KONA GRILL INC

. Income Taxes

Income tax expense consisted of the following

(in thousands):

	Year Ended December 31,
	20 1 7		20 1 6		20 1 5
Current:
Federal	$	—	$	—	$	—
State		90		66		43
Total current		90		66		43

Deferred:
Federal		—		—		—
State		—		—		—
Total deferred		—		—		—

Total	$	90	$	66	$	43

Income tax expense

differed from amounts computed by applying the federal statutory rate to loss from operations before provision for income taxes as follows (in thousands):

	Year Ended December 31,
	20 1 7			20 1 6			20 1 5
Income tax expense at federal statutory rate of 34%	$	(7,936	)	$	(7,331	)	$	(1,514	)
State income taxes, net of federal benefit		(1,109	)		(1,382	)		46
Nondeductible expenses		702			701			583
Business tax credit		(1,754	)		(1,692	)		(1,503	)
F ederal rate change		8,042			—			—
Other		639			108			(273	)
Change in valuation allowance		1,506			9,662			2,704
Total	$	90		$	66		$	43

The temporary differences that give rise to significant portions of deferred tax assets and liabilities were as follows (in thousands):

	December 31,
	20 1 7			20 1 6
Deferred tax assets (liabilities):
Net operating loss carryforward	$	11,944		$	10,694
Deferred rent		8,092			11,570
Business tax credits		14,422			12,558
Organizational and preopening costs		340			558
Stock-based compensation		774			1,033
Accrued expenses		98			157
Property and equipment		(2,452	)		(7,338	)
Other		660			984
Net deferred tax assets		33,878			30,216
Valuation allowance		(33,878	)		(30,216	)
Total	$	—		$	—

The Tax Cuts and Jobs Act (

“the Tax Act”) was enacted on

December 22, 2017.

The Tax Act reduces the U.S. federal corporate tax rate from

34%

21%,

effective

January 1, 2018,

limits deductions for, among other things, interest expense, executive compensation and meals and entertainment while enhancing deductions for equipment and other fixed assets. The Tax Act provisions regarding foreign reporting do

not

apply to Kona at this time.

The SEC staff issued SAB

118,

which provides guidance on accounting for the tax effects of the Tax Act. SAB

118

provides a measurement period that should

not

extend beyond

one

year from the Tax Act

’s enactment date for companies to complete its accounting under ASC

740.

In accordance with SAB

118,

to the extent a company has

not

completed its analysis of the Tax Act but can provide a reasonable estimate, it must record a provisional estimate in its financial statements.

As of

December 31, 2017,

we have

not

finalized our accounting for the tax effects of the enactment of the Tax Act; however, as described below, we have made a reasonable estimate of the effects on our existing deferred tax balances and uncertain tax positions.

We remeasured our deferred tax assets and liabilities based on the rates at which they are expected to reverse in the future. However, we are still analyzing certain aspects of the Tax Act and refining our calculations, which could potentially affect the provisional measurement of these balances. We also anticipate that the completion of our

2017

income tax returns by the

third

quarter of

2018

could also impact any provisional amounts recorded. Based on our current estimates, we do

not

anticipate any net change to

our deferred tax balances as we anticipate a full valuation allowance will remain in place. Due to the continued full valuation allowance

provisional amounts are recorded at

December 31, 2017.

We have

reserves for uncertain tax positions and

adjustment or provisional amounts to record at

December 31, 2017.

We 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

but don’t expect it to have a material impact on our income taxes.

The valuation allowance

increased

$3.7

million and

$9.7

million at

December 31, 2017

and

2016.

December 31, 2017,

we had

$41.1

million in federal net operating loss carryforwards,

$64.2

million in state net operating loss carryforwards and

$15.1

million in federal business tax credit carryforwards, the majority of which is comprised of FICA tip credit carryforwards. These credits and certain state net operating loss carryforwards are also subject to annual limitations due to ownership change rules under the Internal Revenue Code.

The Company recorded the effect of the adoption of ASU

2016

as of

January 1, 2017,

which resulted in an increase to deferred tax assets of approximately

$2.1

million.

The realization of our deferred tax assets ultimately depends on the existence of sufficient taxable income in future periods. We have analyzed, and will continue to analyze, the positive and negative evidence to support our conclusion regarding the appropriate amount of our valuation allowance. This analysis incorporates our recent earnings history and forecasted future results. We are currently in a

three

-year cumulative loss which points to a full valuation allowance for our net deferred tax assets due to the uncertainty surrounding their future utilization. The valuation allowance could be reduced in a subsequent period if there is sufficient evidence to support a conclusion that it is more likely than

not

that our deferred tax assets will be realized. Future changes in our valuation allowance could have a material effect on our results of operations in the period recorded.

As of

December 31,

2017,

there were

accrued interest or penalties recorded in the consolidated financial statements. We are subject to U.S. federal income tax as well as income tax of multiple state jurisdictions. The earliest tax year still subject to examination by a significant taxing jurisdiction is

2013.