Kona Grill filed for federal bankruptcy protection late Tuesday as the cash-strapped company closes unprofitable locations and tries to find a buyer.
The company has closed an additional 15 locations, according to bankruptcy filings, and is now down to 27 restaurants—it operated 46 at the end of 2017.
Kona Grill, which had its stock listing suspended last week, has $33.2 million in debt but had just $1.2 million in cash on hand as of the date of the bankruptcy filing, according to court documents.
The company, in filings, blamed a steep sales decline that followed a rapid increase in store growth, which put the chain’s finances deep into the red.
Kona doubled its footprint between 2013 and 2017, growing from 23 restaurants to 46. The rapid investment required a lot of capital, according to a declaration by Christopher Wells, who was appointed chief restructuring officer last month. Each restaurant cost $4 million to open.
But traffic and unit volumes began declining in 2015 after five straight years of increases. The company spent $1 million in advertising in 2017, but that still didn’t help sales, which continued to decline.
Kona Grill also used $15 million in capital to repurchase shares in 2016 and 2017, according to filings. That hurt the company’s liquidity even further.
Kona stopped developing new locations in 2017 and started focusing instead on improving profitability and sales of its existing restaurants. The company closed four locations last year but also started working on “rapid cost-cutting efforts” to offset the decline in revenues.
Kona cut restaurant-level support, training programs and culinary innovation. It also cut management staffing levels, “which negatively impacted guest experiences and restaurant-level standard-operating procedures.”
“Although store-level profitability improved in the short-term, the reductions in staffing, marketing and customer-focused initiatives were unsustainable to counterbalance decreasing revenue trends,” Wells said in his declaration.
A new credit agreement a year ago restricted Kona’s borrowing ability and tightened its financial covenants, which further limited the company’s ability to invest in its restaurants. This past March, the company hired Piper Jaffray to evaluate strategic alternatives, including a sale, and then the company hired restructuring specialist Alvarez & Marsal.
Kona Grill’s sales fell 12.4% last year to $156.9 million.
Kona Grill said last month that it might have to file for bankruptcy protection, and it appointed Jonathan Tibus, managing director with Alvarez & Marsal, as its CEO. Wells is also an Alvarez managing director.
Kona has gone through a revolving door at CEO, with five changes in the position since last August.
The company is also at war with its former CEO, Jim Kuhn, who has sued Kona over an unpaid severance agreement since he was fired last November. Kona has countered with a lawsuit of its own, blaming its former CEO for overly aggressive cost cuts that led to the worst same-store sales performance in company history.