Kona Grill may have to declare bankruptcy

The struggling casual-dining chain appointed a restructuring specialist as CEO and said a bankruptcy filing is possible.
Kona Grill

Kona Grill, struggling with steeply falling sales, a revolving door at CEO, a lawsuit from one of its deposed executives, a potential stock delisting and a missed debt payment, could be forced into another, unfortunate move: bankruptcy.

The Scottsdale, Ariz.-based casual-dining chain said in federal securities filings this week that it is in discussions with lenders as it explores strategic alternatives, and that it might have to file for Chapter 11 bankruptcy protection as a result of its study.

“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,” the company said in its annual report.

The company appointed Jonathan Tibus, managing director with turnaround consulting firm Alvarez & Marsal, to be its CEO. Tibus has served as CEO for Real Mex Restaurants, Ignite Restaurant Group and Fox & Hound owner Last Call Operating Co. as each of those companies filed for bankruptcy protection.

Tibus replaces Marcus Jundt, who resigned last month after four months on the job.

Kona also hired Christopher Wells, managing director with Alvarez & Marsal, to be the chain’s chief restructuring officer—which is frequently a precursor to a bankruptcy filing.

Kona Grill CFO Christi Hing was named “principal executive officer” of the company as it looks for a permanent chief executive.

The company said in its annual report that it has $33.2 million in secured debt and missed its quarterly payment that was due March 31. The company also said that “Given our recent same-store sales declines, we are doubtful that we can obtain debt refinancing on terms acceptable to the company.”

Kona also said it received a notice of default earlier this month after failing to make its payment and failing to provide lenders with audited financial statements.

Kona reported a net loss of $32 million in 2018. Revenues fell 12.4%, and same-store sales declined $12.3%. On a two-year, “stacked” basis, same-store sales fell 18.2% last year. Kona closed four locations last year, ending 2018 with 42 restaurants.

EBITDA, or earnings before interest, taxes, depreciation and amortization, was negative $15.9 million.

Kona Grill also acknowledged in its filing that it was sued by James Kuhn, who was fired as CEO in November. Kuhn sued the company in federal court in February, saying that the company violated his employment agreement and arguing he is owed severance payments.

Kona filed a countersuit accusing Kuhn of a “breach of fiduciary duties” to the company. “We intend to diligently defend Mr. Kuhn’s claims against the company.”

The filing is the culmination of a long string of bad news for Kona, which doubled in size between 2012 and 2017. The company has stopped developing new locations and is closing unprofitable units.

Kona’s stock has lost three quarters of its value and recently received a delisting notice from Nasdaq over its valuation. Delisting would force the company to trade over-the-counter, which requires an appointment and often leads to wild swings in stock price and poor trading activity.

Kona last month said it has started exploring strategic alternatives and has hired Piper Jaffray to be its financial adviser.

The company has gone through several CEO changes since Kuhn was appointed in August to replace longtime CEO Berke Bakay. Kuhn was replaced in November by co-CEOs Jundt and Steven Schussler.

Schussler stepped down in January, giving the full CEO title to Jundt, who didn’t make it through March.

But Jundt had time to take the company’s prior management to task over the chain’s “erosion of core values.”

“We took a lot of pride in what we created and we were really sad about what happened,” Jundt said at a conference in January. He had been Kona’s CEO for years until he left the company in 2009. “We really believe in the brand and we really believe in the company.”

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