A configuration analysis and the installer trace logs shows the following error:
CreateSqlLogin.Execute: Logged Error: Could not create login: System.Data.SqlClient.SqlException (0x80131904): Windows NT user or group 'denallix.com\k2webservice' not found. Check the name again.
This is caused by the K2 Setup Manager and IIS Application Pool accepting the account in the format 'denallix.com\k2webservice'; but failing when attempting to create an SQL login with this value.
To resolve this issue, the Application Pool Service Account should be specified in the 'DOMAIN\username' format (i.e. 'DENALLIX\k2webservice') as below: