##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 2009
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 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.)
 7150 East Camelback Road, Suite 220
Scottsdale, Arizona 85251
(480) 922-8100  (Address, including zip code, and telephone number, including area code, of principal executive offices)
 Yes þ No o
 Yes
o No o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 Yes o No þ




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance Sheets as of September 30, 2009 (Unaudited) and December 31, 2008
    
    
    2Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2009 and 2008
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2009
and 2008
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    13Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4T. Controls and Procedures
    
    
    24PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    25Item 1A. Risk Factors
    
    
    25Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 3. Defaults Upon Senior Securities
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    25Item 5. Other Information
    
    
    25Item 6. Exhibits
    
    
    26Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1.
    
    Consolidated Financial Statements
 KONA GRILL, INC.
 
 CONSOLIDATED BALANCE SHEETS  (in thousands, except share data)
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,516
    
    
    $
    2,477Investments
    
    
    6,268
    
    
    
    370Receivables
    
    
    501
    
    
    
    980Other current assets
    
    
    1,107
    
    
    
    938Total current assets
    
    
    10,392
    
    
    
    4,765Long-term investments
    
    
    
    
    
    
    6,491Other assets
    
    
    702
    
    
    
    794Property and equipment, net
    
    
    56,591
    
    
    
    53,504Total assets
    
    $
    67,685
    
    
    $
    65,554LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,761
    
    
    $
    4,335Accrued expenses
    
    
    5,830
    
    
    
    4,878Current portion of notes payable
    
    
    715
    
    
    
    717Line of credit
    
    
    5,798
    
    
    
    2,488Total current liabilities
    
    
    14,104
    
    
    
    12,418Notes payable
    
    
    789
    
    
    
    1,320Deferred rent
    
    
    15,779
    
    
    
    16,218Total liabilities
    
    
    30,672
    
    
    
    29,956Commitments and contingencies (Note 11)Stockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized, none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 15,000,000 shares authorized, 9,260,056
shares issued and 9,143,856 shares outstanding at September 30, 2009 and
6,628,191 shares issued and 6,511,991 shares outstanding at December 31,
2008
    
    
    93
    
    
    
    66Additional paid-in capital
    
    
    57,472
    
    
    
    53,739Treasury stock, at cost, 116,200 shares at September 30, 2009 and
December 31, 2008
    
    
    (1,000
    )
    
    
    (1,000
    )Accumulated deficit
    
    
    (19,552
    )
    
    
    (17,207
    )Total stockholders equity
    
    
    37,013
    
    
    
    35,598Total liabilities and stockholders equity
    
    $
    67,685
    
    
    $
    65,554
   2




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KONA GRILL, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS  (in thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales
    
    $
    20,173
    
    
    $
    19,454
    
    
    $
    61,096
    
    
    $
    57,242Costs and expenses:Cost of sales
    
    
    5,267
    
    
    
    5,254
    
    
    
    15,825
    
    
    
    15,816Labor
    
    
    7,117
    
    
    
    6,496
    
    
    
    21,135
    
    
    
    19,003Occupancy
    
    
    1,655
    
    
    
    1,260
    
    
    
    4,711
    
    
    
    3,760Restaurant operating expenses
    
    
    3,296
    
    
    
    2,978
    
    
    
    9,568
    
    
    
    8,468General and administrative
    
    
    1,590
    
    
    
    2,079
    
    
    
    6,138
    
    
    
    5,957Preopening expense
    
    
    480
    
    
    
    471
    
    
    
    1,332
    
    
    
    1,190Depreciation and amortization
    
    
    1,820
    
    
    
    1,656
    
    
    
    5,373
    
    
    
    4,806Total costs and expenses
    
    
    21,225
    
    
    
    20,194
    
    
    
    64,082
    
    
    
    59,000Loss from operations
    
    
    (1,052
    )
    
    
    (740
    )
    
    
    (2,986
    )
    
    
    (1,758
    )Nonoperating income (expense):Interest income and other, net
    
    
    44
    
    
    
    62
    
    
    
    169
    
    
    
    371Interest expense
    
    
    (22
    )
    
    
    
    
    
    
    (153
    )
    
    
    (51
    )Loss from continuing operations before provision
for income taxes
    
    
    (1,030
    )
    
    
    (678
    )
    
    
    (2,970
    )
    
    
    (1,438
    )Provision for income taxes
    
    
    5
    
    
    
    55
    
    
    
    65
    
    
    
    205Loss from continuing operations
    
    
    (1,035
    )
    
    
    (733
    )
    
    
    (3,035
    )
    
    
    (1,643
    )Gain (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    (3,161
    )
    
    
    690
    
    
    
    (3,459
    )Net loss
    
    $
    (1,035
    )
    
    $
    (3,894
    )
    
    $
    (2,345
    )
    
    $
    (5,102
    )Net (loss) income per sharebasic and diluted
(Note 5):Continuing operations
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.36
    )
    
    $
    (0.20
    )Discontinued operations
    
    
    
    
    
    
    (0.40
    )
    
    
    0.08
    
    
    
    (0.43
    )Net loss
    
    $
    (0.11
    )
    
    $
    (0.49
    )
    
    $
    (0.28
    )
    
    $
    (0.63
    )Weighted average shares used in computation (Note
5):Basic
    
    
    9,141
    
    
    
    7,998
    
    
    
    8,478
    
    
    
    8,071Diluted
    
    
    9,141
    
    
    
    7,998
    
    
    
    8,478
    
    
    
    8,071
   3




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KONA GRILL, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS  (in thousands)
 Nine Months Ended September 30,2009
    
    
    2008Operating activitiesNet loss
    
    $
    (2,345
    )
    
    $
    (5,102
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    5,373
    
    
    
    5,063Stock-based compensation expense
    
    
    392
    
    
    
    403Amortization of debt discount
    
    
    70
    
    
    
    Asset impairment charge in discontinued operations
    
    
    
    
    
    
    2,158Change in operating assets and liabilities:Receivables
    
    
    479
    
    
    
    (1,955
    )Other current assets
    
    
    (169
    )
    
    
    (88
    )Accounts payable
    
    
    (40
    )
    
    
    667Accrued expenses
    
    
    952
    
    
    
    264Deferred rent
    
    
    (439
    )
    
    
    3,012Net cash provided by operating activities
    
    
    4,273
    
    
    
    4,422Investing activitiesPurchase of property and equipment
    
    
    (10,994
    )
    
    
    (12,516
    )Decrease (increase) in other assets
    
    
    92
    
    
    
    (78
    )Net purchases and sales of investments
    
    
    593
    
    
    
    7,221Net cash used in investing activities
    
    
    (10,309
    )
    
    
    (5,373
    )Financing activitiesNet borrowings on line of credit
    
    
    3,310
    
    
    
    Proceeds from bridge loan
    
    
    1,200
    
    
    
    Repayment of bridge loan
    
    
    (1,200
    )
    
    
    Repayments of notes payable
    
    
    (533
    )
    
    
    (493
    )Proceeds from issuance of common stock, net of issuance costs
    
    
    3,245
    
    
    
    Proceeds from issuance of common stock under the Employee Stock Purchase Plan and exercise
of stock options and warrants
    
    
    53
    
    
    
    66Purchase of treasury stock
    
    
    
    
    
    
    (1,000
    )Net cash provided by (used in) financing activities
    
    
    6,075
    
    
    
    (1,427
    )Net increase (decrease) in cash and cash equivalents
    
    
    39
    
    
    
    (2,378
    )Cash and cash equivalents at the beginning of the period
    
    
    2,477
    
    
    
    4,991Cash and cash equivalents at the end of the period
    
    $
    2,516
    
    
    $
    2,613Supplemental disclosure of cash flow informationCash paid for interest, net of capitalization
    
    $
    83
    
    
    $
    51Noncash investing activities(Decrease) increase in accounts payable related to property and equipment additions
    
    $
    (2,534
    )
    
    $
    1,059
   4




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KONA GRILL, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
    Recent Accounting Pronouncements
     5




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2. Discontinued Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales
    
    $
    
    
    
    $
    340
    
    
    $
    
    
    
    $
    1,531Gain (loss) from discontinued operations before income
tax benefit
    
    $
    
    
    
    $
    (3,186
    )
    
    $
    690
    
    
    $
    (3,534
    )Income tax benefit
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    75Gain (loss) from discontinued operations, net of tax
    
    $
    
    
    
    $
    (3,161
    )
    
    $
    690
    
    
    $
    (3,459
    )
  Balance at December 31, 2008
    
    $
    1,417Cash payments
    
    
    (456
    )Non-cash activity
    
    
    (690
    )Balance at September 30, 2009
    
    $
    271
  3. Investments
  GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Losses
    
    
    Fair ValueSeptember 30, 2009Short-term investments:Certificates of deposit
    
    $
    171
    
    
    $
    
    
    
    $
    171Money market securities
    
    
    314
    
    
    
    
    
    
    
    314Auction rate securities
    
    
    5,386
    
    
    
    
    
    
    
    5,386Put option on auction rate securities
    
    
    397
    
    
    
    
    
    
    
    397Total investments
    
    $
    6,268
    
    
    $
    
    
    
    $
    6,268December 31, 2008Short-term investments:Certificates of deposit
    
    $
    370
    
    
    $
    
    
    
    $
    370Long-term investments:Auction rate securities
    
    
    5,858
    
    
    
    
    
    
    
    5,858Put option on auction rate securities
    
    
    633
    
    
    
    
    
    
    
    6336,491
    
    
    
    
    
    
    
    6,491Total investments
    
    $
    6,861
    
    
    $
    
    
    
    $
    6,861
  6




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4. Fair Value Measurements
  Level 1:
    
    Fair values determined by quoted prices in active markets for identical assets or
liabilities that the reporting entity has the ability to access.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.Level 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.
   7




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Fair Value Measurements at Reporting Date UsingQuoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    Inputs
    
    
    September 30,Description
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    

2009Certificates of deposit
    
    $
    171
    
    
    $
    
    
    
    $
    
    
    
    $
    171Money market securities
    
    
    314
    
    
    
    
    
    
    
    
    
    
    
    314Auction rate securities
    
    
    
    
    
    
    
    
    
    
    5,386
    
    
    
    5,386Put option on auction rate securities
    
    
    
    
    
    
    
    
    
    
    397
    
    
    
    397$
    485
    
    
    $
    
    
    
    $
    5,783
    
    
    $
    6,268
  Put option onAuction rate
    
    
    auction ratesecurities
    
    
    securitiesBalance at December 31, 2008
    
    $
    5,858
    
    
    $
    633Transfer to Level 3
    
    
    
    
    
    
    Total gains or losses (realized and unrealized)Included in earnings
    
    
    328
    
    
    
    (236
    )Included in other comprehensive loss
    
    
    
    
    
    
    Net settlements
    
    
    (800
    )
    
    
    Balance at September 30, 2009
    
    $
    5,386
    
    
    $
    397
  8




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5. Net Loss Per Share
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands, except per share data)Numerator:Loss from continuing operations
    
    $
    (1,035
    )
    
    $
    (733
    )
    
    $
    (3,035
    )
    
    $
    (1,643
    )Gain (loss) from discontinued operations
    
    
    
    
    
    
    (3,161
    )
    
    
    690
    
    
    
    (3,459
    )Net loss
    
    $
    (1,035
    )
    
    $
    (3,894
    )
    
    $
    (2,345
    )
    
    $
    (5,102
    )Denominator:Weighted average shares  Basic
    
    
    9,141
    
    
    
    7,998
    
    
    
    8,478
    
    
    
    8,071Effect of dilutive stock options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares  Diluted
    
    
    9,141
    
    
    
    7,998
    
    
    
    8,478
    
    
    
    8,071Basic and diluted net (loss) income per share:Loss from continuing operations
    
    $
    (0.11
    )
    
    $
    (0.09
    )
    
    $
    (0.36
    )
    
    $
    (0.20
    )Gain (loss) from discontinued operations
    
    
    
    
    
    
    (0.40
    )
    
    
    0.08
    
    
    
    (0.43
    )Net loss
    
    $
    (0.11
    )
    
    $
    (0.49
    )
    
    $
    (0.28
    )
    
    $
    (0.63
    )
   6. Accrued Expenses
  September 30,
    
    
    December 31,2009
    
    
    2008Accrued payroll
    
    $
    2,313
    
    
    $
    1,846Business and income taxes
    
    
    680
    
    
    
    663Sales taxes
    
    
    568
    
    
    
    643Gift cards
    
    
    545
    
    
    
    654Lease termination accrual
    
    
    271
    
    
    
    Accrued occupancy
    
    
    122
    
    
    
    255Other
    
    
    1,331
    
    
    
    817$
    5,830
    
    
    $
    4,878
  9




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7. Debt and Credit Agreements
 Credit Facility
  Bridge Loan
   8. Rights Offering
  9. Stock-Based Compensation
   10




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Nine Months EndedSeptember 30,2009
    
    
    2008Expected volatility
    
    
    55.0
    %
    
    
    36.0
    %Risk-free interest rate
    
    
    1.6
    %
    
    
    2.5
    %Expected option life (in years)
    
    
    3.8
    
    
    
    3.7Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted average fair value per option granted
    
    $
    0.86
    
    
    $
    3.42
  Shares
    
    
    Weighted
    
    
    Weighted AverageUnder
    
    
    Average
    
    
    Remaining
    
    
    AggregateOption
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding options at December 31, 2008
    
    
    824,056
    
    
    $
    12.34Granted
    
    
    197,100
    
    
    
    2.03Forfeited
    
    
    (336,100
    )
    
    
    12.91Exercised
    
    
    
    
    
    
    Outstanding options at September 30, 2009
    
    
    685,056
    
    
    $
    9.08
    
    
    3.6 years
    
    
    $
    213,000Exercisable at September 30, 2009
    
    
    409,706
    
    
    $
    9.68
    
    
    3.4 years
    
    
    $
    32,000
  10. Comprehensive Loss
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (1,035
    )
    
    $
    (3,894
    )
    
    $
    (2,345
    )
    
    $
    (5,102
    )Net unrealized loss on available-for-sale securities
    
    
    
    
    
    
    (171
    )
    
    
    
    
    
    
    (629
    )Total comprehensive loss
    
    $
    (1,035
    )
    
    $
    (4,065
    )
    
    $
    (2,345
    )
    
    $
    (5,731
    )
  11




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11. Commitments and Contingencies
     12. Subsequent Event
   12




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Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
      13




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Key Measures We Use to Evaluate Our Company
  Number of Restaurant Openings.
 Same-Store Sales Percentage Change.
 Average Weekly Sales.
 Average Unit Volume.
 Sales Per Square Foot.
 Restaurant Operating Profit.
 Key Financial Definitions
 Restaurant Sales.
 Cost of Sales.
 Labor.
 Occupancy.
 Restaurant Operating Expenses.
 General and Administrative.
  14




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Preopening Expense.
 Depreciation and Amortization
 Interest Income and Other, Net.
 Interest Expense.
 Financial Performance Overview
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales growth
    
    
    3.7
    %
    
    
    4.3
    %
    
    
    6.7
    %
    
    
    9.9
    %Same-store sales percentage change (1)
    
    
    (9.9
    )%
    
    
    (10.3
    )%
    
    
    (9.7
    )%
    
    
    (6.4
    )%Average weekly sales  comparable restaurant base (2)
    
    $
    74,934
    
    
    $
    83,212
    
    
    $
    75,876
    
    
    $
    84,026Average weekly sales  non-comparable restaurant base (3)
    
    $
    56,138
    
    
    $
    78,933
    
    
    $
    64,218
    
    
    $
    75,331Average unit volume (in thousands) (4)
    
    $
    969
    
    
    $
    1,095
    
    
    $
    2,919
    
    
    $
    3,287Sales per square foot (4)
    
    $
    138
    
    
    $
    156
    
    
    $
    414
    
    
    $
    467Restaurant operating profit (in thousands) (5)
    
    $
    2,838
    
    
    $
    3,466
    
    
    $
    9,857
    
    
    $
    10,195Restaurant operating profit as a percentage of sales (5)
    
    
    14.1
    %
    
    
    17.8
    %
    
    
    16.1
    %
    
    
    17.8
    %
 (1)
    
    Same-store sales percentage change reflects the periodic change in restaurant sales for
the comparable restaurant base. In calculating the percentage change for same-store sales,
we include a restaurant in the comparable restaurant base after it has been in operation for
more than 18 months.(2)
    
    Includes only those restaurants in the comparable restaurant base.(3)
    
    Includes only those restaurants that are not in the comparable restaurant base
that were open for the entire period.(4)
    
    Includes only those restaurants open for at least 12 months before the beginning
of the period measured.(5)
    
    Restaurant operating profit is not a financial measurement determined in accordance with
U.S. generally accepted accounting principles and should not be considered in isolation or as
an alternative to income (loss) from operations. Restaurant operating profit may not be
comparable to the same or similarly titled measures computed by other companies. 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 productivity,
efficiency, and performance. We use restaurant operating profit as a percentage of
restaurant sales as a key metric to evaluate our restaurants financial performance compared
with our competitors.  15




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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands)Restaurant sales
    
    $
    20,173
    
    
    $
    19,454
    
    
    $
    61,096
    
    
    $
    57,242Costs and expenses:Cost of sales
    
    
    5,267
    
    
    
    5,254
    
    
    
    15,825
    
    
    
    15,816Labor
    
    
    7,117
    
    
    
    6,496
    
    
    
    21,135
    
    
    
    19,003Occupancy
    
    
    1,655
    
    
    
    1,260
    
    
    
    4,711
    
    
    
    3,760Restaurant operating expenses
    
    
    3,296
    
    
    
    2,978
    
    
    
    9,568
    
    
    
    8,468Restaurant operating profit
    
    
    2,838
    
    
    
    3,466
    
    
    
    9,857
    
    
    
    10,195Deduct  other costs and expensesGeneral and administrative
    
    
    1,590
    
    
    
    2,079
    
    
    
    6,138
    
    
    
    5,957Preopening expense
    
    
    480
    
    
    
    471
    
    
    
    1,332
    
    
    
    1,190Depreciation and amortization
    
    
    1,820
    
    
    
    1,656
    
    
    
    5,373
    
    
    
    4,806Loss from operations
    
    $
    (1,052
    )
    
    $
    (740
    )
    
    $
    (2,986
    )
    
    $
    (1,758
    )
 Percentage of
    
    
    Percentage ofRestaurant Sales
    
    
    Restaurant SalesThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    26.1
    
    
    
    27.0
    
    
    
    25.9
    
    
    
    27.6Labor
    
    
    35.3
    
    
    
    33.4
    
    
    
    34.6
    
    
    
    33.2Occupancy
    
    
    8.2
    
    
    
    6.5
    
    
    
    7.7
    
    
    
    6.6Restaurant operating expenses
    
    
    16.3
    
    
    
    15.3
    
    
    
    15.7
    
    
    
    14.8Restaurant operating profit
    
    
    14.1
    
    
    
    17.8
    
    
    
    16.1
    
    
    
    17.8Deduct  other costs and expensesGeneral and administrative
    
    
    7.9
    
    
    
    10.7
    
    
    
    10.0
    
    
    
    10.4Preopening expense
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.2
    
    
    
    2.1Depreciation and amortization
    
    
    9.0
    
    
    
    8.5
    
    
    
    8.8
    
    
    
    8.4Loss from operations
    
    
    (5.2
    )%
    
    
    (3.8
    )%
    
    
    (4.9
    )%
    
    
    (3.1
    )%
  Nine Months Ended
    
    
    Year EndedSeptember 30, 2009
    
    
    December 31, 2008Beginning of period
    
    
    20
    
    
    
    18Openings
    
    
    3
    
    
    
    3Closings
    
    
    
    
    
    
    (1
    )End of period
    
    
    23
    
    
    
    20
  16




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    26.1
    
    
    
    27.0
    
    
    
    25.9
    
    
    
    27.6Labor
    
    
    35.3
    
    
    
    33.4
    
    
    
    34.6
    
    
    
    33.2Occupancy
    
    
    8.2
    
    
    
    6.5
    
    
    
    7.7
    
    
    
    6.6Restaurant operating expenses
    
    
    16.3
    
    
    
    15.3
    
    
    
    15.7
    
    
    
    14.8General and administrative
    
    
    7.9
    
    
    
    10.7
    
    
    
    10.0
    
    
    
    10.4Preopening expense
    
    
    2.4
    
    
    
    2.4
    
    
    
    2.2
    
    
    
    2.1Depreciation and amortization
    
    
    9.0
    
    
    
    8.5
    
    
    
    8.8
    
    
    
    8.4Total costs and expenses
    
    
    105.2
    
    
    
    103.8
    
    
    
    104.9
    
    
    
    103.1Loss from operations
    
    
    (5.2
    )
    
    
    (3.8
    )
    
    
    (4.9
    )
    
    
    (3.1
    )Nonoperating income (expense):Interest income and other, net
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.3
    
    
    
    0.6Interest expense
    
    
    (0.1
    )
    
    
    
    
    
    
    (0.3
    )
    
    
    (0.1
    )Loss from continuing operations before provision
for income taxes
    
    
    (5.1
    )
    
    
    (3.5
    )
    
    
    (4.9
    )
    
    
    (2.5
    )Provision for income taxes
    
    
    
    
    
    
    0.3
    
    
    
    0.1
    
    
    
    0.4Loss from continuing operations
    
    
    (5.1
    )
    
    
    (3.8
    )
    
    
    (5.0
    )
    
    
    (2.9
    )Gain (loss) from discontinued operations, net of tax
    
    
    
    
    
    
    (16.2
    )
    
    
    1.1
    
    
    
    (6.0
    )Net loss
    
    
    (5.1
    )%
    
    
    (20.0
    )%
    
    
    (3.9
    )%
    
    
    (8.9
    )%
  Three Months Ended September 30, 2009 Compared with Three Months Ended September 30, 2008
 Restaurant Sales.
 Cost of Sales
 Labor
  17




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##### Table of Contents



Occupancy
 Restaurant Operating Expenses
 General and Administrative
 Preopening Expense
 Depreciation and Amortization
 Interest Income and Other, Net.
 Interest Expense.
 Provision for Income Taxes
  18




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##### Table of Contents



Gain/(loss) from Discontinued Operations
 Nine Months Ended September 30, 2009 Compared with Nine Months Ended September 30, 2008
 Restaurant Sales.
 Cost of Sales
 Labor
 Occupancy
 Restaurant Operating Expenses
 General and Administrative
  19




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##### Table of Contents



Preopening Expense
 Depreciation and Amortization
 Interest Income and Other, Net.
 Interest Expense.
 Provision for Income Taxes
 Gain from Discontinued Operations
 Potential Fluctuations in Quarterly Results and Seasonality
  
    
    timing of new restaurant openings and related expenses;
 
    
    restaurant operating costs and preopening costs for our newly-opened restaurants, which
are often materially greater during the first several months of operation than thereafter;
 
    
    labor availability and costs for hourly and management personnel;
 
    
    profitability of our restaurants, especially in new markets;
 
    
    increases and decreases in comparable restaurant sales;
 
    
    impairment of long-lived assets and any loss on restaurant closures;
    
    changes in borrowings and interest rates;
  20




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##### Table of Contents




    
    general economic conditions;
 
    
    weather conditions or natural disasters;
 
    
    timing of certain holidays;
 
    
    changes in government regulations;
 
    
    outside shareholder activities;
 
    
    settlements, damages and legal costs associated with litigation;
 
    
    new or revised regulatory requirements and accounting pronouncements;
 
    
    changes in consumer preferences and competitive conditions; and
 
    
    fluctuations in commodity prices.
  Liquidity and Capital Resources
  September 30,
    
    
    December 31,2009
    
    
    2008Cash and short-term investments(1)
    
    $
    3,001
    
    
    $
    2,847Net working capital (deficit)(2)
    
    
    (3,712
    )
    
    
    (7,653
    )
 (1)
    
    At September 30, 2009, cash and short-term investments exclude $5.8 million in auction rate
securities that are used as collateral for the line of credit. Proceeds from the sale of auction
rate securities are used to reduce the outstanding balance on the line of credit.(2)
    
    The working capital deficit at September 30, 2009, is primarily attributable to accruals for
legal and severance costs and capital expenditures for new restaurant construction. The working
capital deficit at December 31, 2008 is principally due to $6.5 million of investments in auction
rate securities which were classified as non-current assets. Nine Months EndedSeptember 30,2009
    
    
    2008Cash provided by operating activities
    
    $
    4,273
    
    
    $
    4,422Capital expenditures
    
    
    10,994
    
    
    
    12,516
  21




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##### Table of Contents



Future Capital Requirements
   Bridge Loan
  Rights Offering
   22




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##### Table of Contents



Equipment Loans
  Credit Facility
  Cash Flows
  Nine Months EndedSeptember 30,2009
    
    
    2008Net cash provided by (used in):Operating activities
    
    $
    4,273
    
    
    $
    4,422Investing activities
    
    
    (10,309
    )
    
    
    (5,373
    )Financing activities
    
    
    6,075
    
    
    
    (1,427
    )Net increase (decrease) in cash and cash equivalents
    
    $
    39
    
    
    $
    (2,378
    )
 Operating Activities.
 Investing Activities.
  23




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##### Table of Contents



Financing Activities.
 Critical Accounting Policies
  
 Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
  Primary Market Risk Exposures
  
 Item 4T.
    
    Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
   24




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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1.
    
    Legal Proceedings
    
 Item 1A.
    
    Risk Factors
  
 Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3.
    
    Defaults Upon Senior Securities
  
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  
 Item 5.
    
    Other Information
   25




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##### Table of Contents



Item 6.
    
    Exhibits
 (a)
    
    Exhibits
 3.1
    
    
    Amended and Restated Certificate of Incorporation of Kona Grill, Inc. (1)3.3
    
    
    Amended and Restated Bylaws of Kona Grill, Inc. (2)3.4
    
    
    Certificate of Designations, Preferences, and Rights of Series A Junior
Participating Preferred Stock of Kona Grill, Inc. (4)4.1
    
    
    Form of Common Stock Certificate (3)4.2
    
    
    Kona Grill, Inc. Stockholders Agreement, dated August 29, 2003 (3)4.3
    
    
    Kona Grill, Inc. Series A Investor Rights Agreement, dated August 29, 2003 (3)4.4
    
    
    Amendment No. 1 to Kona Grill, Inc. Series A Investor Rights Agreement, dated
May 31, 2005 (3)4.7
    
    
    Form of Warrant (March 2009 Note Offering) (6)4.9
    
    
    Form of First Amended and Restated Promissory Note (March 2009 Note Offering) (5)10.21
    
    
    Note and Warrant Purchase Agreement, dated March 6, 2009, among Kona Grill, Inc.
and the investor parties thereto (6)10.23
    *
    
    Employment Agreement, dated as of May 11, 2009, between the Company and Mark L.
Bartholomay (7)10.24
    *
    
    Employment Agreement, dated as of May 11, 2009, between the Company and Mark S.
Robinow (7)10.25
    *
    
    Separation Agreement, dated as of August 6, 2009, between the Company and Marcus
E. Jundt (8)10.26
    *
    
    Employment
Agreement, dated as of November 2, 2009, between the Company and
Marc A. Buehler (9)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 amended31.2
    
    
    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 amended32.1
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
906 of the Sarbanes-Oxley Act of 2002
 
 *
    
    Management contract or compensatory plan or arrangement in which directors or
executive officers are eligible to participate.(1)
    
    Incorporated by reference to Amendment No. 1 to the Registrants Registration
Statement on Form S-1 (Registration No. 333-125506), as filed on July 8, 2005.(2)
    
    Incorporated by reference to the Registrants Form 8-K filed on November 5,
2007.(3)
    
    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)
    
    Incorporated by reference to the Registrants Form 8-K filed on May 28, 2008.(5)
    
    Incorporated by reference to the Registrants Form 8-K filed on April 10, 2009.(6)
    
    Incorporated by reference to the Registrants Form 8-K filed on March 9, 2009.(7)
    
    Incorporated by reference to the Registrants Form 8-K filed on May 14, 2009.(8)
    
    Incorporated by reference to the Registrants Form 8-K filed on August 12,
2009.(9)
    
    Incorporated by reference to the Registrants
Form 8-K filed on November 3, 2009.  26




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##### Table of Contents



SIGNATURES
  Kona Grill, Inc./s/ Marc A. BuehlerMarc A. BuehlerChief Executive Officer/s/ Mark S. RobinowMark S. RobinowExecutive Vice President, Chief
Financial Officer, and Secretary
(Principal Accounting and Financial
Officer)   27




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##### Table of Contents



EXHIBIT INDEX
 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 amended31.2
    
    
    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 amended32.1
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 200232.2
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002
  28