~Company ~~and~~receives ~~operate~~an 46equity ~~restaurants~~investment, ~~located~~or inunless 23some ~~states~~third ~~and~~party ~~Puerto~~acquires ~~Rico.~~the ~~Over~~Company’s ~~the~~debt ~~past~~from ~~four~~the ~~years~~secured lenders, wethe ~~have~~Company ~~grown~~may ~~organically~~be ~~through~~required ~~opening~~to ~~new~~file ~~restaurants~~for ~~and~~protection ~~doubled~~under ~~the~~Chapter ~~number~~11 of ~~domestic~~the ~~restaurants~~U.S. ~~during~~Bankruptcy ~~this~~Code. ~~time~~It ~~from~~is 23possible tothat ~~46.~~even ~~Our~~a ~~unit~~successful ~~growth~~implementation ~~rate~~of ~~was~~one ~~22%~~of inthe ~~2016,~~strategic ~~with~~alternatives ~~eight~~that ~~openings~~we ~~during~~are ~~the~~pursuing ~~year~~will ~~and~~require weus ~~had~~to ~~23%~~make ~~unit~~a ~~growth~~Chapter in11 ~~2015~~filing. Our ~~with~~seeking ~~seven~~relief ~~restaurant~~under ~~openings~~the U.S. WeBankruptcy ~~opened~~Code, ~~one~~whether ~~restaurant~~or innot ~~2017.~~such Werelief ~~believe~~leads ~~that~~to a ~~modest~~quick ~~growth~~emergence ~~rate~~from ~~over~~Chapter ~~the~~11, ~~next~~could ~~few~~materially ~~years~~adversely ~~will~~affect ~~allow~~the usrelationships tobetween ~~focus~~us and our ~~time~~existing and ~~attention~~potential oncustomers, ~~restaurant~~employees, ~~operations~~suppliers, and ~~improving~~others, ~~financial~~and ~~performance.~~could result in little or no recovery to our existing security holders.

~~During~~We ~~the~~previously ~~years~~expanded ~~ended~~our ~~December~~concept ~~31,~~internationally. ~~2017~~In ~~and~~ 2016, we ~~recorded~~signed ~~non-cash~~agreements ~~asset~~for ~~impairment~~the ~~charges~~development of ~~$9.3~~six ~~million~~Kona Grill restaurants in Mexico and ~~$12~~six Kona Grill restaurants in the United Arab Emirates.5 ~~million,~~In ~~respectively~~April 2017, we signed an agreement for ~~certain~~the ~~underperforming~~development ~~restaurants~~of ~~based~~one ~~upon~~Kona anGrill ~~assessment~~restaurant in Vaughan (Toronto), Canada. Each of ~~each~~our ~~restaurant’s~~three ~~historical~~international ~~operating~~franchise ~~performance~~partners ~~combined~~opened ~~with~~a ~~expected~~Kona ~~cash~~Grill ~~flows~~restaurant ~~for~~in ~~these~~their ~~restaurants~~respective ~~over~~countries in the ~~respective~~second ~~remaining~~half ~~lease~~of ~~term~~2017. During ~~2017~~the second quarter of 2018, we ~~executed~~terminated ~~lease~~the ~~amendments~~development ~~for~~and ~~rent~~franchise ~~concessions~~agreements ~~for~~with ~~five~~our franchise partner in Mexico as a result of ~~our~~the ~~existing~~franchisee ~~restaurants~~ceasing to do business at the franchised restaurant. WeAdditionally, ~~continue~~during tothe ~~negotiate~~third ~~with~~quarter of 2018, the agreement for our ~~landlords~~franchise ~~regarding~~partner ~~rent~~in ~~abatement~~the orUnited ~~closures~~Arab ofEmirates ~~underperforming~~was amended to reduce the development schedule to three franchised restaurants. As asa ~~part~~result of ~~our~~the ~~strategy~~modifications to ~~improve~~the ~~financial~~two ~~performance~~agreements, we recognized $0.6 million of revenue during the year ended December 31, 2018 associated with the remaining deferred upfront territory and franchise related fees.

AsCost ~~part~~ of sales, labor, and other operating expenses for our ~~capital~~restaurants ~~allocation~~open ~~strategy,~~at ~~during~~least ~~the~~18 ~~second~~months ~~quarter~~generally oftrend ~~2017~~consistently with revenue, and we ~~made~~analyze ~~the~~those ~~decision~~costs toas ~~not~~a ~~move~~percentage ~~forward~~of ~~with~~revenue. ~~the~~Our ~~planned~~typical ~~construction~~new ~~and~~restaurants ~~opening~~experience ofgradually aincreasing ~~restaurant~~unit involumes Elas ~~Segundo,~~customers ~~California~~discover our concept and ~~recognized~~we $1generate market awareness.4 ~~million~~Our ~~related~~new restaurants generally take up to ~~estimated~~twelve ~~lease~~months ~~termination~~to ~~and~~achieve ~~exit~~the ~~costs.~~majority ~~See~~of ~~“Lease~~operating ~~Termination~~efficiencies as a result of challenges typically associated with opening and ~~exit~~operating ~~costs”~~new inrestaurants, ~~Note~~including 10lack of market recognition and the ~~Notes~~need to ~~the~~hire ~~Consolidated~~and ~~Financial~~sufficiently ~~Statements~~train ~~for~~employees, ~~further~~as ~~discussion.~~well as other factors.

~~Cost~~Key ofMeasures sales, labor, and other operating expenses for our restaurants open at least 12 months generally trend consistently with revenue, and we analyze those costs as a percentage of revenue. Our typical new restaurants experience gradually increasing unit volumes as customers discover our concept and we generate market awareness. We ~~anticipate~~Use ~~that our new restaurants will take up~~ to ~~twelve~~Evaluate ~~months~~Our to achieve the majority of operating efficiencies as a result of challenges typically associated with opening and operating new restaurants, including lack of market recognition and the need to hire and sufficiently train employees, as well as other factors. We expect cost of sales and labor expenses as a percentage of revenue to be higher when we open a new restaurant, but to decrease as a percentage of revenue as the restaurant matures and as the restaurant management and employees become more efficient in operating that unit. Occupancy and a portion of restaurant operating expenses are fixed. As a result, the volume and timing of newly opened restaurants has had, and is expected to continue to have, an impact on cost of sales, labor, occupancy, and restaurant operating expenses measured as a percentage of revenue, which we expect will continue until these restaurants mature. Company

WeKey ~~continue~~measures ~~to execute our strategy for international market expansion. As there is increased demand for upscale casual dining concepts overseas,~~ we ~~believe~~use ~~there is a significant opportunity~~ to ~~expand~~evaluate ~~our concept in Canada, Latin America, the Middle East~~ and ~~beyond.~~assess In 2016, we signed agreements for the development of six Kona Grill restaurants in Mexico and six Kona Grill restaurants in the United Arab Emirates. In April 2017, we signed an agreement for the development of one Kona Grill restaurant in Vaughan, Canada. The agreement allows our ~~franchisee~~business ~~the~~include ~~right to develop additional restaurants in~~ the ~~Toronto market for a specified period of time~~ following ~~the opening of the first restaurant. Each of our three international franchise partners opened a Kona Grill restaurant in their respective countries in the second half of 2017.~~:

25Same-Store Sales Percentage Change. Same-store sales percentage change reflects the periodic change in restaurant sales for the comparable restaurant base. In calculating the percentage change in same-store sales, we include a restaurant in the comparable restaurant base in the first full quarter after it has been in operation for 18 months. We adjust the sales included in the same-store sales calculation for restaurant closures, so that the periods will be comparable. Same-store sales growth can be generated by an increase in customer traffic counts or by increases in the per person average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount.

~~Key Measures We Use to Evaluate Our Company~~23

~~Key~~Sales ~~measures~~per weSquare ~~use~~Foot. toSales ~~evaluate~~per ~~and~~square ~~assess~~foot ~~our~~is ~~business~~a ~~include~~measure of a restaurant’s productivity and represents the ~~following:~~amount of sales generated for each square foot.

~~Same-Store~~Average ~~Sales~~Unit ~~Percentage Change~~Volume. ~~Same-store~~Average ~~sales~~unit ~~percentage~~volume ~~change~~represents ~~reflects~~ the ~~periodic~~average ~~change in~~ restaurant sales for the comparable restaurant base. In calculating the percentage change in same-store sales, we include a restaurant in the comparable restaurant base after it has been in operation for more than 18 months. We adjust the sales included in the same-store sales calculation for restaurant closures, primarily as a result of remodels, so that the periods will be comparable. Same-store sales growth can be generated by an increase in customer traffic counts or by increases in the per person average check amount. Menu price changes and the mix of menu items sold can affect the per person average check amount.

Restaurant Operating ~~Weeks~~Profit. ~~Operating~~Restaurant ~~weeks~~operating ~~represent~~profit is defined as revenue minus cost of sales, labor, occupancy, and restaurant operating expenses. Restaurant operating profit does not include general and administrative expenses, depreciation and amortization, or preopening expenses. We believe restaurant operating profit is an important component of financial results because it is a widely-used metric within the ~~number~~restaurant industry to evaluate restaurant-level productivity, efficiency, and performance prior to application of ~~weeks~~corporate ~~that~~overhead. We use restaurant operating profit as a percentage of revenue as a key metric to evaluate our restaurants’ ~~were~~financial ~~open~~performance ~~during~~compared ~~the~~with ~~reporting~~our ~~period~~competitors. This measure provides useful information regarding our financial condition and results of operations and allows investors to better determine future financial results driven by growth and to compare restaurant level profitability.

~~Sales~~EBITDA ~~per~~and ~~Square~~Adjusted ~~Foot~~EBITDA. ~~Sales~~EBITDA ~~per~~is ~~square~~defined ~~foot~~as net income (loss) plus the sum of interest, taxes, depreciation and amortization. Adjusted EBITDA is defined as EBITDA plus unusual or non-recurring items, such as impairment, lease termination and exit costs and write-off of deferred financing costs. EBITDA and Adjusted EBITDA are presented because: (i) we believe it is a useful measure for investors to assess the operating performance of our business; (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness; and (iii) we use EBITDA and Adjusted EBITDA internally as a ~~restaurant’s~~benchmark ~~productivity~~to evaluate our operating performance and ~~represents~~compare ~~the~~our ~~amount~~performance to that of ~~sales~~our ~~generated~~competitors. ~~for~~EBITDA ~~each~~and ~~square~~Adjusted ~~foot~~EBITDA as presented in this report are supplemental measures of our performance that are neither required by, nor presented in accordance with, GAAP. EBITDA and Adjusted EBITDA are not measurements of our financial performance under GAAP and should not be considered as alternatives to net income, operating income, or any other performance measures derived in accordance with GAAP, or as alternatives to cash flow from operating activities as a measure of our liquidity.

~~Average~~Key ~~Unit~~Financial ~~Volume. Average unit volume represents the average restaurant sales for the comparable restaurant base.~~Definitions

~~Restaurant Operating Profit~~Revenue. ~~Restaurant~~Revenue ~~operating profit is defined as revenue minus cost of sales, labor, occupancy, and restaurant operating expenses. Restaurant operating profit does not~~ include ~~general~~gross ~~and~~food ~~administrative expenses, depreciation~~ and ~~amortization,~~beverage or preopening expenses. We believe restaurant operating profit is an important component of financial results because it is a widely-used metric within the restaurant industry to evaluate restaurant-level productivitysales, ~~efficiency,~~net ~~and performance prior to application~~ of ~~corporate~~promotions overhead. We use restaurant operating profit as a percentage of revenue as a key metric to evaluate our restaurants’ financial performance compared with our competitors. This measure provides useful information regarding our financial condition and ~~results~~discounts ~~of operations~~ and ~~allows~~franchise-related ~~investors to better determine future financial results driven by growth and to compare restaurant level profitability~~revenues.

~~EBITDA~~Cost ~~and Adjusted EBITDA. EBITDA is defined as net income (loss) plus the sum~~ of ~~interest, taxes, depreciation and amortization~~Sales. ~~Adjusted~~Cost ~~EBITDA is defined as EBITDA plus unusual or non-recurring items, such as impairment, lease termination and exit costs and write-off~~ of ~~deferred~~sales ~~financing~~consists ~~costs. EBITDA and Adjusted EBITDA are presented because: (i) we believe it is a useful measure for investors to assess the operating performance~~ of ~~our~~food ~~business; (ii) we believe that investors will find these measures useful in assessing our ability to service or incur indebtedness;~~ and ~~(iii)~~beverage wecosts ~~use EBITDA~~ and ~~Adjusted~~related ~~EBITDA~~delivery ~~internally as a benchmark to evaluate our operating performance and compare our performance to that of our competitors~~fees.

26Labor. Labor includes all direct and indirect labor costs incurred in operations.

~~Key~~Occupancy. ~~Financial~~Occupancy ~~Definitions~~includes all rent payments associated with the leasing of real estate, including base, percentage and straight-line rent, real estate taxes, and common area maintenance expense. We record tenant improvement allowances as a reduction of occupancy expense over the term of the lease.

~~Revenue~~Restaurant Operating Expenses. ~~Revenue~~Restaurant ~~include~~operating ~~gross~~expenses ~~food~~consist ~~and~~of ~~beverage~~all ~~sales~~other restaurant-level operating costs, ~~net~~the major components of ~~promotions~~which are utilities, credit card fees, advertising, supplies, marketing, repair and ~~discounts~~maintenance, and ~~franchise-related~~other ~~revenues~~expenses. Other operating expenses contain both variable and fixed components.

~~Cost~~General ofand ~~Sales~~Administrative. ~~Cost~~General ofand ~~sales~~administrative ~~consists~~includes all corporate and administrative functions that support operations and provide infrastructure to facilitate our future growth. Components of ~~food~~this category include management and ~~beverage~~staff ~~costs~~salaries, bonuses, stock-based compensation and related ~~delivery~~employee benefits, travel, information systems, corporate rent, professional and consulting fees, and corporate insurance costs.

~~Labor. Labor includes all direct and indirect labor costs incurred in operations.~~24

~~Occupancy~~Preopening Expense. ~~Occupancy~~Preopening ~~includes~~expense ~~all~~consists ~~rent~~of ~~payments~~costs ~~associated~~incurred ~~with~~prior ~~the~~to ~~leasing~~opening a new restaurant and is comprised principally of ~~real~~manager ~~estate~~salaries, ~~including~~payroll ~~base~~and related training costs for new employees, ~~percentage~~including food and ~~straight-line~~beverage ~~rent,~~costs ~~real~~associated ~~estate~~with ~~taxes,~~practice and ~~common~~rehearsal ~~area~~of ~~maintenance~~service activities, and rent expense incurred from the date we obtain possession of the property until opening. We ~~record~~expense ~~tenant~~restaurant ~~improvement~~preopening ~~allowances~~expenses as incurred. We expect preopening expenses to commence six to eight months prior to a ~~reduction~~restaurant ofopening. ~~occupancy~~Although the actual preopening expenses for a particular location depend upon numerous factors, our historical cash preopening expenses average approximately $450,000 per location, and non-cash preopening rent expense ~~over~~typically ranges from $50,000 to $100,000 per location. Preopening costs will fluctuate from period to period depending upon the ~~term~~number of restaurants opened, the ~~lease~~timing of new restaurant openings, the location of the restaurants, and the complexity of the staff hiring and training process.

~~Restaurant~~Depreciation ~~Operating~~and ~~Expenses~~Amortization. ~~Restaurant~~Depreciation ~~operating~~and ~~expenses~~amortization ~~consist~~expense consists of ~~all other restaurant-level operating costs,~~ the ~~major~~depreciation ~~components~~ of ~~which~~property ~~are~~and ~~utilities,~~equipment. ~~credit~~Depreciation ~~card~~and ~~fees,~~amortization ~~advertising,~~expense ~~supplies,~~also ~~marketing,~~includes ~~repair~~gains ~~and~~or ~~maintenance,~~losses ~~and~~on ~~other~~the ~~expenses.~~disposal ~~Other~~of ~~operating~~fixed ~~expenses~~assets, ~~contain~~primarily ~~both~~associated ~~variable~~with ~~and~~remodel ~~fixed components~~activities.

~~General~~Interest ~~and~~Expense, ~~Administrative~~net. ~~General~~Interest ~~and~~expense ~~administrative~~consists ~~includes~~of ~~all~~the ~~corporate~~cost ~~and~~of ~~administrative~~servicing ~~functions~~our ~~that~~debt ~~support~~obligations ~~operations~~ and ~~provide~~the ~~infrastructure~~amortization toof ~~facilitate~~debt ~~our~~issuance ~~future~~costs ~~growth.~~and ~~Components~~commitment offees ~~this~~on ~~category~~the ~~include~~credit ~~management~~facility. ~~and~~Interest ~~staff~~expense ~~salaries,~~is ~~bonuses,~~offset ~~stock-based~~by ~~compensation~~interest ~~and~~earned ~~related~~on ~~employee~~cash ~~benefits,~~and ~~travel,~~investment ~~information~~balances. ~~systems,~~We ~~corporate~~capitalize ~~rent,~~interest ~~professional~~incurred ~~and~~on ~~consulting~~borrowings ~~fees,~~for ~~and~~restaurant ~~corporate insurance costs~~construction.

~~Preopening~~Income Tax Expense. ~~Preopening~~Expense ~~expense consists of costs incurred prior to opening a new restaurant and is comprised principally of manager salaries, payroll and related training costs~~ for ~~new~~income ~~employees,~~taxes ~~including~~represents ~~food~~amounts ~~and~~due beverage costs associated with practice and rehearsal of service activities, and rent expense incurred from the date we obtain possession of the property until opening. We expense restaurant preopening expenses as incurred. We expect preopening expenses to commence six to eight months prior to a restaurant opening. Although the actual preopening expenses for astate ~~particular~~income location depend upon numerous factors, our historical cash preopening expenses average approximately $450,000 per location, and non-cash preopening rent expense typically ranges from $50,000 to $100,000 per locationtaxes. Preopening costs will fluctuate from period to period depending upon the number of restaurants opened, the timing of new restaurant openings, the location of the restaurants, and the complexity of the staff hiring and training process.

~~Depreciation~~Financial ~~and~~Performance Amortization. Depreciation and amortization expense consists of the depreciation of property and equipment. Depreciation and amortization expense also includes gains or losses on the disposal of fixed assets, primarily associated with remodel activities.Overview

~~Interest~~The ~~Expense,~~following ~~net.~~table ~~Interest~~sets ~~expense~~forth ~~consists~~certain ofinformation ~~the~~regarding ~~cost of servicing~~ our ~~debt~~financial ~~obligations,~~performance ~~the~~for ~~amortization~~2018 ~~of debt issuance costs~~ and ~~commitment fees on the credit facility. Interest expense is offset by interest earned on cash and investment balances. We capitalize interest incurred on borrowings for restaurant construction.~~2017:

Income Tax Expense. Expense for income taxes represents amounts due for state income taxes.

	Year Ended December 31,
	2018			2017
Revenue percentage change		(12.4	)%		5.6	%
Same-store sales percentage change		(12.3	)%		(5.9	)%
Average unit volume (in thousands)	$	3,492		$	4,119
Sales per square foot (in thousands)	$	483		$	569
Restaurant operating profit (in thousands)	$	17,920		$	19,099
Restaurant operating profit as a percentage of sales		11.4	%		10.7	%
EBITDA (in thousands)	$	(15,899	)	$	(6,375	)
EBITDA as a percentage of sales		(10.1	)%		(3.6	)%
Adjusted EBITDA (in thousands)	$	6,654		$	4,830
Adjusted EBITDA as a percentage of sales		4.2	%		2.7	%

2725

~~Financial~~The ~~Performance~~table ~~Overview~~below sets forth our reconciliation of Net Loss to EBITDA, Adjusted EBITDA and restaurant operating profit to the most comparable U.S. GAAP measure.

The following table sets forth certain information regarding our financial performance for 2017, 2016 and 2015:

	Year Ended December 31,
	2018			2017
(In thousands)
Net loss	$	(31,968	)	$	(23,432	)
Income tax expense		9			90
Interest expense, net		2,463			1,784
Depreciation and amortization		13,597			15,183
EBITDA		(15,899	)		(6,375	)
Asset impairment charge		18,325			9,341
Lease termination costs and other ⁽¹⁾		4,191			1,392
Write-off of deferred financing costs		37			472
Adjusted EBITDA		6,654			4,830
General and administrative		11,404			13,453
Preopening expense		—			816
Gain on insurance recoveries		(138	)		—
Restaurant operating profit	$	17,920		$	19,099

	Year Ended December 31,
	2017			2016			2015
Revenue growth		5.6	%		18.5	%		20.1	%
Same-store sales percentage change		(5.9	)%		0.5	%		2.0	%
Average unit volume (in thousands)	$	4,119		$	4,531		$	4,506
Sales per square foot	$	569		$	630		$	625
Restaurant operating profit (in thousands)	$	19,099		$	23,688		$	23,212
Restaurant operating profit as a percentage of sales		10.7	%		14.0	%		16.2	%
EBITDA (in thousands)	$	(6,375	)	$	(6,571	)	$	5,693
EBITDA as a percentage of sales		(3.6	)%		(3.9	)%		4.0	%
Adjusted EBITDA (in thousands)	$	4,830		$	5,883		$	5,854
Adjusted EBITDA as a percentage of sales		2.7	%		3.5	%		4.1	%

(1) Amounts include approximately $0.2 million of litigation settlement costs which are included in “Lease termination costs and other” in the accompanying Consolidated Statements of Operations for the year ended December 31, 2018.

The table below sets forth our reconciliation of Net Loss to EBITDA, Adjusted EBITDA and restaurant operating profit to the most comparable U.S. GAAP measure.

	Percentage of Restaurant Sales
	Year Ended December 31,
	2018			2017
Net loss		(20.4	)%		(13.1	)%
Income tax expense		0.0			0.1
Interest expense, net		1.6			1.0
Depreciation and amortization		8.7			8.5
EBITDA		(10.1	)%		(3.6	)%
Asset impairment charge		11.7			5.2
Lease termination costs and other		2.7			0.8
Write-off of deferred financing costs		0.0			0.3
Adjusted EBITDA		4.2	%		2.7	%
General and administrative		7.3			7.5
Preopening expense		0.0			0.5
Gain on insurance recoveries		(0.1	)		—
Restaurant operating profit		11.4	%		10.7	%

	Year Ended December 31,
	2017			2016			2015
	(In thousands)
Net loss	$	(23,432	)	$	(21,629	)	$	(4,496	)
Income tax expense		90			66			43
Interest expense, net		1,784			571			180
Depreciation and amortization		15,183			14,421			9,966
EBITDA	$	(6,375	)	$	(6,571	)	$	5,693
Asset impairment charge		9,341			12,454			—
Lease termination and exit costs		1,392			—			—
Other		—			—			161
Write-off of deferred financing costs		472			—			—
Adjusted EBITDA		4,830			5,883			5,854
General and administrative		13,453			13,272			12,612
Preopening expense		816			4,533			4,746
Restaurant operating profit	$	19,099		$	23,688		$	23,212

Certain amounts may not sum due to rounding.

	Percent of Revenue
	Year Ended December 31,
	2017			2016			2015
Net loss		(13.1	)%		(12.8	)%		(3.1	)%
Income tax expense		0.1			0.0			0.0
Interest expense, net		1.0			0.3			0.1
Depreciation and amortization		8.5			8.5			7.0
EBITDA		(3.6	)		(3.9	)		4.0
Asset impairment charge		5.2			7.3			—
Lease termination and exit costs		0.8			—			—
Other		—			—			0.1
Write-off of deferred financing costs		0.3			—			—
Adjusted EBITDA		2.7			3.5			4.1
General and administrative		7.5			7.8			8.8
Preopening expense		0.5			2.7			3.3
Restaurant operating profit		10.7	%		14.0	%		16.2	%

Store Activity

Certain percentage amounts may not sum to total due to rounding.

	2018			2017

Number of Restaurants at Beginning of Year		46			45
Openings		—			1
Closures		(4	)		—
Total		42			46

2826

~~Store~~The ~~Growth~~following ~~Activity~~table sets forth, for the years indicated, our Consolidated Statements of Operations expressed as a percentage revenue.

	2017			2016			2015
	Year Ended December 31,
Number of Restaurants at Beginning of Year		45			37			30
	2018			2017
Openings		1			8			7
Revenue		100.0	%		100.0	%
Total		46			45			37
Costs and expenses:
Cost of sales		26.0			27.2
Labor		36.6			36.7
Occupancy		10.4			9.3
Restaurant operating expenses		15.6			16.2
General and administrative		7.3			7.5
Preopening expenses		—			0.5
Depreciation and amortization		8.7			8.5
Asset impairment charge		11.7			5.2
Lease termination costs and other		2.7			0.8
Total costs and expenses		118.8			111.8
Loss from operations		(18.8	)		(11.8	)
Write-off of deferred financing costs		0.0			0.3
Interest expense, net		1.6			1.0
Loss before income taxes		(20.4	)		(13.0	)
Income tax expense		0.0			0.1
Net loss		(20.4	)%		(13.1	)%

~~Results~~Certain ofpercentage ~~Operations~~amounts may not sum to the total due to rounding.

~~The~~Year ~~following~~Ended ~~table~~December ~~sets forth~~31, ~~for~~2018 ~~the~~Compared ~~years~~with ~~indicated,~~Year ~~our~~Ended ~~Consolidated~~December ~~Statements~~31, ~~of Comprehensive Loss expressed as a percentage revenue.~~2017

	Year Ended December 31,
	2017			2016			2015
Revenue		100.0	%		100.0	%		100.0	%
Costs and expenses:
Cost of sales		27.2			26.7			27.1
Labor		36.7			36.6			35.1
Occupancy		9.3			8.1			7.4
Restaurant operating expenses		16.2			14.6			14.2
General and administrative		7.5			7.8			8.8
Preopening expense		0.5			2.7			3.3
Depreciation and amortization		8.5			8.5			7.0
Asset impairment charge		5.2			7.3			—
Lease termination and exit costs		0.8			—			—
Other		—			—			0.1
Total costs and expenses		111.8			112.4			103.0
Loss from operations		(11.8	)		(12.4	)		(3.0	)
Write off of deferred financing costs		0.3			—			—
Interest expense, net		1.0			0.3			0.1
Loss before income taxes		(13.0	)		(12.7	)		(3.1	)
Income tax expense		0.1			—			—
Net loss		(13.1	)%		(12.8	)%		(3.1	)%

Revenue. Revenue decreased 12.4% to $156.9 million during the twelve months ended December 31, 2018 from $179.1 million in the prior year period. This decrease is attributable to the closure of four of our restaurants during the year ended December 31, 2018 and to a decline in same-store sales. Same-store sales decreased 12.3% in 2018 compared to a decrease of 5.9% in 2017 driven primarily by a decrease in customer traffic compared to the prior year period due in part by our reduction in happy hour times and $5 food offerings, elimination of certain customer discounts and reducing unprofitable store hours for certain of our restaurants. This reduction in operating hours and changes in happy hour times/offerings was part of the Company’s strategic initiative in 2018 that was intended to improve operating margins. Since early December 2018, we have expanded our happy hour and reinstated certain discounts and food and drink offerings in an effort to drive traffic.

~~Certain~~Cost of Sales. Cost of sales decreased $7.9 million, or 16.2% to $40.8 million during 2018 compared to $48.7 million during the same period in the prior year, with the decrease primarily attributable to an overall lower sales volume. As a percentage ~~amounts~~of ~~may~~revenues, ~~not~~cost ~~sum~~of sales was 26.0% compared to 27.2% during the ~~total~~prior ~~due~~year, primarily reflecting a favorable commodities environment and our continued efforts on enhancing recipes and processes to ~~rounding~~improve margins.

~~Year~~Labor. ~~Ended~~Labor ~~December~~costs 31for 2018 decreased $8.4 million, ~~2017~~or ~~Compared~~12.8% ~~with~~to ~~Year~~$57.4 ~~Ended~~million ~~December~~compared 31to $65.8 million in the prior year, ~~2016~~mainly due to the lower sales volume and our continued efforts and emphasis on wage management and recipe and process enhancements to improve labor productivity. Labor expenses as a percentage of revenues decreased to 36.6% compared to 36.7% in the prior year.

~~Revenue~~Occupancy. ~~Revenue~~Occupancy ~~increased~~expenses ~~5.6%~~decreased to $~~179~~0.13 million ~~for~~or ~~2017~~1.6% ~~from~~to $~~169~~16.53 million in ~~the~~2018 ~~prior~~compared ~~year period, primarily due~~ to ~~a 14~~$16.6% ~~increase~~million in ~~the~~2017. ~~number~~The ofdecrease ~~operating~~is ~~weeks~~attributable ~~from~~to ~~nine~~the ~~restaurants~~closure ~~opened~~of ~~since~~two ~~April~~restaurants ~~2016.~~during ~~Same~~the ~~store~~third ~~sales~~quarter ~~decreased~~of 52018.9% inOccupancy ~~2017~~expenses ~~compared~~as toa anpercentage ~~increase~~ of 0revenues were 10.54% in ~~2016~~2018 ~~driven primarily by a decline in customer traffic~~ compared to ~~the~~9.3% ~~prior~~in ~~year period~~2017.

~~Cost~~Restaurant ofOperating ~~Sales~~Expenses. ~~Cost~~Restaurant ofoperating ~~sales~~expenses ~~increased~~decreased $34.4 million, or 715.42%, to $4824.75 million induring ~~2017~~2018 compared to $4528.39 million in ~~2016~~2017. AsThe decrease is primarily attributable to a ~~percentage~~decrease ofin ~~revenue~~advertising expenses, ~~cost~~travel ofand ~~sales~~relocation ~~was~~costs ~~27.2%~~and ~~compared~~professional toservices, ~~26.7%~~as ~~during~~well ~~prior~~as ~~year,~~a ~~primarily~~reduction ~~reflecting~~in ~~unfavorable~~variable ~~commodity~~expenses ~~pricing~~attributable onto ~~certain~~the ~~seafood,~~lower ~~meat~~sales ~~and~~volume, ~~produce~~partially ~~items~~offset ~~and~~by an increase in ~~beer~~delivery ~~costs~~services fees. Restaurant operating expenses as a ~~result~~percentage of ~~promotions~~revenues ~~offered~~were at15.6% ~~certain~~during ~~locations~~2018 incompared ~~an effort~~ to ~~increase~~16.2% ~~customer~~in ~~traffic~~2017.

Labor. Labor costs for 2017 increased $3.8 million, or 6.0% to $65.8 million compared to $62.0 million in the comparable prior year period, mainly due to incremental labor costs for nine new locations opened since April 2016. Labor expenses as a percentage of revenue increased slightly to 36.7% compared to 36.6% in the prior year period driven mainly by increased wage costs due to certain state mandated minimum wage increases.27

29General and Administrative. General and administrative decreased by $2.0 million, or 15.2% to $11.4 million in 2018 from $13.5 million in 2017. General and administrative expenses as a percentage of revenues decreased to 7.3% in 2018 compared to 7.5% in the prior year period. The $2.0 million decrease in absolute dollars was attributable to the overall decrease in labor and benefits, including stock-based compensation expense as a result of headcount reductions and a decrease in consulting fees as part of the Company’s cost-savings initiatives.

~~Occupancy~~Preopening Expense. ~~Occupancy~~We ~~expenses~~did ~~increased~~not ~~$2.8~~record ~~million~~any orpreopening ~~20.7%~~related toexpenses ~~$16~~during 2018.6 ~~million~~Preopening ~~for~~expenses ~~2017~~were ~~compared to~~ $130.8 million in ~~the~~2017, ~~prior~~attributable ~~year~~to ~~period. Higher base rent and common area maintenance charges associated with~~ the ~~new~~opening ~~locations~~of ~~accounted~~one ~~for~~restaurant ~~the~~at ~~majority of~~ the ~~total~~Scottsdale ~~year~~Quarter ~~over~~in ~~year~~June ~~increase. Occupancy expenses as a percentage~~ of ~~revenue were 9.3% in~~ 2017 ~~compared to 8~~.~~1% for 2016.~~

~~Restaurant~~Depreciation ~~Operating~~and ~~Expenses~~Amortization. ~~Restaurant~~Depreciation ~~operating~~and ~~expenses~~amortization ~~increased~~expense decreased $41.26 million, or 1610.94%, to $2813.96 million ~~during 2017~~ compared to $2415.72 million in ~~2016~~the prior year period, primarily ~~due~~attributable to ~~incremental~~the ~~operating~~impact ~~expenses~~of ~~associated~~fully ~~with~~depreciated ~~nine~~assets ~~new~~during ~~locations~~the ~~opened~~year ~~since~~and ~~April~~the ~~2016.~~decrease ~~Restaurant~~in ~~operating~~certain ~~expenses~~long-lived assets as a ~~percentage~~result of ~~revenue~~the ~~were 16~~$9.2%3 ~~for~~million ~~2017~~impairment ~~compared~~charge torecorded ~~14.6%~~in ~~for~~the ~~2016.~~fourth ~~The~~quarter ~~year~~of ~~over~~2017. ~~year~~Depreciation ~~increase~~and ~~was~~amortization ~~driven~~expense ~~primarily~~increased byas ~~higher~~a ~~advertising~~percentage ~~costs~~of ~~associated~~revenues ~~with~~to ~~increased~~8.7% ~~marketing~~for ~~efforts~~2018 compared to ~~enhance~~8.5% ~~brand~~for ~~awareness,~~the ~~increased~~prior ~~repair~~year ~~and~~period ~~maintenance~~primarily ~~activity,~~attributable ~~and~~to ~~higher~~an ~~delivery~~overall ~~and~~lower ~~service~~sales ~~related fees~~volume.

~~General~~Asset ~~and~~Impairment ~~Administrative~~Charge. ~~General~~During 2018 and ~~administrative~~2017, ~~increased~~we ~~slightly~~recorded tonon-cash ~~$13.4~~asset ~~million~~impairment ~~during~~charges ~~2017~~of ~~compared to~~ $1318.3 million ~~in the prior year period. General~~ and ~~administrative expenses as a percentage of sales decreased to 7~~$9.5%3 inmillion, ~~2017 compared to 7.8% in the prior year period. Decreased payroll~~respectively, ~~benefit~~for ~~costs~~certain ~~and~~underperforming ~~recruiting~~restaurants ~~fees~~based ~~associated~~upon ~~with~~an aassessment ~~reduction in headcount as a result~~ of ~~the~~each ~~slow-down~~restaurant’s inhistorical ~~growth,~~operating ~~partially~~performance ~~offset~~combined ~~by higher professional fees associated~~ with ~~our~~expected ~~increased~~cash ~~marketing~~flows ~~efforts~~for ~~contributed~~these torestaurants ~~the slight increase year~~ over ~~year~~the inrespective ~~absolute~~remaining ~~dollars.~~lease term.

~~Preopening~~Lease ~~Expense~~Termination Costs and Other. ~~Preopening~~We ~~expenses~~continue ~~were~~to monitor and evaluate our underperforming restaurants and as a result decided to close four restaurants and not pursue opening a restaurant for which we had a signed lease and entered into a lease termination agreement during 2018. As such, we recorded $05.81 million of lease termination costs and a non-cash impairment charge of $4.53 million, ~~for~~partially ~~2017~~offset ~~and~~by ~~2016,~~the ~~respectively~~write-off of deferred rent liabilities of $5.4 ~~Preopening~~million. ~~expenses~~Additionally, inwe ~~2017~~recorded ~~were~~approximately ~~primarily~~$0.2 ~~attributable~~million toof ~~the~~litigation ~~Scottsdale~~settlement ~~Quarter~~charges ~~restaurant,~~offset ~~which~~by ~~opened~~insurance inrecoveries ~~June~~of $0.1 million. In 2017, we recognized $1.4 ~~Preopening~~million ~~expenses~~related into ~~2016~~estimated ~~were~~lease ~~primarily~~termination ~~attributable~~costs and asset write-offs associated with the decision to ~~eight~~not ~~restaurants~~move ~~opened~~forward ~~during~~with ~~2016~~the construction of a restaurant.

~~Depreciation~~Write-Off ~~and~~of ~~Amortization.~~Deferred ~~Depreciation~~Financing ~~and amortization expense increased $0~~Costs.8 ~~million~~Effective orJune ~~5.3%~~30, to2017 ~~$15.2~~we ~~million~~amended ~~year~~our ~~over~~credit ~~year,~~facility ~~primarily attributable~~ to ~~the~~provide ~~nine~~additional ~~new~~flexibility ~~restaurants~~with ~~opened~~financial ~~since~~covenants ~~April~~and ~~2016~~also ~~partially~~decreased ~~offset~~our byrevolver ~~the~~from ~~impact~~$45 ofmillion ~~certain~~to ~~assets~~$30 ~~that~~million ~~became~~and ~~fully~~shortened ~~depreciated~~the inmaturity ~~2017,~~date. ~~and~~As a ~~lower~~result, ~~depreciable~~we ~~asset~~wrote-off ~~base as~~ a ~~result~~portion of the ~~$12.5~~unamortized ~~million~~deferred ~~asset~~financing ~~impairment~~costs ~~charge~~associated ~~recorded~~with in the ~~fourth~~amendment ~~quarter~~ of ~~2016~~approximately $0. ~~Depreciation and amortization expense as a percentage of revenue was 8.~~5% ~~for~~million during ~~2017~~the year ~~and~~ended December ~~2016~~31, ~~respectively~~2017.

~~Asset~~Subsequently, ~~Impairment~~during ~~Charge.~~the ~~During~~first ~~2017~~half ~~and~~of ~~2016,~~2018 we ~~recorded~~amended ~~non-cash~~our ~~asset~~credit ~~impairment~~facility ~~charges~~to ofprovide additional flexibility with financial covenants and also decreased our Revolver from $~~9.3~~30 million to $25 million and further reduced the available credit on the Revolver to $1222.5 million at June 30, ~~respectively~~2018 and $20 million at December 31, ~~for~~2018. ~~certain~~Additionally, ~~underperforming~~the ~~restaurants~~Amendment ~~based~~extended ~~upon~~the anmaturity ~~assessment~~date to January 13, 2020. As a result, we wrote-off a portion of ~~each~~the ~~restaurant’s~~unamortized ~~historical~~deferred ~~operating~~financing ~~performance~~costs ~~combined~~associated with ~~expected~~the ~~cash~~amendment ~~flows~~of ~~for~~approximately ~~these~~$37,000 ~~restaurants~~during ~~over~~ the ~~respective~~year ~~remaining~~ended ~~lease~~December ~~term.~~31, 2018.

~~Lease~~Interest ~~Termination~~Expense, ~~and Exit Costs~~Net. InNet ~~the~~interest ~~second~~expense, ~~quarter~~consisting primarily of ~~2017,~~interest weexpense ~~assessed~~on ~~our~~borrowings, ~~capital~~deferred ~~allocation~~loan ~~strategy~~fee amortization and ~~made~~line ~~the~~of ~~decision~~credit commitment fees, was $2.5 million in 2018 compared to ~~not~~$1.8 ~~move~~million ~~forward~~in ~~with~~2017. ~~the~~Net ~~planned~~interest ~~construction~~expense ~~and~~increased ~~opening~~during of2018 as a ~~restaurant~~result of the overall increase in Elthe ~~Segundo,~~interest ~~California~~rate environment compared to the prior year period. AsWe ~~such,~~also wecapitalized ~~recognized~~approximately $~~1.4~~135,000 ~~million~~of ~~related~~interest during 2017 as interest was incurred to ~~estimated~~fund ~~lease~~new ~~termination~~restaurant ~~costs~~construction. ~~and~~We ~~asset~~did ~~write-offs~~not capitalize any interest expense during ~~2017~~2018.

Write-Off of Deferred Financing Costs. Effective June 30, 2017 we amended our credit facility to provide additional flexibility with financial covenants and also decreased our revolver from $45 million to $30 million and shortened the maturity date to October 12, 2019. As a result, we wrote-off a portion of the unamortized deferred financing costs associated with the amendment of approximately $0.5 million during the year ended December 31, 2017.28

~~Interest~~Income ~~Expense,~~Tax ~~Net~~Expense. ~~Interest~~Income tax expense ~~increased~~was ~~year~~$9,000 ~~over~~during ~~year~~2018 ~~due~~related to ~~borrowings~~state ~~under~~income ~~the~~tax ~~credit~~expenses ~~facility,~~for ~~with~~which ~~$37.8~~no ~~million~~state ~~and~~net ~~$26.8~~operating ~~million~~loss ~~outstanding~~carryforwards ~~under~~or ~~the~~other ~~credit~~credits ~~facility~~exist asprimarily ofoffset ~~the~~by ~~end~~refunds and reversal of ~~the~~accruals ~~fourth~~associated ~~quarter~~with ~~2017~~previous ~~and~~year ~~2016,~~state ~~respectively~~income tax. WeIncome ~~used~~tax ~~the~~expense ~~borrowings~~was $90,000 during 2017 and related to ~~fund~~state ~~restaurant~~income ~~construction~~tax ~~activities~~expenses ~~and~~for ~~stock~~which ~~repurchases~~no ~~during~~state ~~2017~~net ~~and~~operating ~~2016.~~loss carryforwards or other credits exist.

30Potential Fluctuations in Annual Results and Seasonality

~~Income~~Our ~~Tax~~annual ~~Expense.~~operating ~~Income~~results ~~tax~~may ~~expense~~fluctuate ~~was~~significantly ~~$90,000~~as ~~and~~a ~~$66,000~~result ~~during~~of ~~2017~~a ~~and~~variety ~~2016,~~of ~~respectively~~factors, ~~related~~including tothe ~~state income tax expenses for which no state net operating loss carryforwards or other credits exist.~~following:

~~Year~~● ~~Ended~~Profitability ~~December~~or ~~31,~~operating ~~2016~~losses ~~Compared~~of our restaurants ● increases and decreases in comparable restaurant sales; ● labor availability and wages and benefits for hourly and management personnel; ● timing of restaurant remodels and potential lost sales associated with ~~Year~~remodel ~~Ended~~closure; ~~December~~● 31impairment of long-lived assets and any loss on restaurant closures; ● costs related to any lease terminations, ~~2015~~which could be significant, or fluctuations due to renegotiation of leases; ● fluctuations in commodity and food protein prices; ● changes in borrowings and interest rates; ● general economic conditions; ● weather conditions or natural disasters; ● timing of certain holidays; ● changes in government regulations; ● settlements, damages and legal costs associated with litigation; ● new or revised regulatory requirements and accounting pronouncements; and ● changes in consumer preferences and competitive conditions.

~~Revenue.~~Our ~~Revenue~~business ~~increased~~is ~~18.5%~~also subject to ~~$169~~seasonal fluctuations.5 ~~million~~Historically, ~~during~~sales ~~2016~~in ~~from~~most ~~$143.0~~of ~~million~~our inrestaurants ~~2015,~~have ~~primarily~~been ~~due~~higher toduring athe ~~24%~~spring ~~increase~~and insummer ~~the~~months ~~number~~and ofwinter holiday season. Consequently, our quarterly and annual operating ~~weeks~~results and ~~same-store~~comparable restaurant sales ~~growth~~may fluctuate significantly as a result of ~~0.5%~~seasonality ~~year~~and ~~over~~the ~~year~~factors discussed above. ~~The~~Accordingly, ~~increase~~results isfor ~~primarily~~any ~~due~~one toquarter ~~revenue~~are ~~generated~~not bynecessarily ~~eight~~indicative ~~restaurants~~of ~~opened~~results ~~during~~to ~~2016~~be ~~and~~expected afor ~~full~~any other quarter or for any year ofand comparable restaurant sales for ~~seven~~any ~~restaurants~~particular future period may decrease. In the future, operating results may fall below the expectations of our investors. In that ~~opened~~event, ~~during~~the ~~2015~~price of our common stock would likely be impacted.

~~Cost~~Liquidity of Sales. Cost of sales increased $6.5 million, or 16.8% to $45.3 million in 2016 compared to $38.8 million in 2015, with the increase primarily attributable to our new locations opened since the beginning of the fourth quarter of 2015. As a percentage of revenue, cost of sales was 26.7% compared to 27.1% in the prior year, primarily reflecting improved kitchen efficiencies and ~~favorable~~Capital ~~commodity pricing for poultry, produce and dairy products compared to 2015.~~ Resources

~~Labor.~~Our ~~Labor~~primary ~~expense~~source ~~for~~of ~~our~~liquidity ~~restaurants~~and ~~increased~~capital toresources ~~$62.0~~is ~~million~~cash provided from ~~$50.2~~operating ~~million~~activities; inwe ~~2015,~~no anlonger ~~increase~~have ofadditional ~~23.6%,~~capital ~~primarily~~available ~~due~~under toour ~~the~~secured ~~twelve~~credit ~~new~~facility. Our ~~restaurants~~primary ~~opened~~current ~~since~~liquidity ~~the~~and ~~beginning~~capital ofrequirements ~~the~~are ~~fourth~~for ~~quarter~~lease ofpayments, ~~2015.~~labor ~~Labor~~and ~~expenses~~food ascosts, ainitiatives ~~percentage~~to ofimprove ~~revenue~~the ~~increased~~guest toexperience ~~36.6%~~in ~~compared~~our torestaurants, ~~35.1%~~such inas ~~the~~new ~~prior~~menu ~~year~~development, ~~reflecting~~working ~~labor~~capital ~~inefficiencies~~and ~~from~~general ~~our~~corporate ~~newly~~needs, ~~opened~~including ~~locations,~~the ~~increased~~use ~~wage~~of ~~costs~~certain ~~due~~consultants and professionals to assist in pursuing certain ~~state~~strategic oralternatives. ~~local~~As ~~mandated~~of ~~minimum~~December ~~wage~~31, ~~increases~~2018, ~~and~~we had a ~~competitive~~cash ~~labor~~and ~~market,~~cash equivalents and ~~higher~~short-term ~~benefit~~investment ~~costs~~balance totaling $2.6 Wemillion that we expect ~~labor~~to ~~cost~~utilize, asalong awith ~~percentage~~cash offlow ~~sales~~from operations, to ~~typically~~provide ~~trend~~capital ~~higher~~to ~~upon~~make ~~opening~~our ~~and~~lease ~~gradually~~payments ~~improve~~and assupport our ~~new~~business, ~~restaurant~~to ~~management~~maintain ~~and~~our ~~employees~~existing ~~become~~restaurants, ~~more~~to ~~efficient~~invest in ~~operating~~technology ~~their~~to support our restaurants., and for general corporate purposes.

Occupancy. Occupancy expenses increased $3.2 million or 30.6% to $13.8 million year over year, primarily associated with base rent and common area maintenance charges for twelve new locations opened since the beginning of the fourth quarter of 2015. Occupancy expenses as a percentage of revenue were 8.1% in 2016 compared to 7.4% in 2015.29

~~Restaurant~~The ~~Operating~~Company ~~Expenses.~~has ~~Restaurant~~incurred ~~operating~~losses ~~expenses~~resulting ~~increased~~in an accumulated deficit of $4111.49 million, orhas 21a net working capital deficit of $45.9% million, tonegative cash flow from operations, and outstanding borrowings under a credit facility of $2433.72 million inas ~~2016~~of December 31, ~~primarily~~2018. The ~~due~~Company has implemented various initiatives to ~~the~~increase ~~additional~~sales ~~operating~~and ~~expenses~~reduce ~~for~~costs ~~twelve~~in ~~new~~order ~~restaurants~~to ~~opened~~increase ~~since~~profitability. Additionally, the ~~beginning~~Company is evaluating strategic alternatives including the sale of the ~~fourth~~Company, ~~quarter~~refinancing and other alternatives, including the closure of ~~2015~~additional restaurants. ~~Restaurant~~Any ~~operating~~reduction ~~expenses~~of ascash aflow ~~percentage~~from ofoperations ~~revenue~~may ~~were~~cause ~~14.6%~~the ~~and~~Company ~~14.2%~~to intake ~~2016~~appropriate ~~and~~measures ~~2015,~~to ~~respectively~~generate cash. The ~~year~~failure ~~over~~to ~~year~~raise ~~increase~~capital ~~was~~when ~~driven~~needed inor ~~part~~renegotiate byits ~~higher~~debt ~~repair~~could ~~and~~adversely ~~maintenance~~impact ~~costs,~~the ~~marketing~~financial ~~expenses,~~condition ~~professional~~and ~~services~~results ~~and~~of ~~training-related~~operations ~~travel~~of ~~costs~~the Company.

~~General~~Additional ~~and~~equity ~~Administrative.~~financing, ~~General~~to ~~and~~the ~~administrative~~extent ~~expenses~~available, ~~increased~~would result in ~~absolute~~dilution ~~dollars~~to bycurrent ~~$0.7~~stockholders ~~million,~~and oradditional ~~5.2%~~debt tofinancing, ~~$13.3~~if ~~million~~available, ~~from~~may ~~$12.6~~involve ~~million~~significant ~~year~~cash ~~over~~payment ~~year;~~obligations ~~however,~~or ~~these~~financial ~~expenses~~covenants ~~decreased~~and asratios athat ~~percentage~~may ofrestrict ~~sales~~our ability to 7operate our business.8% inThere ~~2016~~can ~~compared~~be tono ~~8.8%~~assurance inthat the ~~prior~~Company ~~year.~~will ~~Increased~~be ~~payroll,~~successful ~~benefit~~in ~~costs~~its ~~and~~plans ~~recruiting~~to ~~fees~~increase ~~associated~~revenue, ~~with~~increase ~~additional~~profitability ~~headcount~~or to ~~support~~obtain ~~our~~alternative ~~unit~~capital ~~growth~~and ~~expansion~~financing on acceptable terms, ~~higher~~when ~~audit~~required ~~fees~~or ~~and~~if ~~increased~~at ~~legal~~all. ~~and~~These ~~professional~~factors ~~fees~~as ~~contributed~~well toas the ~~year~~Company’s ~~over~~dependency ~~year~~on ~~increase~~additional incapital ~~absolute~~or ~~dollars,~~debt ~~partially~~financing ~~offset~~raise bysubstantial ~~lower~~doubt ~~incentive~~about ~~compensation.~~the Company’s ability to continue as a going concern.

~~Preopening~~During ~~Expense.~~our ~~Preopening~~high ~~expense~~growth ~~was~~phase, ~~$4.5~~we ~~million~~required insignificant ~~2016~~capital ~~compared~~resources to ~~$4.7~~construct ~~million in 2015, including non-cash rent of $1.1 million~~ and ~~$1.2~~equip ~~million,~~each ~~respectively~~restaurant. ~~Preopening~~We ~~expense~~have indiscontinued ~~2016~~new ~~primarily~~restaurant ~~related~~development toand ~~eight~~therefore, ~~restaurants~~our ~~opened~~overall ~~during~~capital ~~the~~requirements ~~year.~~are ~~Preopening~~significantly ~~expense~~less inthan ~~2015 related to seven restaurant openings and preparations for openings~~ in ~~the~~previous ~~first half of 2016~~years.

~~Depreciation~~Like ~~and~~many ~~Amortization~~restaurant companies, we have been able to operate with negative working capital. ~~Depreciation~~Restaurant sales are primarily paid for in cash or by credit card, and ~~amortization~~restaurant ~~expense~~operations ~~increased~~do ~~$4.4~~not ~~million~~require significant inventories or 44receivables.7% toIn ~~$14.4~~addition, ~~million~~we ~~year~~receive ~~over~~trade ~~year~~credit for the purchase of food, ~~primarily~~beverage ~~attributable~~and tosupplies, therefore reducing the need for incremental ~~depreciation~~working ~~expense~~capital ~~for~~to ~~eight~~support ~~restaurants~~growth. ~~opened~~However, ~~during~~changes ~~2016~~in ~~and~~vendor apayment ~~full~~terms, ~~year~~or ofthe ~~depreciation~~price ~~expense~~or ~~for~~availability ~~seven~~of ~~restaurants~~seafood, ~~that~~poultry, ~~opened~~beef, ~~during~~grains, ~~2015~~dairy asor ~~well~~produce ascould ~~depreciation~~affect ~~expense~~our ~~associated~~ability ~~with~~to ~~two~~offer ~~restaurant~~a ~~remodels.~~broad ~~Depreciation~~menu and ~~amortization~~price ~~expense~~offering asto acustomers ~~percentage~~and ofcould ~~revenue~~reduce ~~was~~our ~~8.5%~~operating margins and ~~7.0%~~adversely affect our results of ~~revenue~~operations. inAdditionally, ~~2016~~similar ~~and~~to ~~2015~~many restaurant companies, ~~respectively~~we utilize operating lease arrangements for all of our restaurant locations. We believe that our operating lease arrangements provide appropriate leverage for our capital structure in a financially efficient manner.

31The following tables set forth, as of the dates and for the periods indicated, a summary of our key liquidity measurements (amounts in thousands):

Asset Impairment Charge. During 2016, we recorded a non-cash asset impairment charge of $12.5 million related to the write-down of certain long-lived assets associated with five underperforming restaurants. The asset impairment charges were based upon an assessment of each restaurant’s historical operating performance combined with expected cash flows for that restaurants over the respective remaining lease term.

	December 31,
	2018			2017
Cash and short-term investments	$	2,626		$	5,100
Net working capital (deficit)		(45,931	)		(11,134	)

Other Expenses. Other expenses of $0.2 million in 2015 primarily related to an expected settlement of a state use tax audit.

	Year Ended December 31,
	2018			2017
Cash (used in) provided by operating activities	$	(1,628	)	$	5,900
Capital expenditures		1,700			11,840

~~Interest~~In ~~Expense~~March 2019, ~~Net.~~we ~~Interest~~hired ~~expense~~Piper ~~increased~~Jaffray to ~~$0.6~~assist ~~million~~with ~~year-over-year due to borrowings under~~ the ~~credit~~evaluation ~~facility.~~of Westrategic ~~used~~alternatives, including the ~~majority~~sale of the ~~borrowings~~Company. toWhile ~~fund~~we ~~new~~pursue ~~restaurant~~these ~~construction~~strategic ~~and~~alternatives, ~~remodel~~we ~~activities~~are inundertaking ~~2016.~~a Wenumber ~~did~~of ~~not~~operational ~~borrow~~measures ~~from~~to ~~the~~enhance ~~credit~~our ~~facility~~cash ~~during~~position, ~~2015.~~including, among other things:

~~Income~~● ~~Tax~~Closed ~~Expense.~~12 Weunderperforming ~~recorded~~restaurants ~~income~~since ~~tax~~January ~~expense of $66~~1,~~000~~ and $43,000 for 2016 and 2015, respectively. Income tax expense for 2016 and 2015 relate to state income tax expense for which no net operating loss carryforwards or other credits exist partially offset by refunds primarily associated with previous year state income tax. We did not recognize any federal income tax benefit in 2016 or 2015 due to projected net operating loss carryforwards expected to be generated from tax planning strategies and available credits to offset taxable income.2018;

~~Potential~~● ~~Fluctuations~~Renegotiating inleases ~~Quarterly~~at ~~Results~~restaurants ~~and~~to ~~Seasonality~~more favorable terms;

~~Our~~● ~~quarterly~~Reduced ~~operating~~general ~~results~~and ~~may~~administrative ~~fluctuate~~expenses ~~significantly~~by aseliminating acertain ~~result~~positions ofat aour ~~variety~~corporate ofoffices; ~~factors, including the following:~~and

● ~~profitability~~Eliminated ~~of our restaurants, especially in~~ new ~~markets; ● increases and decreases in comparable~~ restaurant ~~sales;~~development ~~● labor availability~~ and ~~wages~~reduced ~~and~~capital ~~benefits~~expenditures for hourly and management personnel; ● timing of new restaurant openings and related expenses; ● preopening costs for our newly-opened restaurants and operating costs for those locations, which are often materially greater during the first several months of operation than thereafter; ● timing of restaurant remodels and potential lost sales associated with remodel closure; ● impairment of long-lived assets and any loss on restaurant closures; ● costs related to ~~any~~maintenance lease terminations, which could be significant, or fluctuations due to renegotiation of leases; ● fluctuations in commodity and food protein prices; ● changes in borrowings and interest rates; ● general economic conditions; ● weather conditions or natural disasters; ● timing of certain holidays; ● changes in government regulations; ● settlements, damages and legal costs associated with litigation; ● new or revised regulatory requirements and accounting pronouncements; and ● changes in consumer preferences and competitive conditionslevels.

3230

~~Our~~Future ~~business~~Capital is also subject to seasonal fluctuations. Historically, sales in most of our restaurants have been higher during the spring and summer months and winter holiday season. Consequently, our quarterly and annual operating results and comparable restaurant sales may fluctuate significantly as a result of seasonality and the factors discussed above. Accordingly, results for any one quarter are not necessarily indicative of results to be expected for any other quarter or for any year and comparable restaurant sales for any particular future period may decrease. In the future, operating results may fall below the expectations of our investors. In that event, the price of our common stock would likely be impacted.Requirements

~~Liquidity~~As previously mentioned, our capital requirements have historically been significant. Over the past two years, we funded development of new restaurants and ~~Capital~~maintenance ~~Resources~~capital expenditures primarily from borrowings under our credit facility and cash flows from operations. While we are no longer developing new restaurants, we will require cash flows from operations to exclusively fund our operations given that we are no longer able to borrow under our credit facility. Our future cash requirements and the adequacy of available funds will depend on many factors, including the operating performance of our current restaurants, the nature of the arrangements being negotiated with landlords, and the costs and any settlements related to our litigation, various consulting and professional fees required during this period, and the extent to which we undertake any remodeling and capital improvements.

~~During~~We ~~our~~are ~~high~~focused ~~growth~~on ~~phase~~building sales, weimproving ~~required~~margins ~~significant~~and ~~capital~~generating ~~resources~~cash flow to ~~construct~~fund ~~and~~operations ~~equip~~while ~~each restaurant. As~~ we ~~are~~consider ~~significantly~~certain ~~slowing~~strategic ~~the~~alternatives. ~~pace~~We ofdid ~~growth~~not ofopen ~~new~~any ~~restaurant~~restaurants ~~development~~ in 2018, ~~capital~~compared ~~resources are required~~ to ~~maintain~~one ~~our~~restaurant ~~existing~~opening ~~base~~in of2017. ~~restaurants~~We ~~and~~have tosignificantly ~~further~~reduced ~~strengthen~~capital ~~the~~spending ~~capabilities~~from of$11.8 ~~our~~million ~~corporate~~for ~~and~~the ~~information~~year ~~technology~~ended ~~infrastructures.~~December ~~Similar to many restaurant companies~~31, we2017 ~~utilize~~compared ~~operating~~to ~~lease arrangements for all of our restaurant locations~~$1.7 Wemillion ~~believe~~in ~~that~~capital ~~our~~expenditures ~~operating~~during ~~lease~~the ~~arrangements~~year ~~provide~~ended ~~appropriate~~December ~~leverage~~31, ~~for our capital structure in a financially efficient manner~~2018.

~~The~~On ~~following~~May ~~tables~~4, ~~set~~2018, ~~forth~~the Company issued to a single investor (the “Investor”) 2,651,261 asshares of the ~~dates~~Company’s ~~and~~Common ~~for~~Stock ~~the~~at ~~periods~~a ~~indicated~~purchase price of $1.785 per share, which was equal to the closing bid price of the Company’s common stock on the date of the securities purchase agreement plus a ~~summary~~five percent (5%) premium (the “Premium Purchase Price”). Following the private placement, the Investor beneficially owns approximately 19.9% of the Company’s common stock. Additionally, Berke Bakay, the Company’s former Executive Chairman of the Board of Directors, acquired 492,997 shares of the Company’s common stock in the private placement at the Premium Purchase Price such that Mr. Bakay retained his current beneficial ownership of 15.7% following the private placement. Total net proceeds from the private placement were $5.5 million, the proceeds of which were utilized to repay bank debt and pay existing account payables. Any reduction of our ~~key~~cash flow from operations or an inability to refinance or obtain other capital would materially impact our business. Our failure to raise capital when needed could impact our financial condition and results of operations and ability to continue as a going concern. Therefore, we may have to take other actions such as modify our business plan to close additional restaurants, record additional impairment, pursue additional external liquidity ~~measurements~~generating ~~(amounts~~events, inseek ~~thousands):~~additional financing to the extent available, further reduce or delay capital expenditures or file for protection under Chapter 11 of the U.S. Bankruptcy Code.

	December 31,
	2017			2016
Cash and short-term investments	$	5,100		$	3,654
Net working capital (deficit)		(7,559	)		(10,545	)

Additional equity financing, to the extent available, would result in dilution to current stockholders and additional debt financing, if available, may involve significant cash payment obligations or financial covenants and ratios that may restrict our ability to operate our business. Therefore, we are evaluating strategic alternatives including the sale of the Company, refinancing or other alternatives, including the closure of additional restaurants. In March 2019, we hired Piper Jaffray to assist with the evaluation of strategic alternatives. There can be no assurance that the process that we are undertaking will be successful. In addition, we cannot predict the terms or timing of any transaction that we may undertake or whether any such transaction will result in any proceeds for the holders of our common stock. It is possible that even a successful and efficient implementation of the recapitalization initiatives we are pursuing will require us to make a filing for protection under the U.S. Bankruptcy Code. In the event that we cannot refinance the Company or otherwise obtain new capital, or in the event that no third party acquires our secured debt and renegotiates its terms, the Company may be required to file for Chapter 11 protection of the U.S. Bankruptcy Code.

	Year Ended December 31,
	2017		2016
Cash provided by operating activities	$	5,900	$	20,887
Capital expenditures		11,840		41,900

~~Future~~Debt ~~Capital~~and ~~Requirements~~Credit Agreements

~~Our~~On ~~capital~~March ~~requirements~~9, ~~including~~2018, ~~development~~we ~~costs~~entered ~~related~~into Amendment No. 4 to the ~~opening~~Second ofAmended ~~new~~and ~~restaurants,~~Restated ~~have~~Credit ~~historically~~Agreement ~~been~~(“Amendment ~~significant~~No. ~~Over~~4”). Amendment No. 4 amends the ~~past~~Second ~~two~~Amended ~~years~~and Restated Credit Agreement to, weamong ~~funded~~other ~~development~~things, ofreduces ~~new~~the ~~restaurants~~available ~~and~~credit ~~maintenance~~on ~~capital~~the ~~expenditure~~Revolver ~~primarily~~to ~~from~~$25 ~~borrowings~~million ~~under~~as ~~our~~of ~~credit~~the ~~facility~~effective date of Amendment No. 4 and ~~cash~~further ~~flows~~reduces ~~from~~the ~~operations~~available credit on the Revolver to $22.5 ~~Our~~million ~~future~~at ~~cash~~June ~~requirements~~30, 2018 and $20 million at December 31, 2018. Thus, the ~~adequacy~~Company ofwas ~~available~~required ~~funds~~to ~~will~~make ~~depend~~payments on ~~many~~the ~~factors~~Revolver of $1.25 million by June 30, ~~including~~2018 ~~the~~and ~~operating~~an ~~performance~~additional payment of ~~our~~$2.5 ~~current~~million ~~restaurants~~by December 31, 2018. Additionally, (a) the ~~pace~~maturity ofdate ~~expansion~~was ~~and~~amended ~~remodels~~from October 12, ~~real~~2019 ~~estate~~to ~~markets~~January 13, ~~site~~2020 ~~locations,~~with no option to extend the ~~nature~~maturity; of(b) the ~~arrangements~~applicable ~~negotiated~~margins ~~with~~for ~~landlords~~base rate loans and ~~capital~~the ~~market~~applicable ~~accessibility~~margins for LIBOR rate loans were increased by 50 bps to 100 bps depending on the Company’s leverage ratio; and ~~availability~~(c) ~~under~~the ~~our~~maximum ~~credit~~leverage ~~line.~~ratio was increased and the minimum fixed charge coverage ratio was decreased to provide increased flexibility as further described below.

WeAmendment ~~opened~~No. ~~one~~4 ~~restaurant~~requires atus ~~the~~to ~~Scottsdale~~comply ~~Quarter~~with incertain ~~2017~~covenants ~~compared~~on a quarterly basis, including (a) a minimum fixed charge coverage ratio of (i) 1.10 to ~~eight~~1.00 ~~restaurants~~for inthe ~~2016~~fiscal quarters ending March 31, 2018, June 30, 2018 and ~~seven~~September ~~restaurants~~30, in2018; ~~2015~~(ii) 1.15 ~~Our~~to ~~current~~1.00 ~~plans~~for ~~are~~the ~~for~~fiscal ~~modest~~quarters ~~new~~ending ~~restaurant~~December ~~growth~~31, ~~over~~2018 ~~the~~and ~~next~~March ~~few~~31, ~~years~~2019 and (iii) 1.20 Weto ~~are~~1.00 ~~focused~~for onthe ~~building~~fiscal ~~sales,~~quarter ~~improving~~ending ~~margins~~June 30, 2019 and ~~generating~~each ~~cash~~fiscal ~~flow~~quarter tothereafter; ~~repay~~and ~~debt.~~(b) Wea ~~spent~~maximum ~~$11.8~~leverage ~~million~~ratio onof ~~capital~~(i) ~~expenditures~~6.25 ~~during~~to 1.00 for the ~~year~~fiscal ~~ended~~quarter ~~December~~ending March 31, ~~2017,~~2018; ~~primarily~~(ii) ~~associated~~6.00 ~~with~~to ~~the~~1.00 ~~opening~~for of the ~~Scottsdale~~fiscal ~~Quarter~~quarter ~~restaurant~~ending June 30, ~~residual~~3018; ~~payments~~(iii) ~~for~~5.50 ~~restaurants~~to ~~opened~~1.00 ~~during~~for the ~~second~~fiscal ~~half~~quarter ofending ~~2016~~September 30, 2018; (iv) 5.00 to 1.00 for the ~~relocation~~fiscal ofquarters ~~our~~ending ~~corporate~~December ~~office~~31, ~~and~~2018, ~~maintenance~~March ~~capital~~31, ~~expenditures.~~2019 ~~Additionally~~and June 30, we2019; ~~received~~and $(v) 4.125 ~~million~~for inthe ~~tenant~~fiscal ~~improvement~~quarter ~~allowances~~ending ~~during~~September ~~the~~30, ~~year.~~2019 ~~Net~~and ~~capital~~each ~~expenditures~~fiscal ~~was~~quarter $7thereafter.7 ~~million~~The ~~for~~Company was in compliance with the ~~year~~fixed ~~ended~~charge coverage ratio and the leverage ratio at December 31, ~~2017~~2018. WeHowever, ~~expect~~we toreceived ~~spend~~a ~~significantly~~Notice ~~less~~of inDefault ~~capital~~and ~~expenditures~~Reservation inof ~~2018~~Rights Letter dated April 2, as2019 wefor ~~have~~failure ~~slowed~~to ~~down~~pay our ~~growth~~quarterly principal payment due March 31, 2019, failure to provided audited financial statements within 90 days of ~~new~~fiscal ~~units~~year end, and failing to provide a covenant compliance certificate that was due April 1, 2019. ~~Our~~As ~~current~~a ~~plans~~result, ~~for~~the ~~unit~~Company ~~growth~~is ~~are~~in ~~through~~default in the ~~franchising~~performance of ~~our~~its ~~brand~~obligations ~~outside~~under the ~~United~~credit ~~States~~facility ~~which~~and ~~require~~the ~~significantly~~lenders ~~less~~have ~~capital~~the ~~investment~~right to accelerate the due date of such debt.

We utilized $3.75 million in proceeds from the May 2018 private placement to pay down the Revolver and permanently reduced the availability on the Revolver to $20.0 million. At December 31, 2018, we had $33.2 million in outstanding secured borrowings, consisting of $20.0 million under the Revolver and $13.2 million under the Term Loan. As of December 31, 2018, there was no availability under the credit facility.

AsCash of December 31, 2017, we had a working capital deficit of $7.6 million and outstanding borrowings under our credit facility of $37.8 million. We believe existing cash and cash equivalents and short-term investments of $5.1 million, cash flow from operations, and the ability to draw additional borrowings under our credit facility, subject to compliance with certain covenants and to the extent such borrowings are permitted under our debt arrangements, will be sufficient to fund working capital requirements over the next 12 months.Flows

~~During~~ The ~~the~~following ~~first~~table ~~quarter~~summarizes ofour ~~2017,~~primary wesources ~~repurchased~~and ~~$3.6~~uses ~~million or 395,586 shares~~ of ~~common~~cash ~~stock~~during ~~and~~the ~~completed~~past ~~our~~two ~~$5.0 million stock repurchase program.~~years:

Any reduction of our cash flow from operations or an inability to draw on our credit facility may cause us to take appropriate measures to generate cash. Our failure to raise capital when needed could impact our financial condition and results of operations and ability to continue as a going concern. Additional equity financing, to the extent available, may result in dilution to current stockholders and additional debt financing, if available, may involve significant cash payment obligations or financial covenants and ratios that may restrict our ability to operate our business and remain a going concern.

	2018			2017
Net cash provided by (used in):
Operating activities	$	(1,628	)	$	5,900
Investing activities		(1,576	)		(11,715	)
Financing activities		730			7,381
Net (decrease) increase in cash and cash equivalents	$	(2,474	)	$	1,566

~~Debt~~Operating Activities. We used $1.6 million of operating cash flows in 2018 and ~~Credit~~generated ~~Agreements~~ $5.9 million of operating cash flows in 2017. The year over year change in cash from operating activities is primarily due to an increase in the net loss, greater impairment and lease termination cost, the amount and timing of receipt of tenant allowance reimbursements and timing of payments for accrued expenses and accounts payable.

OnInvesting ~~October~~activities. Net ~~12,~~capital ~~2016,~~expenditures wefor ~~entered~~2018 ~~into~~were ~~the~~$1.6 ~~Second~~million, ~~Amended~~primarily ~~and~~associated ~~Restated Credit Agreement (the “Second Amended Credit Agreement”)~~ with ~~KeyBank~~remodels, ~~National~~technology ~~Association~~investments ~~(“KeyBank”)~~ and ~~Zions~~maintenance-related ~~First~~capital ~~National~~expenditures. ~~Bank~~Net tocapital ~~(i)~~expenditures ~~increase~~for ~~the~~2017 ~~combined~~were ~~revolving and term credit facilities (the “credit facility”) from~~ $3511.7 million ~~to $60 million~~, ~~comprised~~primarily ofassociated awith ~~$45~~our ~~million~~Scottsdale ~~revolver~~Quarter ~~(“Revolver”)~~restaurant, ~~and~~which ~~$15~~opened ~~million~~in ~~term~~June ~~loan (“Term Loan”)~~2017, ~~and~~residual ~~(ii)~~payments ~~extend~~from ~~the~~restaurants ~~maturity~~opened ~~date~~during of the ~~credit~~fourth ~~facility~~quarter toof ~~October 12~~2016, ~~2021.~~the ~~The~~relocation ~~credit facility is secured by our personal property and assets. Certain~~ of our ~~wholly~~corporate ~~owned subsidiaries have also guaranteed the credit facility. On March 29~~office, ~~2017, we entered into Amendment No. 1 to the Second Amended~~ and ~~Restated~~maintenance ~~Credit~~related ~~Agreement,~~capital ~~which amended certain financial covenants in the Second Amended Credit Agreement~~expenditures.

On July 7, 2017, we entered into Amendment No. 2 to the Second Amended and Restated Credit Agreement (“Amendment No.2”). Amendment No. 2 amended the Second Amended Credit Agreement to, among other things, decrease the total available credit from the revolving credit facility from $45 million to $30 million, which including the $15 million term loan, resulted in an overall reduction of the credit facility from $60 million to $45 million. Additionally, (a) the maturity date was amended from October 12, 2021 to October 12, 2019, provided that if the Company’s pro forma leverage ratio is less than 4.25 to 1.00 at any time prior to the maturity date, the Company may request a one year extension of the maturity date until October 12, 2020; (b) the applicable margins for base rate loans and the applicable margins for LIBOR rate loans were increased by 25 bps to 75 bps depending on the Company’s leverage ratio; and (c) the maximum leverage ratio was increased and the minimum fixed charge coverage ratio was decreased to provide increased flexibility as further described below. The terms of Amendment No. 2 were effective as of June 30, 2017. 32

~~Amendment~~Financing NoActivities. Financing 2cash ~~requires~~flow usfor to2018 ~~comply~~consisted ~~with~~primarily ~~certain~~of ~~covenants~~$5.5 onmillion ain ~~quarterly~~net ~~basis,~~proceeds ~~including~~received ~~(a)~~from athe ~~minimum~~issuance ~~fixed charge coverage ratio~~ of ~~(i)~~common ~~1.25~~stock toassociated ~~1.00~~with ~~for~~our ~~the~~equity ~~fiscal~~offering ~~quarter~~in ~~ended~~May ~~June 30~~2018, ~~2017;~~partially ~~(ii)~~offset ~~1.20~~by ~~to 1~~$4.006 ~~for~~million ~~the~~in ~~fiscal~~payments ~~quarters~~under ~~ended~~our ~~September~~credit ~~30,~~facility ~~2017,~~(including ~~December~~$3.75 ~~31,~~million ~~2017,~~from ~~March~~the ~~31,~~net ~~2018,~~proceeds ~~June~~of ~~30,~~the ~~2018,~~equity ~~September~~offering) ~~30,~~and ~~2018,~~$0.2 ~~and~~million ~~December~~for ~~31,~~costs ~~2018;~~associated ~~and~~with ~~(iii)~~Amendment 1No.30 4 to ~~1.00~~the ~~for~~credit ~~the~~facility. ~~fiscal~~Net ~~quarter~~cash ~~ended~~provided ~~March~~by ~~31,~~financing ~~2019~~activities ~~and~~for ~~each~~2017 ~~fiscal~~was ~~quarter~~$7.4 ~~thereafter;~~million and ~~(b)~~consisted aprimarily ~~maximum~~of ~~leverage~~$11.0 ~~ratio~~million ofin ~~(i)~~net ~~5.50~~borrowings tounder ~~1.00~~the ~~for~~credit ~~the~~facility ~~fiscal~~and ~~quarters~~$0.3 ~~ended~~million ~~June~~of ~~30,~~proceeds ~~2017,~~from ~~September~~stock ~~30,~~option ~~2017,~~exercises and ~~December~~employee 31stock purchases, ~~2017;~~partially ~~(ii)~~offset ~~5.25~~by ~~to 1~~$3.006 million for the ~~fiscal~~repurchase ~~quarters~~of ~~ended~~common ~~March~~stock ~~31,~~under ~~2018,~~the ~~June~~October ~~30,~~2016 ~~3018,~~stock ~~September~~repurchase ~~30,~~program ~~2018~~ and ~~December 31, 2018; and (iii) 5~~$0.003 tomillion ~~1.00~~ for ~~the~~debt ~~fiscal~~issuance ~~quarter~~costs ~~ended~~associated ~~March~~with ~~31,~~amendments ~~2019~~to ~~and~~our ~~each~~credit ~~fiscal quarter thereafter~~facility.

OnOff-Balance ~~October~~Sheet 30, 2017, we entered into Amendment No. 3 to the Second Amended and Restated Credit Agreement (“Amendment No. 3”). Amendment No. 3 amends the Second Amended Credit Agreement to, among other things, (a) implement a monthly reporting requirement; (b) restrict certain restricted payments as defined in the Second Amended Credit Agreement; and (c) implement a limitation on capital expenditures subject to approval by the Lenders in their sole discretion. Arrangements

34As of December 31, 2018, we had no off-balance sheet arrangements or obligations, other than operating leases, which are not classified as debt.

OnCritical ~~March~~Accounting 9,Policies 2018, we entered into Amendment No. 4 to the Second Amended and Restated Credit Agreement (“Amendment No. 4”). Amendment No. 4 amends the Second Amended Credit Agreement to, among other things, reduces the available credit on the Revolver from $30 million to $25 million as of the effective date of Amendment No. 4 and further reduces the available credit on the Revolver to $22.5 million at June 30, 2018 and $20 million at December 31, 2018. Additionally, (a) the maturity date was amended from October 12, 2019 to January 13, 2020 with no option to extend the maturity; (b) the applicable margins for base rate loans and the applicable margins for LIBOR rate loans were increased by 50 bps to 100 bps depending on the Company’s leverage ratio; and (c) the maximum leverage ratio was increased and the minimum fixed charge coverage ratio was decreased to provide increased flexibility as further described below. The terms of Amendment No. 4 were effective as of March 9, 2018.

~~Amendment~~Critical ~~No.~~accounting 4policies ~~requires~~are usthose tothat ~~comply~~we ~~with~~believe ~~certain~~are ~~covenants~~most onimportant ~~a quarterly basis, including (a) a minimum fixed charge coverage ratio of (i) 1.10~~ to ~~1.00 for~~ the ~~fiscal~~portrayal ~~quarters~~of ~~ended~~our ~~March~~financial ~~31,~~condition ~~2018,~~and ~~June~~results ~~30,~~of ~~2018~~operations and ~~September~~also ~~30,~~require ~~2018;~~our ~~(ii)~~most ~~1.15 to 1.00 for the fiscal quarters ended December 31~~difficult, ~~2018~~subjective ~~and~~or ~~March~~complex ~~31, 2019 and (iii) 1~~judgments.20 toJudgments ~~1.00~~or ~~for~~uncertainties regarding the ~~fiscal~~application ~~quarter ended June 30, 2019 and each fiscal quarter thereafter; and (b) a maximum leverage ratio~~ of ~~(i)~~these ~~6.25~~policies tomay ~~1.00~~result ~~for~~in ~~the~~materially ~~fiscal~~different ~~quarter~~amounts ~~ended~~being ~~March~~reported ~~31,~~under ~~2018;~~various ~~(ii)~~conditions ~~6.00~~or tousing ~~1.00~~different ~~for the fiscal quarter ended June 30, 3018; (iii) 5~~assumptions.50 toWe ~~1.00~~consider ~~for~~ the ~~fiscal~~following ~~quarter~~policies ~~ended September 30, 2018; (iv) 5.00~~ to ~~1.00~~be ~~for~~ the ~~fiscal~~most ~~quarters~~critical ~~ended~~in ~~December~~understanding ~~31, 2018, March 31, 2019 and June 30, 2019; and (v) 4.25 for~~ the ~~fiscal~~judgment ~~quarter~~that ~~ended~~is ~~September~~involved ~~30,~~in ~~2019~~preparing ~~and~~our ~~each~~consolidated ~~fiscal~~financial ~~quarter thereafter~~statements.

~~The~~Revenue Company was not in compliance with the fixed charge coverage ratio and the leverage ratio at December 31, 2017. A waiver was received on March 9, 2018 for the quarter ended December 31, 2017. The Company believes that it is probable that it will be in compliance at future covenant compliance dates. Recognition

AtRevenues ~~December~~from 31food, ~~2017~~beverage, weand ~~had~~alcohol ~~$37~~sales are recognized when payment is tendered at the point of sale.8 ~~million~~Restaurant insales ~~outstanding~~are ~~borrowings,~~recorded ~~consisting~~net of ~~$23~~promotions, discounts and sales taxes.7 ~~million~~The ~~under~~sales tax obligation is included in “Accrued expenses” on the ~~Revolver~~consolidated balance sheets until the taxes are remitted to the appropriate taxing authority. We sell gift cards to our customers in our restaurants and ~~$14~~through selected third parties.1 ~~million~~The ~~under~~gift cards sold to customers have no stated expiration dates and are subject to actual and/or potential escheatment rights. We recognize revenue from gift cards when: (i) the ~~Term~~gift ~~Loan~~card is redeemed by the customer; or (ii) we determine the likelihood of the gift card being redeemed by the customer is remote (gift card breakage) and there is not a legal obligation to remit the unredeemed gift cards to the relevant jurisdiction. As the unused balances of ~~December~~our ~~31,~~gift ~~2017~~cards are subject to the escheat or unclaimed property law, ~~net~~we ~~availability~~recognize ~~under~~gift card breakage income when those escheatment rights are extinguished.. Gift card breakage income is recorded in “Revenue” on the ~~credit~~Consolidated ~~facility~~Statements ~~was~~of Operations and amounted to $636,000 and $0.252 million during the year ended December 31, ~~subject~~2018 and 2017, respectively. Prior to ~~compliance~~redemption, ~~with~~the ~~certain~~outstanding ~~covenants.~~balances of all gift cards are included in “Accrued expenses” in the accompanying Consolidated Balance Sheets.

~~Cash~~During ~~Flows~~the third quarter of 2018 the Company launched its loyalty program to encourage customers to frequent Kona Grill restaurants. The loyalty rewards program awards a customer one point for every $1 spent. When points are accumulated a reward to be used on future purchases is earned. When a customer is part of the rewards program, the obligation to provide future discounts related to points earned is considered a separate performance obligation, to which a portion of the transaction price is allocated. The performance obligation related to loyalty points is deemed to have been satisfied, and the amount deferred in the balance sheet is recognized as revenue, when the points are converted to a reward and redeemed, or the likelihood of redemption is remote. A portion of the transaction price is allocated to loyalty points, if necessary, on a pro-rata basis, based on the stand-alone selling price, as determined by menu pricing and loyalty points terms. As of December 31, 2018, the deferred revenue allocated to loyalty points that have not been redeemed is less than $0.1 million, which is reflected in “Accrued expenses” in the accompanying Consolidated Balance Sheets. The Company expects the loyalty points to be redeemed and recognized over a one-year period.

~~The following table summarizes our primary sources and uses of cash during the past three years:~~33

	2017			2016			2015
	(In thousands)
Net cash provided by (used in):
Operating activities	$	5,900		$	20,887		$	10,294
Investing activities		(11,715	)		(42,033	)		(38,215	)
Financing activities		7,381			15,567			398
Net increase (decrease) in cash and cash equivalents	$	1,566		$	(5,579	)	$	(27,523	)

We execute franchise agreements for units owned and operated by third parties. Our franchise agreements typically provide for upfront payment of territory and initial franchise fees in addition to subsequent royalty and advertising fees. Royalties and advertising fees are based on a percentage of gross sales at franchise restaurants and are recognized over time as the amount of gross sales becomes known. We recognize upfront territory and franchise fees received from a franchisee as revenue when the separate and distinct performance obligations associated with the fees are satisfied. We currently believe that the services we provide related to upfront fees we receive from franchisees such as territory or initial franchise fees do not contain separate and distinct performance obligations from the franchise right and thus those upfront fees are recognized as revenue on a straight-line basis over the term of each respective franchise agreement upon store opening. Upfront territory fees paid by franchisees in connection with development agreements are deferred when the development agreement includes a minimum number of restaurants to be opened by the franchisee. The deferred amounts are recognized on a pro rata basis as the franchisee opens each respective restaurant. Any such unamortized portion of fees received are presented in “Deferred rent and other long-term liabilities” in our consolidated balance sheets. The unamortized portion of fees received totaled $0.3 million and $0.9 million as of December 31, 2018 and 2017, respectively. Additionally, we capitalize certain costs to obtain or fulfill a contract that represent incremental costs that can be tied directly to obtaining and executing a contract. We amortize these costs over the life of the customer relationship. Costs to obtain a contract are less than $0.1 million as of December 31, 2018 and zero as of December 31, 2017 and are presented in “Other assets” in our Consolidated Balance Sheets.

~~Operating~~Upon ~~Activities.~~adoption Weof ~~generated~~the ~~$5.9~~new ~~million~~revenue recognition standard, we reversed $200.93 million of franchise revenue previously recorded associated with the upfront territory and franchise related fees as a cumulative adjustment to “Accumulated deficit” effective January 1, 2018. This cumulative adjustment increased our deferred revenue balance by $100.3 million ofand ~~operating~~is ~~cash~~recorded ~~flows~~ in ~~2017,~~“Deferred ~~2016~~rent and ~~2015,~~other ~~respectively.~~long-term ~~The~~liabilities” ~~year~~on ~~over~~the ~~year~~accompanying ~~change~~consolidated inbalance ~~cash~~sheet ~~from~~as ~~operating~~of ~~activities~~December is31, ~~primarily~~2018. ~~due~~In addition to ~~lower~~the ~~net~~changes ~~income~~presented above, ~~the~~we ~~amount~~have ~~and~~historically ~~timing~~recognized ofsales ~~receipt~~commissions as a component of ~~tenant~~general ~~allowance~~and ~~reimbursements~~administrative expenses as they are incurred. Under the new standard, certain sales commissions will be capitalized and ~~timing~~amortized to general and administrative expense over the expected life of ~~payments~~the ~~for~~customer ~~accrued~~relationship. ~~expenses~~We ~~and~~recognized ~~accounts~~less ~~payable~~than a $0.1 million cumulative effect adjustment to “Accumulated deficit” with an increase to “Other assets” as of January 1, 2018

~~Investing~~Property activities. Capital expenditures for 2017 were $11.8 million, primarily associated with our Scottsdale Quarter restaurant, which opened in June 2017, residual payments from restaurants opened during the fourth quarter of 2016, the relocation of our corporate office, and maintenance capital expenditures. Capital expenditures for 2016 were $41.9 million, primarily attributed to costs associated with eight new restaurant openings, costs for our Boca Park restaurant remodel, and residual payments from restaurants opened during the fourth quarter of 2015. Capital expenditures in 2015 were $38.1 million, primarily associated with seven new restaurant openings and our Denver restaurant remodel. Equipment

35We record property and equipment at cost less accumulated depreciation, and we select useful lives that reflect the estimated economic lives of the underlying assets. We amortize leasehold improvements over the shorter of the useful life of the asset or the related lease term. We calculate depreciation using the straight-line method for financial statement purposes. We capitalize improvements and expense repairs and maintenance costs as incurred. We are often required to exercise judgment in our decision whether to capitalize an asset or expense an expenditure that is for maintenance and repairs. The useful life of property and equipment and the determination as to what constitutes a capitalized cost versus a repair and maintenance expense involves judgment by management, which may produce different amounts of repair and maintenance or depreciation expense if different assumptions were used.

~~Financing~~We ~~Activities.~~evaluate ~~Net~~property ~~cash~~and ~~provided~~equipment byfor ~~financing~~impairment ~~activities~~whenever ~~for~~events ~~2017~~or ~~was~~changes ~~$7.4~~in ~~million~~restaurant ~~and~~operating ~~consisted~~results ~~primarily~~indicate ofthat ~~$11.0~~the ~~million~~carrying invalue ~~net~~of ~~borrowings~~those ~~under~~assets ~~the~~may ~~credit~~not ~~facility~~be ~~and $0~~recoverable.3 ~~million~~Factors ofconsidered ~~proceeds~~include, ~~from~~but ~~stock~~are ~~option~~not ~~exercises~~limited ~~and~~to, ~~employee~~significant ~~stock~~underperformance ~~purchases,~~relative ~~partially~~to ~~offset~~expected byhistorical ~~$3.6~~or ~~million~~projected ~~for~~future ~~the~~operating ~~repurchase~~results; ofsignificant ~~common~~negative ~~stock~~industry ~~under~~or ~~the~~economic ~~October~~trends; ~~2016~~and ~~stock~~significant ~~repurchase~~changes ~~program~~in laws and ~~$0.3~~regulations, ~~million~~legal ~~for~~factors ~~debt~~or ~~issuance~~in ~~costs~~the ~~associated~~business ~~with~~climate. ~~amendments~~The toassessment ~~our~~of ~~credit~~impairment ~~facility.~~is ~~Net~~performed ~~cash~~on ~~provided~~a restaurant-by-restaurant ~~financing~~basis. ~~activities~~Recoverability ~~for~~is ~~2016~~assessed ~~consisted~~by ofcomparing ~~$26.8~~the ~~million~~carrying invalue ~~net~~of ~~borrowings~~the ~~under~~asset to the ~~credit~~undiscounted ~~facility~~cash ~~and~~flows $0expected to be generated by the asset.7 ~~million~~This inassessment ~~proceeds~~process ~~from~~requires ~~stock~~the ~~option~~use ~~exercises~~of estimates and ~~employee~~assumptions ~~stock~~regarding ~~purchases,~~future ~~partially~~cash ~~offset~~flows byand ~~$11.2~~estimated ~~million~~useful inlives, ~~cash~~which ~~outflow~~are ~~associated~~subject ~~with~~to ~~stock~~a ~~repurchase~~significant ~~programs,~~degree $0of judgment.5 ~~million~~If inindicators ~~fees~~of ~~paid~~impairment ~~for~~are ~~the~~present ~~amended~~and ~~credit~~if ~~facility~~we ~~and~~determine ~~$0.2~~that ~~million~~the incarrying ~~payment~~value ~~for~~of ~~withholding~~the ~~tax~~asset ~~from~~exceeds ~~net~~the ~~settled~~fair ~~option~~value ~~exercise.~~of ~~Net~~the ~~cash~~restaurant ~~provided~~assets, byan ~~financing~~impairment ~~activities~~charge ~~during~~is ~~2015~~recorded ~~consisted~~to ofreduce ~~$0.6~~the ~~million~~carrying value of ~~proceeds~~the ~~from~~asset ~~stock~~to ~~option~~its ~~exercises~~fair ~~partially~~value. ~~offsetting~~Calculation aof ~~$0.2~~fair ~~million~~value ~~purchase~~requires ~~and~~significant ~~retirement~~estimates ofand ~~our~~judgments ~~common~~which ~~stock~~could ~~under~~vary ~~the~~significantly ~~November~~based ~~2015~~on ~~authorization.~~our assumptions.

~~Off-Balance Sheet Arrangements~~34

AsWe recorded long-lived asset impairment charges of ~~December~~ $18.3 million and $9.3 million, for the years ended December 31, 2018 and 2017, werespectively. ~~had~~Such noamounts ~~off-balance~~are ~~sheet~~included ~~arrangements~~in or"Asset ~~obligations,~~impairment ~~other~~charge" ~~than~~in ~~operating~~the ~~leases,~~Consolidated ~~which~~Statements ~~are~~of ~~not~~Operations. ~~classified~~See asNote ~~debt~~2 in the Notes to the Consolidated Financial Statements for further details on the impairment charges. We continue to monitor the operating performance of each individual restaurant. We may be required to record impairment charges in the future if certain restaurants perform below expectations.

~~Critical~~Leasing ~~Accounting Policies~~ Activities

~~Critical~~We ~~accounting~~lease ~~policies~~all ~~are~~of ~~those~~our ~~that~~restaurant weproperties. ~~believe~~At ~~are~~the ~~most~~inception ~~important~~of to the ~~portrayal~~lease, ofwe ~~our~~evaluate ~~financial~~each ~~condition~~property and ~~results~~classify ofthe ~~operations~~lease ~~and~~as ~~also~~an ~~require~~operating ~~our~~or ~~most~~capital ~~difficult,~~lease ~~subjective~~in oraccordance ~~complex~~with ~~judgments~~applicable accounting standards. ~~Judgments~~We orexercise ~~uncertainties~~significant ~~regarding~~judgment in determining the ~~application~~estimated offair ~~these~~value ~~policies~~of ~~may~~the ~~result~~restaurant inas ~~materially~~well ~~different~~as ~~amounts~~the ~~being~~discount ~~reported~~rate ~~under~~used ~~various~~to ~~conditions~~discount orthe ~~using~~future ~~different~~minimum ~~assumptions~~lease payments. WeThe ~~consider~~term ~~the~~used ~~following~~for ~~policies~~this toevaluation beincludes ~~the~~renewal ~~most~~option ~~critical~~periods only in ~~understanding~~instances in which the ~~judgment~~exercise ~~that~~of isthe ~~involved~~renewal option can reasonably be assured and failure to exercise such option would result in ~~preparing~~an economic penalty. All of our ~~consolidated~~restaurant ~~financial~~leases ~~statements.~~are classified as operating leases.

~~Property~~Our lease term used for straight-line rent expense is calculated from the date we take possession of the leased premises through the lease termination date. There is potential for variability in our “rent holiday” period which typically begins on the possession date and ~~Equipment~~ends on the store open date. Factors that may affect the length of the rent holiday period generally include construction related delays or situations where we take possession of the leased premises upon execution of the lease. Extension of the rent holiday period due to delays in restaurant opening will result in greater rent expensed during the rent holiday period.

We record ~~property~~contingent ~~and~~rent ~~equipment~~expense atbased ~~cost~~on ~~less~~a ~~accumulated~~percentage ~~depreciation,~~of ~~and~~revenue weamounts ~~select useful lives~~ that ~~reflect~~exceed ~~the~~a ~~estimated~~specified ~~economic~~sales ~~lives~~threshold ~~of the underlying assets. We amortize leasehold improvements~~ over the ~~shorter~~periods of the ~~useful~~liability ~~life~~is of the asset or the related lease term. We calculate depreciation using the straight-line method for financial statement purposes. We capitalize improvements and expense repairs and maintenance costs as incurred. WeContingent ~~are~~rent ~~often required to exercise judgment in our decision whether to capitalize an asset or~~ expense ~~an expenditure that~~ is ~~for~~recorded ~~maintenance~~prior ~~and~~to ~~repairs.~~achievement ~~The useful life~~ of ~~property~~specified ~~and~~sales ~~equipment~~levels ~~and~~if ~~the~~achievement ~~determination~~of assuch toamounts ~~what~~is ~~constitutes~~considered aprobable ~~capitalized cost versus a repair~~ and ~~maintenance expense involves judgment by management, which may produce different amounts of repair and maintenance or depreciation expense if different assumptions were used~~estimable.

WeLeasehold ~~evaluate~~improvements ~~property~~financed ~~and~~by ~~equipment~~the ~~for~~landlord ~~impairment~~through ~~whenever~~tenant ~~events~~improvement orallowances ~~changes~~are incapitalized ~~restaurant~~as ~~operating~~leasehold ~~results~~improvements ~~indicate~~with ~~that~~ the ~~carrying~~tenant ~~value~~improvement ofallowances ~~those~~recorded ~~assets~~as ~~may~~deferred ~~not~~lease ~~be recoverable~~incentives. ~~Factors~~Deferred ~~considered~~lease ~~include,~~incentives ~~but~~ are ~~not~~amortized limited to, significant underperformance relative to expected historical or projected future operating results; significant negative industry or economic trends; and significant changes in laws and regulations, legal factors or in the business climate. The assessment of impairment is performed on a ~~restaurant~~straight-~~by-restaurant~~line basis. ~~Recoverability~~over isthe ~~assessed~~lesser byof ~~comparing~~ the ~~carrying~~life ~~value~~ of the asset toor the ~~undiscounted~~lease ~~cash~~term, ~~flows~~including ~~expected~~option toperiods bewhich ~~generated~~in by the ~~asset.~~judgment ~~This~~of ~~assessment~~management ~~process~~are ~~requires~~reasonably ~~the~~assured ~~use~~ of ~~estimates~~renewal ~~and~~(same ~~assumptions~~term ~~regarding~~that ~~future~~is ~~cash~~used ~~flows~~for ~~and~~related ~~estimated~~leasehold ~~useful~~improvements) ~~lives,~~and ~~which~~ are ~~subject~~recorded toas a ~~significant~~reduction ~~degree~~ of ~~judgment~~occupancy expense. IfAs ~~indicators~~part of ~~impairment~~the ~~are~~initial ~~present~~lease ~~and~~terms, if we ~~determine~~negotiate ~~that~~with ~~the~~our ~~carrying~~landlords ~~value~~to ofsecure ~~the~~these ~~asset~~tenant ~~exceeds~~improvement ~~the~~allowances. ~~fair~~There ~~value of the restaurant assets, an impairment charge~~ is ~~recorded~~no toguarantee ~~reduce~~that ~~the~~we ~~carrying~~will ~~value~~receive oftenant ~~the~~improvement ~~asset~~allowances tofor ~~its~~any ~~fair value. Calculation~~ of ~~fair~~our ~~value~~future ~~requires~~locations, ~~significant estimates and judgments~~ which ~~could~~would ~~vary~~result ~~significantly~~in ~~based~~additional onoccupancy ~~our assumptions~~expenses.

36In February 2016, ASC Topic 842, Leases, was issued to increase the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. In order to meet that objective, the new standard requires recognition of the assets and liabilities that arise from leases. Accordingly, a lessee will recognize a right-of-use (ROU) asset for its right to use the underlying asset and a lease liability for the corresponding lease obligation. Both the ROU asset and lease liability will initially be measured at the present value of the future minimum lease payments over the lease term. Subsequent measurement, including the presentation of expenses and cash flows, will depend on the classification of the lease as either a finance or an operating lease. Initial costs directly attributable to negotiating and arranging the lease will be included in the ROU asset. See Note 1 in the Notes to the Consolidated Financial Statements for further details on the adoption impact associated with the new leasing standard effective January 1, 2019.

WeIncome recorded long-lived asset impairment charges of $9.3 million and $12.5 million, for the years ended December 31, 2017 and 2016, respectively. Such amounts are included in "Asset impairment charge" in the Consolidated Statements of Comprehensive Loss. See Note 2 in the Notes to the Consolidated Financial Statements for further details on the impairment charges. We continue to monitor the operating performance of each individual restaurant. We may be required to record impairment charges in the future if certain restaurants perform below expectations. Taxes

~~Leasing~~We ~~Activities~~provide for income taxes based on our estimate of federal and state tax liabilities. These estimates consider, among other items, effective rates for state and local income taxes, allowable tax credits for items such as taxes paid on reported tip income, estimates related to depreciation and amortization expense allowable for tax purposes, and the tax deductibility of certain other items. Our estimates are based on information available to us at the time we prepare the income tax provision. Income tax returns are subject to audit by federal, state, and local governments, generally years after the returns are filed. These returns could be subject to material adjustments or differing interpretations of the tax laws.

We lease all of our restaurant properties. At the inception of the lease, we evaluate each property and classify the lease as an operating or capital lease in accordance with applicable accounting standards. We exercise significant judgment in determining the estimated fair value of the restaurant as well as the discount rate used to discount the future minimum lease payments. The term used for this evaluation includes renewal option periods only in instances in which the exercise of the renewal option can reasonably be assured and failure to exercise such option would result in an economic penalty. All of our restaurant leases are classified as operating leases.35

~~Our~~Deferred ~~lease~~income ~~term~~tax ~~used~~assets and liabilities are recognized for ~~straight-line~~the ~~rent~~expected ~~expense~~future isincome ~~calculated~~tax ~~from~~consequences of carryforwards and temporary differences between the ~~date~~book weand ~~take~~tax ~~possession~~basis of assets and liabilities. Deferred tax assets and liabilities are measured using the ~~leased~~income ~~premises~~tax ~~through~~rate in effect during the ~~lease~~year ~~termination~~in ~~date~~which the differences are expected to reverse. ~~There~~The isrealization ~~potential~~of ~~for~~tax ~~variability~~benefits inof ~~our~~deductible ~~“rent~~temporary ~~holiday”~~differences ~~period~~and ~~which~~operating ~~typically~~loss ~~begins~~or tax credit carryforwards will depend on whether we have sufficient taxable income within the ~~possession~~carryforward ~~date~~periods ~~and~~permitted ~~ends~~by ontax law to allow for utilization of the ~~store~~deductible ~~open~~amounts ~~date~~and carryforwards. ~~Factors~~We ~~that~~record ~~may~~net ~~affect~~deferred ~~the~~tax ~~length~~assets ofto the ~~rent~~extent ~~holiday~~we ~~period~~believe ~~generally~~these ~~include~~assets ~~construction~~will ~~related~~more ~~delays~~likely orthan ~~situations~~not ~~where~~be realized. In making this determination, we ~~take~~consider ~~possession~~all ofavailable ~~the~~positive ~~leased~~and ~~premises~~negative ~~upon~~evidence, ~~execution~~including scheduled reversals of ~~the~~deferred ~~lease.~~tax ~~Extension~~liabilities, ofprojected future taxable income, tax planning strategies and recent financial operations. In the ~~rent~~event ~~holiday~~we ~~period~~determine ~~due~~that we would be able to ~~delays~~realize inour ~~restaurant~~deferred ~~opening~~income ~~will~~tax ~~result~~assets in ~~greater~~the ~~rent~~future, ~~expensed~~in ~~during~~excess of their net recorded amount, we will make an adjustment to the ~~rent~~valuation ~~holiday~~allowance ~~period~~which would likely result in an income tax benefit.

WeEffective ~~record~~for ~~contingent~~tax ~~rent~~years ~~expense~~beginning ~~based~~after onDecember a31, ~~percentage~~2017, ofthe ~~revenue~~U.S. ~~amounts~~corporate ~~that~~income ~~exceed~~tax arate ~~specified~~is ~~sales~~21% ~~threshold~~pursuant ~~over~~to the ~~periods~~Tax Cuts and Jobs Act (the ~~liability~~“Tax isAct”), ~~incurred~~that was signed into law December 2017. ~~Contingent~~As ~~rent~~of ~~expense~~December is31, ~~recorded~~2018, ~~prior~~we tohave ~~achievement~~completed our accounting for the tax effects of ~~specified~~the ~~sales~~Tax ~~levels~~Act ifand ~~achievement~~recorded a cumulative tax adjustment of ~~such~~$8.0 ~~amounts~~million isin ~~considered~~2017 ~~probable~~in ~~and~~accordance ~~estimable~~with SAB 118.

Leasehold improvements financed by the landlord through tenant improvement allowances are capitalized as leasehold improvements with the tenant improvement allowances recorded as deferred lease incentives. Deferred lease incentives are amortized on a straightStock-~~line~~Based basis over the lesser of the life of the asset or the lease term, including option periods which in the judgment of management are reasonably assured of renewal (same term that is used for related leasehold improvements) and are recorded as a reduction of occupancy expense. As part of the initial lease terms, we negotiate with our landlords to secure these tenant improvement allowances. There is no guarantee that we will receive tenant improvement allowances for any of our future locations, which would result in additional occupancy expenses.Compensation

InWe ~~February~~apply ~~2016,~~the ~~ASC~~Black-Scholes ~~Topic~~valuation ~~842,~~model ~~Leases,~~in ~~was~~determining ~~issued to increase~~ the ~~transparency~~fair ~~and~~value ~~comparability~~of ~~among~~stock ~~organizations~~option byawards, ~~recognizing~~which ~~lease~~requires ~~assets~~the ~~and~~use ~~lease~~of ~~liabilities~~a onnumber ~~the~~of ~~balance~~highly ~~sheet~~complex and ~~disclosing~~subjective ~~key~~variables. ~~information~~These ~~about~~variables ~~leasing~~include, ~~arrangements.~~but Inare ~~order~~not limited to ~~meet~~the ~~that~~actual ~~objective,~~and ~~the~~projected ~~new~~employee ~~standard~~and ~~requires~~director ~~recognition~~stock ofoption ~~the~~exercise ~~assets~~behavior, ~~and~~expected ~~liabilities~~volatility, ~~that~~risk-free ~~arise~~interest ~~from~~rate, ~~leases.~~expected ~~Accordingly~~dividends, aand ~~lessee~~expected ~~will~~term. ~~recognize~~Expected avolatility ~~right-~~is based on the historical volatility of~~-use~~ ~~(ROU)~~our ~~asset~~stock. ~~for~~We ~~its~~utilize ~~right~~historical data to ~~use~~estimate ~~the~~option ~~underlying~~exercise ~~asset~~ and aemployee ~~lease~~termination ~~liability~~behavior ~~for~~within the ~~corresponding~~valuation ~~lease obligation~~model. ~~Both~~The ~~the~~risk-free ~~ROU~~interest ~~asset~~rate ~~and~~is ~~lease~~based ~~liability~~on ~~will~~the ~~initially~~U.S. beTreasury ~~measured~~yield curve in effect at the ~~present~~time ~~value~~ of ~~the~~grant ~~future~~for ~~minimum~~the ~~lease~~expected ~~payments~~term ~~over~~of the ~~lease term~~option. ~~Subsequent~~We ~~measurement,~~also ~~including~~estimate forfeitures at the ~~presentation~~time of ~~expenses~~grant and ~~cash~~revise ~~flows~~these estimates, ~~will~~if ~~depend~~necessary, onin ~~the~~subsequent ~~classification~~periods ofif ~~the~~actual ~~lease~~forfeitures asdiffer ~~either~~from athose ~~finance~~estimates. orWe anestimate ~~operating~~forfeitures ~~lease.~~based ~~Initial~~on ~~costs~~our ~~directly~~expectation ~~attributable~~of tofuture ~~negotiating~~experience ~~and~~while ~~arranging~~considering ~~the~~our ~~lease~~historical ~~will~~experience. beChanges ~~included~~ in the ~~ROU~~subjective ~~asset.~~assumptions ~~Lessees~~ can ~~make~~materially anaffect ~~accounting~~the ~~policy~~estimate ~~election~~of byfair ~~class~~value of ~~underlying~~stock-based ~~asset~~compensation ~~not to recognize a ROU asset~~ and ~~corresponding~~consequently, ~~lease~~the ~~liability~~related ~~for~~amount ~~leases~~recognized ~~with~~in athe ~~term~~Consolidated Statements of ~~12 months or less~~Operations. ~~All~~We ~~of our restaurant leases~~ are ~~accounted~~also ~~for~~required asto ~~operating~~establish ~~leases,~~deferred ~~with~~tax ~~no related~~ assets ~~and~~for ~~liabilities~~expense onrelating ~~our~~to ~~balance~~options ~~sheet.~~that ~~The~~would ~~new~~be ~~standard~~expected isto ~~effective~~generate ~~for~~a ~~public~~tax ~~companies~~deduction ~~for~~under ~~fiscal~~their ~~years~~original ~~beginning~~terms. ~~after~~The ~~December~~recoverability ~~15,~~of ~~2018,~~such ~~and~~assets ~~interim~~are ~~periods~~dependent ~~within~~upon ~~those~~the ~~years,~~actual ~~with~~deduction ~~early~~that ~~adoption~~may ~~permitted.~~be ~~The~~available ~~expected~~at ~~adoption~~exercise ~~method~~and iscan ~~being~~further ~~evaluated~~be impaired by ~~us.~~either ~~We expect~~ the ~~adoption~~expiration of ~~this~~the ~~guidance~~option toor ~~have~~an aoverall ~~material~~valuation ~~impact~~allowance on ~~our~~deferred ~~consolidated~~tax ~~financial statements~~assets.

37We believe the estimates and assumptions related to these critical accounting policies are appropriate under the circumstances; however, should future events result in unanticipated consequences, there could be a material impact on our future financial condition or results of operations.

~~Income~~Recent ~~Taxes~~Accounting Pronouncements

WeSee ~~provide~~Note ~~for~~1 ~~income~~Recently ~~taxes~~Issued ~~based~~Accounting onStandards to our ~~estimate~~Consolidated ofFinancial ~~federal~~Statements. ~~and~~As ~~state~~described ~~tax~~therein, ~~liabilities.~~in ~~These~~May ~~estimates consider~~2014, ~~among~~the ~~other~~Financial ~~items,~~Accounting ~~effective~~Standards ~~rates~~Board ~~for~~(“FASB”) ~~state~~issued ~~and~~Accounting ~~local~~Standards ~~income~~Update ~~taxes~~(“ASU”) 2014-09, ~~allowable~~Revenue ~~tax~~from ~~credits~~Contracts ~~for~~with ~~items~~Customers ~~such~~(Topic as606). ~~taxes~~We ~~paid~~adopted onthe ~~reported~~new ~~tip~~standard ~~income~~effective January 1, ~~estimates~~2018. ~~related~~We toadopted ~~depreciation~~the ~~and~~standard ~~amortization~~using ~~expense~~the ~~allowable~~modified ~~for~~retrospective ~~tax~~adoption ~~purposes,~~method ~~and~~permitted by the ~~tax~~standard ~~deductibility~~with the cumulative effect of ~~certain~~initially ~~other~~applying ~~items.~~the ~~Our~~amended ~~estimates~~guidance ~~are~~recognized ~~based~~at onJanuary ~~information~~1, ~~available~~2018. toWe ushave atapplied the ~~time~~new weguidance ~~prepare~~only ~~the~~to ~~income~~2018 ~~tax~~and ~~provision.~~revenue ~~Income~~recognition ~~tax~~for ~~returns~~2017 ~~are~~continues ~~subject~~ to ~~audit~~be byunder ~~federal,~~ASC ~~state,~~605. ~~and~~Under ~~local~~previous ~~governments~~guidance, ~~generally~~we ~~years~~would ~~after~~have ~~the~~recognized ~~returns~~any ~~are~~upfront ~~filed.~~franchise ~~These~~and ~~returns~~development ~~could~~fees beupon ~~subject~~restaurant toopening, ~~material~~however ~~adjustments~~no orfranchise ~~differing~~locations ~~interpretations~~opened ofduring ~~the tax laws~~2018.

Deferred income tax assets and liabilities are recognized for the expected future income tax consequences of carryforwards and temporary differences between the book and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using the income tax rate in effect during the year in which the differences are expected to reverse. The realization of tax benefits of deductible temporary differences and operating loss or tax credit carryforwards will depend on whether we have sufficient taxable income within the carryback and carryforward periods permitted by tax law to allow for utilization of the deductible amounts and carryforwards. We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making this determination, we consider all available positive and negative evidence, including scheduled reversals of deferred tax liabilities, projected future taxable income, tax planning strategies and recent financial operations. In the event we determine that we would be able to realize our deferred income tax assets in the future in excess of their net recorded amount, we will make an adjustment to the valuation allowance which would likely result in an income tax benefit.36

~~The~~Item ~~Tax Cuts and Jobs Act (“the Tax Act”) was enacted on December 22, 2017~~7A. AsQuantitative of December 31, 2017, we have not finalized our accounting for the tax effects of the enactment of the Tax Act; however, as described in Note 5 in the Notes to the Consolidated Financial Statements, we have made a reasonable estimate of the effects on our existing deferred tax balances and ~~uncertain~~Qualitative ~~tax~~Disclosures ~~positions.~~About WeMarket anticipate that the completion of our 2017 income tax returns, future guidance and additional information and interpretations with the respect to the Tax Act will cause us to further review a need for provisional amounts to be recorded as of December 31, 2017. If necessary, and in accordance with SAB 118, we will record such adjustments in the period that relevant guidance and/or additional information becomes available and our analysis is completed.Risk

~~Stock~~The following discussion of market risks contains forward-~~Based~~looking ~~Compensation~~statements. Actual results may differ materially from the following discussion based on general conditions in the commodity and capital markets.

WePrimary ~~apply~~Market ~~the~~Risk Black-Scholes valuation model in determining the fair value of stock option awards, which requires the use of a number of highly complex and subjective variables. These variables include, but are not limited to the actual and projected employee and director stock option exercise behavior, expected volatility, risk-free interest rate, expected dividends, and expected term. Expected volatility is based on the historical volatility of our stock. We utilize historical data to estimate option exercise and employee termination behavior within the valuation model. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for the expected term of the option. We also estimate forfeitures at the time of grant and revise these estimates, if necessary, in subsequent periods if actual forfeitures differ from those estimates. We estimate forfeitures based on our expectation of future experience while considering our historical experience. Changes in the subjective assumptions can materially affect the estimate of fair value of stock-based compensation and consequently, the related amount recognized in the Consolidated Statements of Comprehensive Loss. We are also required to establish deferred tax assets for expense relating to options that would be expected to generate a tax deduction under their original terms. The recoverability of such assets are dependent upon the actual deduction that may be available at exercise and can further be impaired by either the expiration of the option or an overall valuation allowance on deferred tax assets. Exposures

WeOur ~~believe~~primary market risk exposure is commodity costs. Many of the ~~estimates~~food ~~and~~products ~~assumptions~~purchased ~~related~~by us can be subject to ~~these~~volatility ~~critical~~due ~~accounting~~to ~~policies~~changes ~~are~~in ~~appropriate~~weather, ~~under~~production, ~~the~~availability, ~~circumstances;~~seasonality, ~~however~~international demand, ~~should~~and ~~future~~other ~~events~~factors ~~result~~outside inour ~~unanticipated~~control. ~~consequences,~~Substantially ~~there~~all ~~could~~of beour afood ~~material~~and ~~impact~~supplies onare available from several sources, which help to diversify our ~~future~~overall ~~financial~~commodity ~~condition~~cost orrisk. ~~results~~We ofalso ~~operations~~believe that we have the ability to increase certain menu prices in response to food commodity price increases.

38We also face market risk exposure due to the variable interest rates on our credit facility. Interest expense is subject to adjustment based on changes to the prime or LIBOR rate. Interest rate fluctuations may adversely impact our financial condition or results of operations.

~~Recent~~Item ~~Accounting~~8. Financial ~~Pronouncements~~Statements and Supplementary Data

~~See~~Reference ~~Note~~is 1made ~~Recently Issued Accounting Standards~~ to ~~our~~the ~~Consolidated~~consolidated ~~Financial~~financial ~~Statements. As described therein~~statements, ~~in May 2014,~~ the ~~Financial~~notes ~~Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2014-09~~thereto, ~~Revenue~~and ~~from Contracts with Customers (Topic 606). We adopted~~ the ~~new~~report ~~standard effective January 1~~thereon, ~~2018.~~commencing ~~The~~on ~~guidance~~page ~~may~~F-1 ~~be applied retrospectively for all periods presented or retrospectively with the cumulative effect~~ of ~~initially~~this applying the guidance recognized at the date of initial application. We adopted the standard retrospectively with the cumulative effect of initially applying the amended guidance recognized at January 1report, ~~2018.~~which ~~Consequently, we will apply the guidance to the most current period presented in the~~ financial statements ~~issued subsequent to the adoption date. However~~, ~~had we adopted the standard as of January 1~~notes, ~~2017, our revenue~~ and ~~operating~~report ~~income~~are ~~for~~incorporated ~~2017~~herein ~~would have been reduced~~ by $0reference.~~3 million.~~

~~Item 7A. Quantitative and Qualitative Disclosures About Market Risk~~37

~~The~~Item ~~following discussion of market risks contains forward-looking statements~~9. Changes ~~Actual~~in ~~results~~and ~~may~~Disagreements ~~differ~~With ~~materially~~Accountants ~~from the following discussion based~~ on ~~general~~Accounting ~~conditions in the commodity~~ and ~~capital~~Financial ~~markets.~~Disclosure

~~Primary~~On ~~Market~~June ~~Risk~~12, ~~Exposures~~2018, the Company dismissed Ernst & Young LLP (“EY”) as the Company's independent registered public accounting firm. The reports of EY on the Company's consolidated financial statements as of and for the years ended December 31, 2017 and 2016 did not contain an adverse opinion or a disclaimer of opinion, and were not qualified or modified as to uncertainty, audit scope or accounting principles.

~~Our~~During ~~primary~~the ~~market~~Company's ~~risk~~two ~~exposure~~most isrecent ~~commodity~~fiscal ~~costs.~~years ~~Many~~and ofthe subsequent interim period preceding EY's dismissal, there were no disagreements (within the ~~food~~meaning ~~products~~of ~~purchased~~Item by304(a)(1)(iv) usof ~~can~~Regulation beS-K) ~~subject~~with toEY ~~volatility~~on ~~due~~any tomatter ~~changes~~of inaccounting ~~weather,~~principles ~~production,~~or ~~availability~~practices, ~~seasonality,~~financial ~~international~~statement ~~demand~~disclosure, ~~and~~or ~~other~~auditing ~~factors~~scope ~~outside~~or ~~our~~procedure, ~~control.~~which ~~Substantially~~disagreements, ~~all~~if ofnot ~~our~~resolved ~~food~~to ~~and~~EY's ~~supplies~~satisfaction, ~~are~~would ~~available~~have ~~from~~caused ~~several~~EY ~~sources,~~to ~~which~~make ~~help~~reference to ~~diversify~~the ~~our~~subject ~~overall~~matter ~~commodity~~thereof ~~cost~~in ~~risk.~~connection Wewith ~~also~~its ~~believe~~reports ~~that~~for wesuch ~~have~~years; ~~the~~and, ~~ability~~no toreportable ~~increase~~events ~~certain~~(as ~~menu~~such ~~prices~~term inis ~~response~~defined toin ~~food~~Item ~~commodity~~304(a)(1)(v) ~~price~~of ~~increases.~~Regulation S-K).

WeOn ~~also~~July ~~face~~10, ~~market~~2018, ~~risk~~the ~~exposure~~Audit ~~due~~Committee to (the ~~variable~~"Audit ~~interest~~Committee") ~~rates~~of ~~on our credit facility. Interest on~~ the ~~loans~~Board isof ~~subject~~Directors toof ~~adjustment~~Kona ~~based~~Grill, onInc. ~~changes to~~ (the ~~prime~~"Company") orengaged ~~LIBOR~~BDO ~~rate.~~USA, ~~Interest~~LLP ~~rate~~(“BDO”) ~~fluctuations~~as ~~may~~the ~~adversely~~Company's ~~impact~~independent ~~our~~registered ~~financial~~public ~~condition~~accounting ~~or results of operations~~firm.

During the Company's two most recent fiscal years and the subsequent interim period through July 10, 2018, neither the Company nor anyone on its behalf consulted with BDO with respect to either (i) the application of accounting principles to a specified transaction, either completed or proposed, or the type of audit opinion that might be rendered on the Company’s consolidated financial statements, and no written report or oral advice was provided to the Company that BDO concluded was an important factor considered by the Company in reaching a decision as to the accounting, auditing, or financial reporting issue or (ii) any matter that was the subject of either a “disagreement” (as defined in Item 8.304(a)(1)(iv) ~~Financial~~of ~~Statements~~Regulation S-K and ~~Supplementary~~the ~~Data~~related instructions to Item 304 of Regulation S-K) or “reportable event” (as defined in Item 304(a)(1)(v) of Regulation S-K).

~~Reference~~Item is9A. ~~made~~Controls ~~to the consolidated financial statements, the notes thereto,~~ and ~~the report thereon, commencing on page F-1 of this report, which financial statements, notes, and report are incorporated herein by reference.~~Procedures

~~Item~~Evaluation 9.of ~~Changes~~Disclosure inControls and ~~Disagreements With Accountants on Accounting and Financial Disclosure~~Procedures

~~Not~~Disclosure ~~applicable~~controls and procedures (as defined in Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended (the “Exchange Act”) are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

~~Item~~Under 9Athe supervision and with the participation of our management, including our former Chief Executive Officer and Chief Financial Officer, we have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2018. ~~Controls~~Based on that evaluation, our former Chief Executive Officer and ~~Procedures~~Chief Financial Officer concluded that our disclosure controls and procedures as of the end of the period covered by this Annual Report were effective, except for the material weakness described below in Management’s Report on Internal Control Over Financial Reporting.

~~Evaluation of Disclosure Controls and Procedures~~38

Disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) are our controls and other procedures that are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange CommissionManagement’s ~~rules~~Report and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of December 31, 2017. Based on ~~that~~Internal ~~evaluation,~~Control ~~the~~Over ~~Chief Executive Officer and Chief~~ Financial ~~Officer concluded that our disclosure controls and procedures are effective.~~Reporting

~~Changes~~We are responsible for establishing and maintaining adequate internal control over financial reporting. As defined in ~~Internal~~the ~~Control~~securities ~~Over~~laws, ~~Financial~~internal ~~Reporting~~control over financial reporting is a process designed by, or under the supervision of, our principal executive and principal financial officer and effected by our Board of Directors, management, and other personnel, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the acquisitions and dispositions of our assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statements.

~~There~~Because ~~has~~of ~~not~~its ~~been~~inherent ~~any~~limitations, ~~change in our~~ internal control over financial reporting ~~during~~may ~~our~~not ~~fourth~~prevent ~~fiscal~~or ~~quarter~~detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that ~~has~~controls ~~materially~~may ~~affected~~become inadequate because of changes in conditions, or isthat ~~reasonably~~the ~~likely~~degree toof ~~materially~~compliance ~~affect,~~with ~~our~~the ~~internal~~policies ~~control~~or ~~over~~procedures ~~financial~~may ~~reporting~~deteriorate.

39A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements will not be prevented or detected on a timely basis.

Management’s ~~Report~~assessed the effectiveness of our internal control over financial reporting as of December 31, 2018, based on the framework set forth by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control—Integrated ~~Over~~Framework ~~Financial~~(the ~~Reporting~~“2013 framework”). Based on that assessment, management concluded that, as of December 31, 2018, our internal control over financial reporting was not effective because a material weakness existed in our internal controls related to the preparation, documentation and review of the income tax provision in accordance with U.S. generally accepted accounting principles. Specifically, we did not design and maintain effective controls over the, documentation and review of relevant facts in order to apply the appropriate tax accounting under accounting standards generally accepted in the United States of America, which impacted the deferred tax asset and valuation allowance accounts and related disclosures. The Company’s management has concluded that this control deficiency constitutes a material weakness as of December 31, 2018.

WeBased ~~are~~on ~~responsible~~this ~~for establishing and maintaining adequate internal control over financial reporting. As defined in the securities laws~~finding, ~~internal~~our ~~control~~management ~~over financial reporting~~ is implementing a ~~process~~remediation ~~designed~~plan ~~by,~~to oraddress ~~under~~ the ~~supervision~~control ~~of,~~deficiency ~~our~~that ~~principal~~led ~~executive and principal financial officer and effected by our Board of Directors, management, and other personnel,~~ to ~~provide reasonable assurance regarding~~ the ~~reliability~~material ofweakness. ~~financial~~The ~~reporting~~remediation ~~and~~plan ~~the preparation of financial statements for external purposes in accordance with generally accepted accounting principles and~~ includes ~~those~~implementing ~~policies~~specific ~~and~~review procedures, ~~that~~including ~~(i)~~strengthening ~~pertain to the maintenance of records that in reasonable detail accurately and fairly reflect the acquisitions and dispositions of~~ our ~~assets;~~income ~~(ii)~~tax ~~provide~~control ~~reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance~~ with ~~generally~~improved ~~accepted~~documentation ~~accounting principles~~standards, ~~and~~technical ~~that~~oversight ~~our receipts~~ and expenditures are being made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the financial statementstraining.

~~Because~~Changes of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in ~~conditions,~~Internal orControl ~~that~~Over ~~the~~Financial ~~degree of compliance with the policies or procedures may deteriorate.~~Reporting

~~Management~~Other ~~assessed~~than the ~~effectiveness~~material ofweakness discussed above, there were no changes in our internal control over financial reporting asduring ofour ~~December~~fourth 31fiscal quarter that has materially affected, ~~2017~~or are reasonably likely to materially affect, ~~based~~our oninternal ~~the~~control ~~framework~~over ~~set~~financial ~~forth~~reporting. byAs ~~the~~we ~~Committee~~continue ofto ~~Sponsoring~~evaluate ~~Organizations~~and ofwork to improve our internal control over financial reporting, our management may determine to take additional measures to address control deficiencies or determine to modify the ~~Treadway~~remediation ~~Commission~~efforts described in ~~Internal~~this ~~Control—Integrated~~section. ~~Framework~~While (the ~~“2013~~Audit ~~framework”).~~Committee ~~Based~~and onmanagement ~~that~~are ~~assessment~~closely monitoring the implementation, ~~management~~until ~~concluded~~the ~~that~~remediation efforts discussed in this section, including any additional remediation efforts that our management identifies as ofnecessary, ~~December~~are 31completed, ~~2017~~tested and determined effective, ~~our~~the ~~internal~~material ~~control~~weakness ~~over~~described ~~financial~~above ~~reporting~~will ~~was~~continue ~~effective~~to exist.

~~Item~~Please ~~9B.~~note ~~Other~~that ~~Information~~our independent registered public accounting firm is not required to formally attest to the effectiveness of our internal control over financial reporting.

~~Not~~Item ~~applicable~~9B. Other Information

~~PART~~Changes ~~III~~in Senior Management Team

~~Item~~Effective ~~10.~~March ~~Directors~~31, ~~Executive~~2019, ~~Officers~~Marcus Jundt resigned from our Board of Directors and ~~Corporate~~as ~~Governance~~Chief Executive Officer. On April 2, 2019, Christi Hing, our Chief Financial Officer, was appointed as the principal executive officer.

~~The~~On ~~information~~March ~~required~~29, by2019, ~~this~~the ~~Item~~Company ~~relating~~and Alvarez & Marsal North America, LLC (“Alvarez & Marsal”) entered into an agreement regarding consulting services to ~~our~~be ~~directors~~provided to the Company. Effective April 17, ~~executive~~2019, ~~officers~~Jonathon Tibus and ~~corporate~~Christopher ~~governance~~Wells iswill ~~incorporated~~be ~~herein~~appointed byas ~~reference~~our toChief Executive Officer and Chief Restructuring Officer, respectively. Under the ~~definitive~~terms ~~Proxy~~of ~~Statement~~the agreement, Mr. Tibus and Mr. Wells will continue to be ~~filed~~employed ~~pursuant~~by Alvarez & Marsal and will not receive any compensation directly from the Company. The Company will instead pay Alvarez & Marsal at Mr. Tibus’ and Mr. Wells’ hourly rate as well as the hourly rate for other personnel used on the engagement with total fees not to ~~Regulation~~exceed ~~14A~~$390,000 ofin any month. Under the ~~Exchange~~agreement, ~~Act~~the Company may not solicit, recruit, hire or otherwise engage any employee of Alvarez & Marsal or any of its affiliates who perform services for ~~our~~the ~~2018~~Company ~~Annual~~for ~~Meeting~~a period of ~~Stockholders~~two years after the termination of the agreement. The foregoing description of the agreement with Alvarez & Marsal are general descriptions and are qualified in their entirely by reference to the actual agreement, which is attached hereto as Exhibit 10.7.

~~Item~~As 11a Managing Director of Alvarez & Marsal, Mr. Tibus has served as Chief Executive ~~Compensation~~Officer of Real Mex Restaurants, Inc. (Chevy’s, El Torito, Sinigual, Las Brisas); Ignite Restaurant Group, Inc. (Joe’s Crab Shack, Brickhouse Tavern); Last Call Operating Co. (Fox & Hound, Champps). Mr. Tibus has also served as Chief Restructuring Officer of Quiznos and Chief Operating Officer of Max & Erma’s. Mr. Tibus has a bachelor’s degree from Florida State University and an MBA from the University of Florida. Mr. Tibus is 46 years old and is not the beneficial owner of any shares of the Company’s common stock.

~~The~~Mr. ~~information~~Wells ~~required~~is bya ~~this~~Managing ~~Item~~Director iswith ~~incorporated~~Alvarez ~~herein~~& byMarsal. ~~reference~~Mr. toWells recently served as Chief Financial Officer of Real Mex Restaurants, Inc. Additionally, Mr. Wells has served in the ~~information~~capacity ~~contained~~of Chief Financial Officer in various privately-held roles encompassing the ~~definitive~~investment ~~Proxy~~management ~~Statement~~and tohealthcare beindustries. Mr. ~~filed~~Wells ~~pursuant~~has toa ~~Regulation~~bachelor’s ~~14A~~degree from the University of Arizona in finance and accounting, is a Certified Public Accountant (CPA) in the ~~Exchange~~state ~~Act~~of ~~for~~Arizona, ~~our~~and ~~2018~~a ~~Annual~~Chartered ~~Meeting~~Financial Analyst (CFA). Mr. Wells is 42 years old and is not the beneficial owner of ~~Stockholders~~any shares of the Company’s common stock.

~~Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters~~39

~~The~~PART information required by this Item is incorporated herein by reference to the information contained in the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for our 2018 Annual Meeting of Stockholders.III

Item 1310. ~~Certain~~Directors, ~~Relationships~~Executive ~~and~~Officers ~~Related Transactions,~~ and ~~Director~~Corporate ~~Independence~~Governance

The ~~information~~following ~~required~~table bysets ~~this~~forth ~~Item~~certain ~~is incorporated herein by reference to the~~ information ~~contained~~regarding ~~in the definitive Proxy Statement to be filed pursuant to Regulation 14A of the Exchange Act for~~ our ~~2018~~current ~~Annual~~directors ~~Meeting~~and ofexecutive ~~Stockholders~~officers.

Name	Age	Director or Executive Officer Since	Position
Richard J. Hauser	57	2004	Director
Anthony L. Winczewski	63	2005	Director
Leonard M. Newman	58	2012	Director
Shawn Hassel	47	2019	Director
Christi Hing	45	2012	Chief Financial Officer

~~Item~~Biographical ~~14.~~Information ~~Principal~~Regarding ~~Accountant~~Directors ~~Fees~~ and ~~Services~~Executive Officers

~~The~~Richard ~~information~~J. ~~required~~Hauser byhas ~~this~~served ~~Item~~as isa ~~incorporated~~director ~~herein~~of byour ~~reference~~company tosince December 2004. Mr. Hauser serves as the ~~information~~President ~~contained~~and owner of Capital Real Estate, Inc., a commercial real estate services company based in Minneapolis, Minnesota, which he founded in 2001. In addition, Mr. Hauser is the ~~definitive~~Manager ~~Proxy~~and ~~Statement~~owner toof beNet ~~filed~~Lease ~~pursuant~~Development LLC, which is a controlled operating company under Capital Real Estate, Inc. Mr. Hauser also controls and operates BTS Construction LLC, a build-to-suit ~~Regulation~~construction ~~14A~~management company. The operations of ~~the~~Capital ~~Exchange~~Real ~~Act~~Estate, ~~for~~Inc. ~~our~~and ~~2018~~its ~~Annual~~related ~~Meeting~~entities encompass a full range of ~~Stockholders~~real estate related services, including land acquisition, land development, retail development, net lease development, construction and general contracting, and both internal and external investment holdings and market disposition of commercial properties.

~~PART~~The IVBoard believes Mr. Hauser’s strong executive background in commercial real estate and finance provides important perspective to the Board, given the importance of real estate evaluation, development and finance to our company’s business. Mr. Hauser also has extensive experience in business operations and strategic planning, which also benefit our company’s business.

~~Item~~Anthony 15L. ~~Exhibits~~Winczewski has served as a director of our company since April 2005. Mr. Winczewski has served as Chief Executive Officer of Commercial Partners Title, LLC, a title insurance agency engaged in providing commercial, residential, and ~~Financial~~tax ~~Statement~~deferred ~~Schedules~~exchange solutions since January 1995. Prior to forming Commercial Partners in 1995, Mr. Winczewski held a variety of positions with title insurance companies for 20 years, including positions as a manager and sales officer for Chicago Title Insurance Company from May 1984 until January 1995 and as a Vice President and Principal of Winona County Abstract and Title, Inc. from July 1975 until May 1984.

~~(a)~~ The ~~following~~Board ~~documents~~believes ~~are~~Mr. ~~filed~~Winczewski’s asstrong aexecutive ~~part~~background in real estate finance and over 35 years of experience in management and ownership positions makes him qualified to serve on the ~~report:~~Board.

	(1)	Financial Statements
		Financial Statements are listed in the Index to Consolidated Financial Statements on page F-1 of this report.
	(2)	Financial Statement Schedules
		No financial statement schedules are included because such schedules are not applicable, are not required, or because required information is included in the consolidated financial statements or notes thereto.
	(3)	Exhibits

Leonard M. Newman has served as a director of our company since March 2012. Mr. Newman began his career as an accountant with Arthur Andersen & Co. from 1982 through 1989. From 1989 through 1996, Mr. Newman served in several accounting and finance functions for PepsiCo, Inc., where he worked with the PepsiCo and Taco Bell divisions. From 1996 through 2003, Mr. Newman was Chief Financial Officer of Border Foods, Inc., which operated several Kentucky Fried Chicken, Pizza Hut and Taco Bell units. From 2004 through 2010, Mr. Newman served as Chief Executive Officer of Camillet Foods, a franchisee of three casual restaurants. From January 2010 through August 2012, Mr. Newman served as a financial consultant in various industries. Since September 2012, Mr. Newman has served as the Chief Financial Officer of East View Information Services, a leading provider of native and translated foreign language information products and services.

Exhibit Number		Exhibit
3.1		Amended and Restated Certificate of Incorporation of the Registrant. Incorporated by reference to Amendment No. 1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended June 30, 2015, as filed with the Commission on August 4, 2015
3.2		Certificate of Designations, Preferences, and Rights of Series A Junior Participating Preferred Stock of Kona Grill, Inc. Incorporated by reference to the Registrant’s Form 8-K filed on May 28, 2008.
3.3		Certificate of Designation, Preferences, and Rights of Series B Junior Participating Preferred Stock of Kona Grill, Inc. filed with the Secretary of State of the State of Delaware on September 7, 2016 (incorporated by reference from Form 8-K filed September 7, 2016)
3.4		Second Amended and Restated Bylaws of Kona Grill, Inc., as of March 1, 2018. Incorporated by reference to the Registrant’s Form 8-K filed on March 6, 2018.
4.1		Form of Common Stock Certificate. Incorporated by reference to Amendment No. 2 to the Registrant’s Registration Statement on Form S-1 (Registration No. 333-125506), as filed on July 21, 2005.
4.2		Rights Agreement dated September 6, 2016 by and between Kona Grill, Inc. and Continental Stock Transfer & Trust Company (incorporated by reference from Form 8-K filed September 7, 2016)
10.12*		Kona Grill, Inc. 2005 Employee Stock Purchase Plan (amended as of August 15, 2005). Incorporated by reference to the Registrant’s Registration Statement on Form S-8 (Registration No. 333-127593), as filed with the Commission on August 16, 2005.
10.15*		Form of Stock Option Agreement (2005 Stock Award Plan). Incorporated by reference to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, as filed with the Commission on May 8, 2006.

41The Board believes that Mr. Newman’s extensive finance and accounting experience combined with his restaurant industry experience makes him uniquely qualified to serve on the Board.

Exhibit Number		Exhibit
10.16*		Kona Grill, Inc. Amended and Restated 2012 Stock Award Plan, as amended Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2017, as filed with the Commission on March 6, 2018.
10.30*		Employment Agreement, dated as of March 1, 2018, between the Company and Berke Bakay. Incorporated by reference to the Registrant’s Form 8-K filed on March 6, 2018.
10.33		Form of Stock Option Agreement (2012 Stock Award Plan) Incorporated by reference to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2012, as filed with the Commission on March 15, 2013.
10.34		Amendment No. 1 to Second Amended and Restated Credit Agreement dated as of March 29, 2017 (incorporated by reference to Form 8-K filed April 3, 2017).
10.35		Amendment No. 2 to Second Amended and Restated Credit Agreement dated as of July 7, 2017 (incorporated by reference to Form 8-K filed July 11, 2017).
10.36		Amendment No. 3 to Second Amended and Restated Credit Agreement dated as of October 30, 2017 (incorporated by reference to Form 8-K filed November 3, 2017).
10.37		Amendment No. 4 to Second Amended and Restated Credit Agreement dated as of March 9, 2018 (incorporated by reference to Form 8-K filed March 15, 2018).
10.38		Second Amended and Restated Credit Agreement dated as of October 12, 2016 (incorporated by reference from Form 8-K filed October 18, 2016)
10.39		Amended and Restated Subsidiary Guaranty dated as of October 12, 2016 (incorporated by reference from Form 8-K filed October 18, 2016)
10.40		Amendment No. 1 to Amended and Restated Pledge and Security Agreement dated as of March 9, 2018 (incorporated by reference from Form 8-K filed March 15, 2018)
21		List of Subsidiaries
23		Consent of Independent Registered Public Accounting Firm
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a) and Rule 15d-14(a), promulgated under the Securities Exchange Act of 1934, as amended
32.1		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2		Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101		The following materials from Kona Grill Inc.’s Annual Report on Form 10-K for the year ended December 31, 2017, formatted in Extensible Business Reporting Language (XBRL), (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Comprehensive Loss, (iii) Consolidated Statements of Stockholders’ Equity, (iv) Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements

Shawn Hassel was appointed to serve as a director of our company in March 2019. Mr. Hassel is the co-founder and Managing Partner of Bestige Holdings, LLC (“Bestige”), a private investment firm focused on building and developing a portfolio of debt and long-term equity investments in high potential businesses. Prior to founding Bestige in 2016, Mr. Hassel was a Managing Director with Alvarez & Marsal where he led the Phoenix Turnaround and Restructuring Practice. Before joining Alvarez & Marsal in 2001, Mr. Hassel was a Senior Director with the Corporate Finance and Restructuring practice of Arthur Andersen. He has served and continues to serve as a member of multiple boards. Mr. Hassel earned a bachelor’s degree in finance and accounting from the University of Arizona.

*The ~~Management~~Board ~~contract~~believes orthat ~~compensatory~~Mr. ~~plan~~Hassel’s orextensive ~~arrangement~~experience in ~~which~~operational ~~directors~~and orfinancial ~~executive~~advisory ~~officers~~to ~~are~~both ~~eligible~~management teams and Board of Directors through on-going margin improvements as well as long-term strategic and top line advancements makes him uniquely qualified to ~~participate~~serve on the Board.

42Christi Hing has served as our Chief Financial Officer since February 2012. Ms. Hing has over 20 years of finance and accounting experience and has been with the Company since January 2006. She had served as the Company’s Vice President and Controller and prior to that as the Company’s Director of Financial Reporting. Prior to joining the Company, from February 2004 to December 2005, she was a Manager of Financial Reporting at American Express Company. From September 1996 to October 2003, she held a variety of audit positions at PricewaterhouseCoopers LLP in the Audit and Business Advisory Services practice. Ms. Hing holds a Bachelor of Science degree in accountancy from Arizona State University. Ms. Hing is a Certified Public Accountant in Arizona.

~~Signatures~~In April 2019, the Board of Directors designated Ms. Hing as our principal executive officer for purposes of filing reports under the Securities Exchange Act of 1934.

~~Pursuant~~Classification ~~to the requirements~~ of ~~Section~~Our 13Board ~~or 15(d)~~ of ~~the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.~~Directors

	Kona Grill, Inc.
	/s/ Berke Bakay
	Berke Bakay
	President and Chief Executive Officer
Date: March 22, 2018

Our certificate of incorporation provides for a Board of Directors consisting of three classes serving three-year staggered terms. Shawn Hassel serves as our Class I director, with the term of office of the Class I director expiring in 2021. The Class II directors consist of Leonard M. Newman and Anthony L. Winczewski, with the term of office of the Class II directors expiring in 2019. Class III directors consist of Richard J. Hauser with the term of office of Class III directors expiring at the annual meeting of stockholders in 2020. Officers serve at the pleasure of the Board of Directors.

~~Pursuant~~Information Relating to ~~the~~Corporate ~~requirement~~Governance ofand the ~~Securities~~Board ~~Exchange Act~~ of ~~1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.~~Directors

Signature	Capacity	Date
/s/ Berke Bakay	President, Chief Executive Officer and Director (Principal Executive Officer)	March 22, 2018
Berke Bakay
/s/ Christi Hing	Chief Financial Officer (Principal Financial and Accounting Officer)	March 22, 2018
Christi Hing
/s/ Richard J. Hauser	Director	March 22, 2018
Richard J. Hauser
/s/ James R. Jundt	Director	March 22, 2018
James R. Jundt
/s/ Marcus E. Jundt	Director	March 22, 2018
Marcus E. Jundt
/s/ Leonard Newman	Director	March 22, 2018
Leonard Newman
/s/ Steven W. Schussler	Director	March 22, 2018
Steven W. Schussler
/s/ Anthony L. Winczewski	Director	March 22, 2018
Anthony L. Winczewski

The Board has designated Leonard Newman to be the lead independent director.

43Risk Oversight

~~KONA~~The ~~GRILL~~Board is actively involved in oversight of risks that could affect our company. This oversight is conducted primarily through committees of the Board, ~~INC~~as disclosed in the descriptions of each of the committees below and in the charters of each of the committees, but the full Board has retained responsibility for general oversight of risks. ~~INDEX~~ TOThe ~~CONSOLIDATED~~Board ~~FINANCIAL~~satisfies ~~STATEMENTS~~this responsibility through full reports by each committee chair regarding the committee’s considerations and actions, as well as through regular reports directly from officers responsible for oversight of particular risks within our company.

	Page
Reports of Independent Registered Public Accounting Firm	F-2
Consolidated Balance Sheets	F-3
Consolidated Statements of Comprehensive Loss	F-4
Consolidated Statements of Stockholders’ Equity	F-5
Consolidated Statements of Cash Flows	F-6
Notes to Consolidated Financial Statements	F-7

~~F-1~~Director Independence

~~REPORT~~Our OFBoard ~~INDEPENDENT~~of ~~REGISTERED~~Directors ~~PUBLIC~~reviews ~~ACCOUNTING~~the ~~FIRM~~independence of our directors to determine whether any relationships, transactions or arrangements involving any director or any family member or affiliate of a director may be deemed to compromise the director’s independence from us. Based on that review, the Board determined that as of the date hereof, the following directors are independent directors, as “independence” is defined by NASDAQ, because they have no relationship with us that would interfere with their exercise of independent judgment in carrying out their responsibilities as a director: Richard J. Hauser, Shawn Hassel, Leonard M. Newman, and Anthony L. Winczewski.

ToWe ~~the~~regularly ~~Stockholders~~schedule ~~and~~executive ~~the~~sessions ~~Board~~at ofwhich ~~Directors~~independent ofdirectors ~~Kona~~meet ~~Grill,~~without ~~Inc~~the presence or participation of management.

~~Opinion~~Information onRegarding ~~the~~Board ~~Financial~~Committees ~~Statements~~and Governance

WeOur ~~have~~bylaws ~~audited~~authorize ~~the~~our ~~accompanying~~Board ~~consolidated balance sheets~~ of ~~Kona~~Directors ~~Grill,~~to ~~Inc.~~appoint ~~(the~~among ~~Company)~~its asmembers ofone ~~December~~or ~~31,~~more ~~2017 and 2016~~committees, ~~the~~each ~~related~~consisting ~~consolidated statements~~ of ~~comprehensive~~one ~~loss,~~or ~~stockholders'~~more ~~equity~~directors. ~~and~~Our ~~cash~~Board ~~flows for each~~ of ~~the~~Directors ~~three~~has ~~years~~established inan ~~the~~Audit ~~period~~Committee, ~~ended~~Compensation ~~December 31~~Committee, ~~2017,~~ and ~~the~~Nominating ~~related notes (collectively referred to as the “consolidated financial statements”). In our opinion~~Committee, ~~the~~each ~~consolidated~~consisting ~~financial~~entirely ~~statements present fairly, in all material respects, the financial position~~ of ~~the~~independent ~~Company at December 31, 2017 and 2016, and the results of its operations and its cash flows for each of the three years in the period ended December 31, 2017, in conformity with U~~directors.~~S. generally accepted accounting principles.~~

~~Basis~~Our Board of Directors has adopted charters for ~~Opinion~~the Audit, Compensation, and Nominating Committees describing the authority and responsibilities delegated to each committee by our Board of Directors. Our Board has also adopted a Code of Business Conduct and Ethics and a Code of Ethics for the CEO and Senior Financial Officers. The charters of our Audit, Compensation, and Nominating Committees; our Code of Business Conduct and Ethics, Code of Ethics for the CEO and Senior Financial Officers and Insider Trading Policy are available on the Investors page of our website at www.konagrill.com under the Governance link.

~~These~~Our ~~financial~~Insider ~~statements~~Trading ~~are~~Policy ~~the~~establishes ~~responsibility~~rules ofwhereby ~~the~~directors, ~~Company's~~officers ~~management.~~and ~~Our~~employees ~~responsibility~~are isrequired to, ~~express~~among another ~~opinion~~items, oncomply ~~the~~with ~~Company’s~~rules ~~financial~~regarding ~~statements~~the ~~based~~trading onof our ~~audits~~common stock and the hedging and pledging of stock. WeThe ~~are~~Company strongly discourages pledging our common stock as collateral for a ~~public~~loan. ~~accounting~~If ~~firm~~an ~~registered~~individual ~~with~~wishes ~~the~~to ~~Public~~pledge ~~Company~~our ~~Accounting~~common ~~Oversight~~stock, ~~Board~~a ~~(United~~written ~~States)~~request ~~(PCAOB)~~for ~~and~~approval ~~are~~is required to be ~~independent~~submitted ~~with~~to ~~respect~~the Company’s compliance officer prior to the ~~Company~~proposed inexecution ~~accordance~~of ~~with~~documents evidencing the Uproposed pledge.S. ~~federal~~The ~~securities~~Company ~~laws~~encourages ~~and~~individuals ~~the~~who ~~applicable~~currently ~~rules~~have ~~and~~pledged ~~regulations~~shares ofto reduce the ~~Securities~~number ~~and~~of ~~Exchange~~pledged ~~Commission~~shares ~~and~~in ~~the~~due ~~PCAOB~~time.

WeCommunications ~~conducted our audits in accordance~~ with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.Directors

~~Our~~Interested ~~audits~~parties ~~included~~may ~~performing~~communicate ~~procedures~~with toour ~~assess~~Board ~~the~~of ~~risks~~Directors ofor ~~material~~specific ~~misstatement~~members of ~~the~~our ~~financial~~Board ~~statements~~of Directors, ~~whether~~including ~~due~~our toindependent ~~error~~directors ~~or fraud,~~ and ~~performing~~the ~~procedures~~members ~~that~~of ~~respond~~our tovarious ~~those~~board ~~risks. Such procedures included examining~~committees, onby submitting a ~~test~~letter ~~basis,~~addressed ~~evidence~~to ~~regarding~~ the ~~amounts~~Board ~~and~~of ~~disclosures~~Directors inof ~~the~~Kona ~~financial~~Grill, ~~statements~~Inc. ~~Our~~c/o ~~audits~~any ~~also~~specified ~~included~~individual ~~evaluating~~director ~~the~~or ~~accounting~~directors ~~principles~~to ~~used~~our ~~and~~corporate ~~significant~~office. ~~estimates~~Any ~~made~~such byletters ~~management,~~are assent ~~well~~to ~~as evaluating~~ the ~~overall~~indicated ~~presentation of the financial statements~~directors. ~~We believe that our audits provide a reasonable basis for our opinion.~~

~~/s/~~Audit ~~Ernst & Young LLP~~Committee

WeThe ~~have~~purpose ~~served~~of asthe Audit Committee is to oversee the ~~Company~~financial and reporting processes and the audits of the financial statements of our company and to provide assistance to our Board of Directors with respect to the oversight of the integrity of the financial statements, our company’s compliance with legal and regulatory matters, the independent auditor’s ~~since~~qualifications ~~2001~~and independence, and the performance of our company’s independent auditor. The primary responsibilities of the Audit Committee are set forth in its charter. The Audit Committee also selects the independent auditor to conduct the annual audit of the financial statements of our company; reviews the proposed scope of such audit; reviews accounting and financial controls of our company with the independent auditor and our financial accounting staff; and reviews and approves transactions between us and our directors, officers, and their affiliates.

~~Phoenix, Arizona~~42

~~March~~The 22Audit Committee currently consists of Messrs. Hauser, ~~2018~~Newman, and Winczewski, each of whom is an independent director of our company under the NASDAQ rules as well as under the SEC rules and NASDAQ listing standards relating to the independence of audit committees. The Board of Directors has determined that Mr. Newman (whose background is detailed above) qualifies as an “audit committee financial expert” in accordance with applicable rules and regulations of the SEC. Mr. Newman serves as the Chairman of the Audit Committee.

~~F-2~~Compensation Committee

~~KONA~~The ~~GRILL~~purpose of the Compensation Committee includes determining, ~~INC~~or recommending to our Board of Directors for determination, the compensation of the Chief Executive Officer and other executive officers of our company and discharging the responsibilities of our Board of Directors relating to compensation programs of our company. The Compensation Committee charter also grants the committee the authority to: review and approve the goals and objectives relevant to executive officer compensation, including annual performance objectives; review and make recommendations to the Board with respect to the establishment of any new incentive compensation and equity-based plans; review and recommend new executive compensation programs; review disclosures to be filed with the SEC and distributed to our stockholders regarding executive compensation and recommend to the Board the filing of such disclosures; assist the Board with its functions relating to our compensation and benefits programs generally; and other administrative matters with regard to our compensation programs and policies. The committee may delegate any of its responsibilities to a subcommittee, except where such delegation is not allowed by legal or regulatory requirements. The Compensation Committee currently consists of Messrs. Hauser, Newman and Winczewski, each of whom is an independent director of our company under the NASDAQ rules as well as under the SEC rules and NASDAQ listing standards relating to the independence of compensation committees. Mr. Hauser serves as Chairman of the Compensation Committee.

~~CONSOLIDATED~~Nominating ~~BALANCE SHEETS~~Committee

~~(In~~The ~~thousands~~Nominating Committee identifies and evaluates nominees for our Board of Directors, ~~except~~including ~~share~~nominees ~~data)~~recommended by stockholders, based on numerous factors it considers appropriate. The Nominating Committee is responsible for making recommendations to the Board of Directors of nominees to stand for election as directors at each election of directors, the oversight of the selection and composition of committees of the Board of Directors, the oversight of the evaluations of the Board of Directors and management, and the development and recommendation to the Board of Directors of a set of corporate governance principles applicable to our company. The Nominating Committee currently consists of Messrs. Hauser and Winczewski, with Mr. Winczewski serving as Chairman.

	December 31,
	2017			2016
ASSETS
Current assets:
Cash and cash equivalents	$	5,042		$	3,476
Investments		58			178
Receivables		1,371			1,850
Inventory		1,706			2,176
Prepaid expenses and other current assets		867			1,052
Total current assets		9,044			8,732
Other assets		1,116			1,383
Property and equipment, net		81,639			98,268
Total assets	$	91,799		$	108,383
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	2,890		$	4,115
Accrued expenses		12,934			14,450
Current portion of long-term debt		779			712
Total current liabilities		16,603			19,277
Long-term debt		36,921			25,921
Deferred rent and other long-term liabilities		32,612			31,610
Total liabilities		86,136			76,808
Commitments and contingencies (Note 9)
Stockholders’ equity:
Preferred stock, $0.01 par value, 2,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value, 30,000,000 shares authorized, 10,225,915 shares issued and 10,109,715 shares outstanding at December 31, 2017 and 10,568,230 shares issued and 10,452,030 shares outstanding at December 31, 2016		102			106
Additional paid-in capital		86,227			88,703
Accumulated deficit		(79,666	)		(56,234	)
Treasury stock, at cost, 116,200 shares at December 31, 2017 and 2016		(1,000	)		(1,000	)
Total stockholders’ equity		5,663			31,575
Total liabilities and stockholders’ equity	$	91,799		$	108,383

The Board of Directors periodically reviews the diversity of specific skills and characteristics necessary for the optimal functioning of the Board in its oversight of the company. The Nominating Committee has adopted a charter regarding the director selection process that requires the committee to assess the skill areas currently represented on the Board against the target skill areas, as well as recommendations of directors regarding skills that could improve the overall quality and ability of the Board to carry out its function. The Nominating Committee then establishes the specific target skill areas or experiences that are to be the focus of a director search, if necessary.

~~See~~The ~~accompanying~~Nominating ~~notes~~Committee will consider persons recommended by stockholders for inclusion as nominees for election to our Board of Directors if the ~~consolidated~~names, biographical data, and qualifications of such persons are submitted in writing in a timely manner, to the attention of our company’s secretary at the address of our corporate office listed herein. The Nominating Committee identifies and evaluates nominees for our Board of Directors, including nominees recommended by stockholders, based on numerous factors it considers appropriate. Specific qualities or experiences could include matters such as experience in the restaurant industry, financial ~~statements~~or technical expertise, strength of character, mature judgment, and the extent to which the nominee would fill a present need on our Board of Directors. As discussed above, the members of the Nominating Committee are independent, as that term is defined by NASDAQ.

~~F-3~~43

~~KONA~~Board ~~GRILL,~~and ~~INC.~~Committee Meetings

~~CONSOLIDATED~~Our ~~STATEMENTS~~Board OFof ~~COMPREHENSIVE~~Directors ~~LOSS~~held a total of nine meetings during 2018. During 2018, the Audit Committee held four meetings, the Compensation Committee held three meetings and the Nominating Committee held one meeting. Each director who served during for the entire year in 2018 attended at least 75% of the aggregate of (i) the total number of meetings of our Board of Directors, and (ii) the total number of meetings held by all committees of our Board of Directors on which he was a member. We encourage each of our directors to attend our annual meeting of stockholders. Accordingly, and to the extent reasonably practicable, we regularly schedule a meeting of the Board of Directors on the same day as the annual meeting of stockholders.

~~(In~~Item ~~thousands,~~11. ~~except~~Executive ~~per share data)~~Compensation

	Year Ended December 31,
	2017			2016			2015
Revenue	$	179,081		$	169,523		$	143,023
Costs and expenses:
Cost of sales		48,673			45,314			38,803
Labor		65,778			62,027			50,187
Occupancy		16,602			13,754			10,528
Restaurant operating expenses		28,929			24,740			20,293
General and administrative		13,453			13,272			12,612
Preopening expense		816			4,533			4,746
Depreciation and amortization		15,183			14,421			9,966
Asset impairment charge		9,341			12,454			—
Lease termination and exit costs		1,392			—			—
Other		—			—			161
Total costs and expenses		200,167			190,515			147,296
Loss from operations		(21,086	)		(20,992	)		(4,273	)
Write off of deferred financing costs		472			—			—
Interest expense, net		1,784			571			180
Loss before income taxes		(23,342	)		(21,563	)		(4,453	)
Income tax expense		90			66			43
Net Loss	$	(23,432	)	$	(21,629	)	$	(4,496	)
Net loss per share (Note 1):
Basic and diluted	$	(2.32	)	$	(2.00	)	$	(0.40	)
Weighted average shares outstanding (Note 1):
Basic and diluted		10,121			10,791			11,264
Comprehensive loss	$	(23,432	)	$	(21,629	)	$	(4,496	)

Overview of Compensation Philosophy and Objectives

~~See~~The ~~accompanying~~objective ~~notes~~of our executive compensation program is to attract, retain and reward executive officers who are critical to our long-term success. Our executive compensation program seeks to provide a level of compensation that is competitive with companies of similar size in the ~~consolidated~~restaurant industry. We align executive officer compensation with both company performance and individual performance and provide incentives to motivate executive officers to achieve our financial, ~~statements~~operating, and strategic objectives and reward them for achieving these objectives. We compensate our executive officers through a mix of compensation designed to be competitive within our industry and to align management’s incentives with the long-term interests of our stockholders.

FThe Compensation Committee believes that executive compensation should be closely aligned with the performance of our company on both a short-4term and a long-term basis. Our executive compensation is comprised of three principal elements:

~~KONA~~● ~~GRILL,~~Annual ~~INC.~~base salary;

~~CONSOLIDATED~~● ~~STATEMENTS~~Performance-based OFannual ~~STOCKHOLDERS’~~cash ~~EQUITY~~incentive bonuses, which are dependent upon our annual financial performance and specific individual performance goals; and

~~(In~~● ~~thousands)~~Long-term incentive compensation in the form of stock options or other equity-based awards which are designed to align executive officers’ interests with the long-term interests of our stockholders.

	Common Stock						Additional Paid-in			Accumulated			Treasury			Stockholders’
	Shares			Amount			Capital			Deficit			Stock			Equity
Balances at December 31, 2014		11,209			113			96,422			(30,109	)		(1,000	)		65,426
Stock-based compensation		—			—			1,363			—			—			1,363
Issuance of common stock under the Employee Stock Purchase Plan and exercise of stock options		81			1			624			—			—			625
Purchase and retirement of common stock		(18	)		—			(227	)		—			—			(227	)
Net loss and comprehensive loss		—			—			—			(4,496	)		—			(4,496	)
Balances at December 31, 2015		11,272			114			98,182			(34,605	)		(1,000	)		62,691
Stock-based compensation		—			—			1,262			—			—			1,262
Issuance of common stock under the Employee Stock Purchase Plan and exercise of stock options net of share repurchase for minimum tax withholdings		132			1			450			—			—			451
Purchase and retirement of common stock		(952	)		(9	)		(11,191	)		—			—			(11,200	)
Net loss and comprehensive loss		—			—			—			(21,629	)		—			(21,629	)
Balances at December 31, 2016		10,452			106			88,703			(56,234	)		(1,000	)		31,575
Stock-based compensation		—			—			831			—			—			831
Issuance of common stock under the Employee Stock Purchase Plan and exercise of stock options		53			—			261			—			—			261
Purchase and retirement of common stock		(395	)		(4	)		(3,568	)		—			—			(3,572	)
Net loss and comprehensive loss		—			—			—			(23,432	)		—			(23,432	)
Balances at December 31, 2017		10,110		$	102		$	86,227		$	(79,666	)	$	(1,000	)	$	5,663

Determining Executive Compensation

~~See~~Our ~~accompanying~~compensation ~~notes~~setting process consists of establishing targeted overall compensation for each executive officer and then allocating that compensation among base salary and annual and long-term incentive compensation. We design annual cash incentive compensation to ~~the~~reward ~~consolidated~~company-wide performance through tying awards primarily to specific operational metrics and financial ~~statements~~performance. The Compensation Committee evaluates both performance and compensation to ensure that we maintain the ability to attract and retain employees in key positions and that compensation provided to key employees remains competitive relative to the compensation paid to similarly situated executives of our peer group.

~~F-5~~The responsibilities of the Compensation Committee include determining, or recommending to our Board of Directors for determination, the compensation of our executive officers and discharging the responsibilities of our Board of Directors relating to compensation programs of our company. The chief executive officer provides recommendations on compensation to the committee based on each executive officer’s annual review. The committee reviews base salary levels for executive officers at the beginning of each year and recommends actual bonuses at the end of each year based upon company performance.

~~KONA GRILL, INC.~~44

~~CONSOLIDATED~~In ~~STATEMENTS~~connection OFwith ~~CASH~~its ~~FLOWS~~decisions about executive compensation, the Compensation Committee considers the results of the most recent stockholder advisory vote on executive compensation (“Say-on-Pay” vote). The Board of Directors has determined, based on the results of an advisory vote held in 2013, to hold a Say-on-Pay vote every three years; therefore, the last Say-on-Pay vote was held in 2016. At the 2016 Annual Meeting, more than 93% of the votes cast in our Say-on-Pay vote were cast in favor of approving the compensation for our named executive officers. The Compensation Committee believes that this Say-on-Pay vote result demonstrates stockholder support for our current executive compensation programs and practices, which has not changed fundamentally over the past six years. Therefore, the Compensation Committee has not made any specific changes in our executive compensation program in response to the Say-on-Pay vote. The frequency of Say-on-Pay as well as an advisory vote on executive compensation will be voted on at the 2019 Annual Meeting of Stockholders.

~~(In~~Recent ~~thousands)~~Changes in Executive Leadership

	Year Ended December 31,
	2017			2016			2015
Operating activities
Net loss	$	(23,432	)	$	(21,629	)	$	(4,496	)
Adjustments to reconcile net loss to net cash provided by operating activities:
Depreciation and amortization		15,155			14,421			9,781
Stock-based compensation		831			1,262			1,363
Loss on disposal of assets		28			—			185
Amortization of deferred financing costs		185			99			81
Write off of deferred financing costs		472			—			—
Asset impairment charge		9,341			12,454			—
Lease termination and exit costs		1,392			—			—
Change in operating assets and liabilities:
Receivables		478			(275	)		(1,187	)
Inventory		470			(311	)		(366	)
Prepaid expenses and other current assets		164			(164	)		(69	)
Accounts payable		4			564			86
Accrued expenses		(701	)		4,044			1,290
Deferred rent and other long term liabilities		1,513			10,422			3,626
Net cash provided by operating activities		5,900			20,887			10,294
Investing activities
Purchase of property and equipment		(11,840	)		(41,900	)		(38,077	)
Change in other assets		125			(133	)		(138	)
Net cash used in investing activities		(11,715	)		(42,033	)		(38,215	)
Financing activities
Borrowings from revolving credit facility		13,500			14,500			—
Repayments on revolving credit facility		(1,750	)		(2,500	)		—
Borrowings from term loan		—			15,000			—
Repayments on term loan		(750	)		(188	)		—
Fees paid for credit facility		(308	)		(496	)		—
Proceeds from issuance of common stock under the Employee Stock Purchase Plan and exercise of stock options		261			674			625
Payment for withholding tax from net settled stock option exercise		—			(223	)		—
Purchase and retirement of common stock		(3,572	)		(11,200	)		(227	)
Net cash provided by financing activities		7,381			15,567			398
Net increase (decrease) in cash and cash equivalents		1,566			(5,579	)		(27,523	)
Cash and cash equivalents at the beginning of the year		3,476			9,055			36,578
Cash and cash equivalents at the end of the year	$	5,042		$	3,476		$	9,055
Supplemental disclosures of cash flow information
Cash paid for interest (net of capitalized interest)	$	1,571		$	323		$	99
Cash paid for income taxes, net of refunds	$	58		$	2		$	12
Noncash investing activities
Accounts payable and accrued expenses related to property and equipment purchases	$	233		$	3,258		$	7,266

On August 7, 2018, Berke Bakay was appointed as Executive Chairman of the Board of Directors and transitioned from his previous role as President and Chief Executive Officer of the Company, a position that he held since January 2012. James Kuhn was promoted from his role as the Company’s Chief Operating Officer to Chief Executive Officer. On November 6, 2018, Marcus Jundt and Steven Schussler, both Board members, were appointed as Co-Chief Executive Officers and James Kuhn’s employment with the Company was terminated. On January 8, 2019, Steven Schussler resigned as Co-Chief Executive Officer and as a director of the Company and Marcus Jundt assumed the role of Chief Executive Officer. On March 27, 2019 Berke Bakay and Alex Zheng resigned from the Board of Directors. Marcus Jundt resigned as Chief Executive Officer of the Company and as a director of the Company effective March 31, 2019.

~~See~~Elements ~~accompanying~~of ~~notes~~Executive ~~to the consolidated financial statements.~~Compensation

~~F-6~~Base Salary

~~KONA~~Base ~~GRILL~~salaries for executive officers are generally reviewed on an annual basis and at the time of promotion or other change in responsibilities. We provide executive officers with a level of base salary that recognizes appropriately each individual officer’s scope of responsibility, ~~INC~~role in the organization, experience, and contributions to the success of our company. The Board of Directors reviews and approves salaries recommended by the Compensation Committee. In formulating these recommendations, the committee considers the overall performance of our company, industry compensation data, and conducts an evaluation of individual officer performance. The committee recommends that the Board of Directors make final determinations on any adjustments to the base salary for executive officers.

~~NOTES~~Performance-Based ~~TO THE CONSOLIDATED FINANCIAL STATEMENTS~~ Bonus

1Prior to 2019, in line with our strategy of rewarding performance, our executive compensation program includes performance-based bonuses. The ~~Company~~Board of Directors believes that annual revenue, same-store sales growth, cash flow, and ~~Summary~~earnings growth are key drivers of ~~Significant~~stockholder ~~Accounting~~return ~~Policies~~over the long term. Therefore, the Compensation Committee provides an annual incentive to motivate and reward executives based upon the goal of increasing earnings before interest, taxes, depreciation, amortization, and unusual charges, if applicable (“Adjusted EBITDA”). The target level of performance-based bonus for our chief executive officer and chief financial officer has been set at 60% and 50%, of each individual’s respective base salary to be competitive with similar size companies. The annual bonus calculation provides for a sliding scale based upon actual results compared to target for Adjusted EBITDA. A minimum performance threshold is necessary to achieve some portion of the annual incentive opportunity. The payout for exceeding the maximum target of each metric is 150% of each executive’s target bonus.

~~Description~~No payout is made if our company’s minimum performance targets are not achieved. For 2018, the executive officers did not receive a bonus. For 2019, the Board of ~~Business~~Directors elected not to have a performance-based bonus and elected to have any bonus be at the discretion of the Board and not determined by set performance goals.

Kona Grill, Inc., including its wholly-owned subsidiaries, (referred to herein as the “Company” or “we,” “us,” and “our”) owns and operates upscale casual dining restaurants under the name “Kona Grill.” Our restaurants feature a diverse selection of contemporary American favorites and award-winning sushi items that are prepared fresh daily at each restaurant location. As of December 31, 2017, we owned and operated 46 restaurants in 23 states throughout the United States and Puerto Rico. Our three international franchise partners opened Kona Grill locations in Monterrey, Mexico; Dubai, United Arab Emirates; and Vaughan (Toronto), Canada in 2017. Our chief operating decision maker function is comprised of our Chief Executive Officer, Chief Operating Officer, and Chief Financial Officer who manage our restaurant operation base that aggregates into one reportable segment. Accordingly, we have a single operating segment and reporting unit structure. 45

~~Basis~~Long-Term ofEquity ~~Presentation~~Compensation

~~The~~Long-term ~~consolidated~~performance-based ~~financial~~compensation ~~statements~~of ~~include~~executive officers has traditionally taken the ~~accounts~~form of stock option awards. We believe that equity ownership for executive officers is important for retention and ~~operations~~provides additional incentive to maximize long-term total return to stockholders. Under our 2012 Stock Award Plan, the Board of Directors or a committee appointed by the ~~Company~~Board is specified to act as the plan administrator. The Board has authorized the Compensation Committee to make recommendations to the Board regarding grants of options to executive officers and ~~its~~these ~~wholly~~recommendations ~~owned~~are ~~subsidiaries~~subject to ratification by the Board of Directors. ~~All~~In ~~significant~~general, ~~intercompany~~stock ~~balances~~options are granted to our executive officers at the onset of employment and ~~transactions~~annually in conjunction with the review of executive officer performance. We do not have ~~been~~any ~~eliminated~~program or plan to time option grants to our executives in ~~consolidation~~coordination with the release of material non-public information.

~~Ability~~Stock options are granted at the closing market price of our common stock on the date of grant. Accordingly, a stock option becomes valuable only if the market price of our common stock increases above the option exercise price and the holder remains employed during the period of time that the option vests. On January 31, 2019, the Board of Directors granted 75,000 stock options to ~~Continue~~the aschief executive officer and 50,000 stock options to the chief financial officer. These grants vest 25% each quarter over a ~~Going~~one-year ~~Concern~~period and expire five years from the date of grant.

~~The~~We ~~accompanying~~believe ~~consolidated~~that ~~financial~~our ~~statements~~executives ~~have~~should ~~been~~be ~~prepared~~required ~~assuming~~to ~~the~~acquire ~~Company~~and ~~will~~maintain ~~continue as a going concern. The Company has incurred losses resulting in~~ an ~~accumulated~~appropriate ~~deficit~~level of ~~$79.7~~equity ~~million,~~interest ~~has~~in aorder ~~net~~to ~~working~~align ~~capital~~their ~~deficit~~interests ofwith ~~$7.6~~those ~~million and outstanding debt~~ of ~~$37.8~~our ~~million as of December 31, 2017~~stockholders. These conditions together with recent debt covenant violations and subsequent debt covenant waivers and debt amendments, raise substantial doubt about the Company’s ability to continue as a going concern. The ~~ability~~Board to continue as a going concern is dependent upon the Company generating profitable operations, improving liquidity and reducing costs to meet its obligations and repay its liabilities arising from normal business operations when they become due. The Company has ~~evaluated~~adopted ~~its~~stock ~~plans~~ownership toguidelines ~~alleviate~~whereby ~~this~~executive ~~doubt,~~officers ~~which~~are ~~will~~required include slowing new restaurant development, implementing cost-savings initiatives and evaluating potential closure of underperforming restaurants. While the Company believes that its existing cash and cash equivalents as of December 31, 2017, coupled with its anticipated cash flow generated from operations, will be sufficient to ~~meet~~maintain ~~its anticipated cash requirements, there can be no assurance that~~ the ~~Company~~following ~~will~~levels be successful in its plans to increase profitability or to obtain alternative financing on acceptable terms, when required or if at all. These consolidated financial statements do not include any adjustments to the recoverability and classification of ~~recorded~~stock ~~asset~~ownership ~~amounts and classification~~ of ~~liabilities~~our ~~that~~common ~~might be necessary should the Company be unable to continue as a going concern.~~stock:

Use of Estimates

Officer

Amount of Stock

Ownership Required

Chief Executive Officer

2 times base salary

Chief Financial Officer

1 times base salary

~~The~~Our ~~preparation~~chief of financial ~~statements~~officer inhad ~~conformity~~previously complied with ~~U.S. generally~~the ~~accepted~~stock ~~accounting~~ownership ~~principles~~guidelines; ~~requires~~however, ~~management~~with tothe ~~make~~decline ~~estimates~~in ~~and~~the ~~assumptions~~Company’s ~~that~~stock ~~affect~~price, ~~the~~she ~~amounts~~no ~~reported~~longer inmeets the ~~consolidated~~ownership ~~financial~~guidelines ~~statements~~ and ~~accompanying~~will ~~notes.~~be ~~Actual~~subject ~~results~~to ~~could~~comply ~~differ~~with ~~from~~the ~~those~~guidelines ~~estimates~~in the future.

~~Cash and Cash Equivalents~~Benefits

WeExecutive ~~consider~~officers ~~all~~are ~~highly~~eligible ~~liquid~~to ~~investments~~participate in various employee benefit programs that are ~~readily~~generally ~~convertible~~available ~~into~~to ~~cash~~all full-time salaried employees of the company. These benefit programs include medical, dental, vision, life, and ~~have~~disability aninsurance ~~original~~benefits. ~~maturity~~We ofalso ~~three~~sponsor ~~months~~a ortax-qualified ~~less~~401(k) atretirement savings plan pursuant to which eligible employees are able to contribute the ~~time~~lesser of ~~purchase~~up to be50% ~~cash~~of ~~equivalents.~~their ~~Amounts~~annual ~~receivable~~salary ~~from~~or ~~credit~~the ~~card~~limit ~~processors~~prescribed ~~are~~by ~~also~~the ~~considered~~Internal ~~cash~~Revenue ~~equivalents~~Service. ~~because~~We ~~they~~match ~~are~~100% ~~both~~of ~~short-term~~the first 3% of salary contributed and 50% of the next 2% of salary contributed, subject to Internal Revenue Code guidelines on highly ~~liquid~~compensated inemployees. ~~nature~~All ~~and~~contributions to the 401(k) plan as well as any matching contributions are ~~typically~~fully ~~converted~~vested upon contribution. In addition, we sponsor an employee stock purchase plan pursuant to ~~cash~~which ~~within~~eligible ~~three~~employees ~~business~~may ~~days~~purchase common stock at a 15% discount of the ~~sales~~fair ~~transaction~~market value of common stock on the last day of the applicable offering period. Eligible employees may purchase up to 15% of eligible earnings during each of the offering periods, subject to a maximum of $25,000 annually.

~~Investments~~Compliance with Internal Revenue Code Section 162(m)

~~Investments~~Section ~~consist~~162(m) ~~primarily~~of the Internal Revenue Code generally disallows a tax deduction to public companies for compensation in excess of ~~certificates~~$1 million paid to each of ~~deposit~~any ~~that~~publicly ~~are~~held ~~generally~~corporation’s chief executive officer, chief financial officer and three other most highly ~~liquid~~compensated inexecutive ~~nature~~officers. WeThe ~~classify~~Compensation ~~our~~Committee ~~investments~~considers ~~based~~the ondeductibility ~~the~~of ~~intended~~compensation ~~holding~~arrangements ~~period~~as one factor in executive compensation decisions for the named executives. However, deductibility is not the sole factor used to determine appropriate levels or types of compensation, and we may make awards that are not deductible.

~~F-7~~46

~~KONA~~Summary ~~GRILL,~~of ~~INC.~~Cash and Other Compensation

~~NOTES~~The TOtable ~~THE~~below ~~CONSOLIDATED~~summarizes ~~FINANCIAL~~the ~~STATEMENTS~~total compensation paid to each of our executive officers for the two years ended December 31, 2018 and 2017, respectively.

~~Inventory~~SUMMARY COMPENSATION TABLE

Inventory consists of food and beverage products that are valued at the lower of cost or market using the first-in, first-out method.

Name and Principal Position	Year	Salary ($)		Option Awards ($) (1)		All Other Compensation ($) (2)		Total ($)
Berke Bakay (3)	2018		427,000		43,935		17,000		487,935
Former Executive Chairman of the Board	2017		475,000		177,755		16,800		669,555

Christi Hing	2018		250,000		16,959		15,616		282,575
Chief Financial Officer and Secretary	2017		245,288		68,616		15,693		329,598

Marcus Jundt (4)	2018		—		—		—		—
Former Co-Chief Executive Officer	2017		—		—		—		—

James Kuhn (5)	2018		262,000		—		6,000		268,000
Former Chief Executive Officer and Chief Operating Officer	2017		16,154		78,123		—		94,277

Steven Schussler (6)	2018		—		—		—		—
Former Co-Chief Executive Officer	2017		—		—		—		—

~~Concentration~~(1) The amounts reflect the grant date fair value of ~~Credit~~awards ~~Risk~~issued for the respective year pursuant to the 2012 Stock Award Plan computed in accordance with Financial Accounting Standards Board Accounting Standards Codification Topic 718 (See Note 7 of Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K filed with the SEC). Details regarding 2017-2018 stock option awards that are still outstanding can be found in the table “Outstanding Equity Awards at December 31, 2018.”

~~Financial~~(2) ~~instruments~~Executive ~~that~~officers ~~potentially~~also ~~subject~~receive usemployee tobenefits athat ~~concentration~~are ofprovided ~~credit~~to ~~risk~~all ~~principally~~salaried ~~consist~~employees of ~~cash~~our ~~and~~company ~~cash equivalents, investments~~ and ~~accounts~~primarily ~~receivable.~~consisted Weof ~~maintain our day-to-day operating cash balances in non-interest-bearing transaction accounts, which are insured by the Federal Deposit Insurance Corporation~~ 401(~~“FDIC”~~k) upmatching tocontributions ~~$250,000. Although we maintain balances that exceed the federally insured limit, we have not experienced any losses related to our accounts,~~ and wehealth ~~believe~~insurance ~~credit risk to be minimal~~premiums.

~~Property~~(3) Mr. Bakay was appointed Executive Chairman of the Board of Directors on August 7, 2018. In connection with his appointment as the Executive Chairman of the Board of Directors from his previous role as President and ~~Equipment~~Chief Executive Officer, his salary was reduced from $475,000 to $350,000 per year. On January 1, 2019, Mr. Bakay’s salary was reduced to $1.00 per year. Mr. Bakay resigned as Executive Chairman of the Board of Directors effective March 27, 2019.

~~Property~~(4) ~~and equipment are recorded at cost~~Mr. WeJundt ~~capitalize~~was ~~all~~appointed ~~direct~~Co-Chief ~~costs~~Executive Officer on ~~the~~November ~~construction~~6, of2018. ~~leasehold~~Mr. ~~improvements~~Jundt ~~and~~received ~~interest~~no ~~incurred~~compensation during the ~~construction~~year ~~and~~ended ~~development~~December ~~period.~~31, ~~Leasehold~~2018 ~~improvements~~as ~~are~~Co-Chief ~~amortized~~Executive ~~over~~Officer. ~~the~~On ~~shorter~~January of31, 2019, the ~~useful~~Board ~~life~~compensated ofMr. ~~the~~Jundt ~~asset~~$30,000 orper ~~the~~month ~~related~~in ~~lease~~cash, ~~term~~effective ~~that~~January ~~includes~~1, ~~reasonably~~2019 ~~assured~~for ~~lease~~his ~~renewals~~services as ~~determined~~Chief onExecutive ~~the~~Officer. ~~date of acquisition of the leasehold improvement~~Mr. ~~Improvements~~Jundt ~~that~~resigned ~~materially~~as ~~extend~~Chief ~~the~~Executive ~~life~~Officer as of anMarch ~~asset~~31, ~~are capitalized while repair and maintenance costs are expensed as incurred~~2019.

~~Depreciation~~(5) Mr. Kuhn was appointed Chief Operating Officer on December 4, 2017 and ~~amortization~~subsequently ~~are~~was ~~recorded~~appointed Chief Executive Officer on aAugust ~~straight-line~~7, ~~basis~~2018. ~~over~~Mr. Kuhn’s employment with the ~~following~~Company ~~estimated~~was ~~useful~~terminated ~~lives:~~effective November 6, 2018.

Furniture and fixtures (years)	5	-	7
Equipment (years)	2	-	7
Computer software and electronic equipment (years)			3
Leasehold improvements	Shorter of the useful life or the lease term

(6)	Mr. Schussler was appointed Co-Chief Executive Officer on November 6, 2018 and subsequently resigned on January 8, 2019. Mr. Schussler received no compensation during this time as Co-Chief Executive Officer.

~~Impairment of Long-Lived Assets~~47

WeOUTSTANDING ~~evaluate~~EQUITY ~~long-lived~~AWARDS ~~assets,~~AT ~~such~~DECEMBER ~~as property and equipment~~31, for impairment whenever events or changes in restaurant operating results indicate that the carrying value of those assets may not be recoverable. Factors considered include, but are not limited to, significant underperformance relative to expected historical or projected future operating results; significant negative industry or economic trends; and significant changes in legal factors or in the business climate. The assessment of impairment is performed on a restaurant-by-restaurant basis. Recoverability is assessed by comparing the carrying value of the asset to the undiscounted cash flows expected to be generated by the asset. This assessment process requires the use of estimates and assumptions regarding future cash flows and estimated useful lives, which are subject to a significant degree of judgment. If indicators of impairment are present and if we determine that the carrying value of the asset exceeds the fair value of the restaurant assets, an impairment charge is recorded to reduce the carrying value of the asset to its fair value. 2018

AsThe afollowing ~~result~~table ofincludes ~~the~~certain ~~process~~information ~~described~~with ~~above,~~respect weto ~~recorded~~all ~~long-lived~~options ~~asset~~previously ~~impairment~~awarded ~~charges~~to ofthe ~~$9.3~~executive ~~million~~officers ~~and~~named ~~$12.5~~above ~~million,~~that ~~for~~were ~~2017~~outstanding ~~and~~as ~~2016, respectively. Such amounts are included in "Asset impairment charge" in the consolidated statements~~ of ~~comprehensive~~December ~~loss~~31, ~~(Note 2)~~2018.

F-8

	Option Awards
	Number of Securities Underlying Unexercised Options (#) (1)					Option Exercise		Option
Name	Exercisable		Unexercisable			Price ($)		Expiration Date
Berke Bakay (1)		30,000		—			16.12	02/05/2019
		42,054		14,017	(a)		23.49	02/04/2020
		35,855		35,856	(b)		14.26	02/24/2021
		14,018		42,053	(c)		8.15	02/22/2022
		—		56,071	(d)		1.60	02/08/2023

Christi Hing (2)		25,000		—			16.12	02/05/2019
		16,233		5,411	(a)		23.49	02/04/2020
		14,416		14,416	(b)		14.26	02/24/2021
		5,411		16,233	(c)		8.15	02/22/2022
		—		21,644	(d)		1.60	02/08/2023

Marcus Jundt (3)		2,750		—			16.12	02/05/2019
		12,000		—			23.49	02/04/2020
		12,000		—			14.26	02/24/2021
		12,000		—			8.15	02/22/2022
		9,000		3,000	(a)		1.60	02/08/2023

James Kuhn (4)		—		—			—		—

Steven Schussler (5)		2,750		—			16.12	02/05/2019
		12,000		—			23.49	02/04/2020
		12,000		—			14.26	02/24/2021
		12,000		—			8.15	02/22/2022
		9,000		3,000	(a)		1.60	02/08/2023

~~KONA~~(1) ~~GRILL~~Mr. Bakay’s unexercisable options as of December 31, ~~INC~~2018 include (a) 14,017 options that vested on February 5, 2019, (b) 17,942 options that vested on February 24, 2019 and 17,943 options that will vest on February 24, 2020, (c) 14,018 options that vested on February 24, 2019 and two installments of 14,018 options each that will vest on February 24, 2020 and 2021, respectively, and (d) 14,018 options that vested on February 8, 2019 and three installments of 14,018 options each that would vest on February 8, 2020, 2021, and 2022, respectively. Mr. Bakay resigned as an executive officer effective March 27, 2019.

~~NOTES~~(2) TOMs. ~~THE~~Hing’s ~~CONSOLIDATED~~unexercisable ~~FINANCIAL~~options ~~STATEMENTS~~as of December 31, 2018 include (a) 5,411 options that vested on February 5, 2019; (b) 7,208 options that vested on February 5, 2019 and 7,208 options that will vest on February 5, 2020, and (c) 5,411 options that vested on February 24, 2019 and two installments of 5,411 options each that will vest on February 24, 2020, and 2021, respectively, and (d) 5,411 options that vested on February 8, 2019 and three installments of 5,411 options each that will vest on February 8, 2020, 2021, and 2022, respectively.

~~Fair~~(3) ~~Value~~Mr. ~~Measurements~~Jundt’s unexercisable options as of December 31, 2018 include (a) 3,000 options that vested on February 5, 2019.

~~Fair~~(4) ~~value~~In isconnection ~~defined~~with asMr. ~~the~~Kuhn’s ~~price~~termination ~~that~~effective ~~would~~November be6, ~~received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such~~2018, ~~fair~~there ~~value~~are isno aoptions ~~market-based~~outstanding ~~measurement that is determined based on assumptions that market participants would use in pricing an asset~~ or aexercisable ~~liability.~~as Asof aDecember ~~basis for considering such assumptions~~31, ~~a three-tier value hierarchy was established, which prioritizes the inputs used in the valuation methodologies in measuring fair value~~2018.

~~Level~~(5) 1:Mr. ~~Fair~~Schussler’s ~~values~~unexercisable ~~determined~~options byas ~~quoted~~of ~~prices~~December in31, ~~active~~2018 ~~markets~~include ~~for~~3,000 ~~identical~~options ~~assets or liabilities~~ that ~~the~~were ~~reporting~~forfeited ~~entity~~upon ~~has~~his ~~the~~resignation ~~ability~~on toJanuary ~~access~~8, 2019.

Level 2: Fair values utilize inputs other than quoted prices that are observable for the asset or liability, and may include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability.48

~~Level~~Employment 3: Fair values determined by unobservable inputs that are not corroborated by market data and may reflect the reporting entity’s own assumptions market participants would use in pricing the asset or liability.Agreements

~~The~~We ~~carrying~~have ~~value~~historically ~~for~~entered into employment agreements with certain executives. The Board believes that terms of our ~~financial~~executive ~~instruments,~~employment ~~including~~agreements ~~cash~~are ~~and~~in ~~cash~~line ~~equivalents,~~with ~~accounts~~market ~~receivable~~standards, and ~~accounts~~the ~~payable~~agreement ~~approximates~~can ~~fair~~be ~~value~~an ~~because~~important ofmeans ~~their~~to ~~short-term~~allow ~~nature.~~management ~~Our~~to ~~investments~~continue ~~represent~~to ~~certificates~~focus ofon ~~deposit~~running ~~and~~the ~~are~~business ~~considered~~of ~~available-for-sale~~the ~~securities~~company ~~that~~in ~~are~~the ~~valued~~event ~~using~~of ~~market~~a ~~observable~~pending ~~inputs~~or ~~(Level~~actual ~~2).~~change ~~Our~~of ~~long-term~~control ~~debt~~event isor ~~valued~~otherwise. ~~using~~More ~~primarily~~detailed ~~Level~~information 2concerning ~~inputs~~severance ~~including~~payments ~~current~~appears ~~applicable~~herein ~~rates~~under ~~for~~the ~~similar~~caption ~~instruments~~“Potential ~~and~~Payments ~~approximates~~Upon ~~the~~Termination ~~carrying~~or ~~value~~Change ofin ~~such obligations~~Control.”

InOn ~~addition~~September to4, ~~our assets and liabilities that are measured at fair value on a recurring basis~~2018, we ~~are~~entered ~~required~~into byemployment ~~GAAP~~agreements towith ~~measure~~each ~~certain~~of ~~assets~~the ~~and~~following ~~liabilities~~executives: atBerke ~~fair~~Bakay, ~~value~~Executive onChairman aof ~~nonrecurring~~the ~~basis~~Board ~~after~~of ~~initial~~Directors; ~~recognition.~~James ~~Generally~~Kuhn, ~~assets,~~Chief ~~liabilities~~Executive ~~and~~Officer, ~~reporting~~Chief ~~units~~Operating ~~are~~Officer ~~measured~~and atPresident; ~~fair~~and ~~value~~Christi onHing, aChief ~~nonrecurring~~Financial ~~basis~~Officer as(collectively, athe ~~result~~“Employment ofAgreements”). ~~impairment reviews and any resulting impairment charge~~Mr. InBakay’s ~~connection~~employment ~~with~~agreement ~~our~~was ~~impairment~~subsequently ~~review~~amended ofeffective ~~long-lived~~January ~~assets~~1, ~~described in Note 2~~2019, weto ~~measured~~among ~~the~~other ~~fair~~things, ~~value~~reduce ofhis ~~our~~annualized ~~asset~~base ~~groups~~salary ~~that~~from ~~were not deemed recoverable~~$350,000 ~~based~~to on$1. ~~Level~~Mr. 2Bakay ~~and~~resigned ~~Level~~as 3a ~~inputs~~director ~~consisting of the fair market value or discounted future cash flows associated with the use~~ and ~~eventual~~officer ~~disposition~~ of the ~~asset~~Company ~~group. The discounted cash flow method is based~~ on ~~Level~~March 327, ~~inputs~~2019 ~~consisting~~without ~~primarily~~“Good ofReason” ~~our restaurant forecasts and utilizes forward-looking assumptions and projections,~~ as ~~well~~such asterm ~~factors~~is ~~impacting~~defined ~~long-range~~in ~~plans~~Mr. ~~such~~Bakay’s asemployment ~~pricing,~~agreement ~~discount~~with ~~rates~~the ~~and commodity prices~~Company.

~~Leases~~Mr. Kuhn’s employment with the Company was terminated on November 6, 2018. There is currently a dispute between the Company and Mr. Kuhn regarding his termination. that the Company’s position is that Mr. Kuhn is not entitled to any post-employment payments under the September 4, 2018 employment agreement.

WeUnless ~~lease~~otherwise ~~our~~stated restaurant locations under operating lease agreements with initial terms ranging from 10 to 20 years. Most of these agreements require minimum annual rent payments plus contingent rent payments based on a percentage of revenue which exceed the minimum base sales threshold. Contingent rent paymentsbelow, to the ~~extent~~terms ~~they exceed minimum payments, are accrued over the periods in which the liability is incurred. Rent expense associated with these contingent payments is recorded prior to the achievement~~ of ~~specified~~each sales levels if exceeding such amount is considered probable and is estimable. The lease agreements typically also require scheduled increases to minimum annual rent payments. For leases that contain rent escalations, we record the total rent payable over the initial lease term, starting on the date we gain possession of the ~~property~~Employment ~~(including~~Agreements the construction period), on a straight-line basis. Any difference between minimum rent and straight-line rent is recorded as deferred rent. Deferred rent also includes tenant improvement allowances which are ~~amortized~~ as a reduction of rent expense on a straight-line basis over the term of the lease. As part of the initial lease terms, we negotiate with our landlords to secure these tenant improvement allowances and record such allowances as lease incentive receivables when determined to be collectible. These amounts are included in receivables on the consolidated balance sheets. follows:

~~F-9~~Term: Unless earlier terminated as provided therein, the term of the Employment Agreement is two years.

~~KONA~~Annualized ~~GRILL~~Base Salary: The annualized base salary is $250,000 ~~INC~~for Ms. Hing which may be increased annually by the Board in its sole discretion.

~~NOTES~~Bonus TOIncentives: ~~THE~~Each ~~CONSOLIDATED~~Executive ~~FINANCIAL~~will ~~STATEMENTS~~also be eligible to receive an annual incentive bonus for each calendar year at the end of which they remain employed by the Company and any additional bonuses as determined by the Board in its sole discretion.

~~Revenue~~Long-Term ~~Recognition~~Incentive Grants of Stock Options: Pursuant to a plan determined annually by the Board and issued pursuant to a stock option agreement, each Executive will also be eligible to be granted long-term incentive grants of stock options.

~~Revenues~~Any ~~from~~stock ~~food,~~option ~~beverage,~~agreement ~~and~~related ~~alcohol~~to ~~sales~~such ~~are~~a ~~recognized~~grant ~~when~~would ~~payment~~provide isfor ~~tendered~~a at“cashless ~~the~~exercise” ~~point of sale~~provision. ~~Revenue~~Vested ~~are~~stock ~~recorded~~options ~~net~~may ofbe ~~promotions~~exercised ~~and~~by ~~discounts.~~each ~~Revenues~~such ~~from~~Executive ~~gift~~during ~~card sales are recognized upon redemption. Prior to redemption,~~ the ~~outstanding~~term ~~balances~~ of ~~all~~their ~~gift~~Employment ~~cards~~Agreement ~~are~~and ~~included~~for inthree ~~accrued~~months ~~expenses~~thereafter inexcept ~~the~~as ~~accompanying~~provided ~~consolidated~~therein ~~balance~~for ~~sheets.~~situations We

Filing Compare · KONA GRILL INC