##### 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 June 30, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 Commission File Number 000-51491
 
 Kona Grill, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware(State of Incorporation)
    
    20-0216690(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)
 þ o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PagePART IFINANCIAL INFORMATIONItem 1.
    
    Unaudited Consolidated Financial StatementsConsolidated Balance Sheets as of June 30, 2007 and December 31, 2006
    
    
    2Consolidated Statements of Operations for the Three and Six Months Ended June 30, 2007 and 2006
    
    
    3Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2007 and 2006
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2.
    
    Management's Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    20Item 1A.
    
    Risk Factors
    
    
    20Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    20Item 3.
    
    Defaults Upon Senior Securities
    
    
    20Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    20Item 5.
    
    Other Information
    
    
    20Item 6.
    
    Exhibits
    
    
    20Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Unaudited Consolidated Financial Statements
 
 KONA GRILL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    3,209
    
    
    $
    1,934Investments
    
    
    8,429
    
    
    
    14,249Receivables
    
    
    347
    
    
    
    949Other current assets
    
    
    1,389
    
    
    
    741Total current assets
    
    
    13,374
    
    
    
    17,873Other assets
    
    
    442
    
    
    
    407Property and equipment, net
    
    
    42,653
    
    
    
    40,516Total assets
    
    $
    56,469
    
    
    $
    58,796LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,102
    
    
    $
    4,616Accrued expenses
    
    
    3,674
    
    
    
    3,502Current portion of notes payable
    
    
    637
    
    
    
    613Total current liabilities
    
    
    6,413
    
    
    
    8,731Notes payable
    
    
    2,375
    
    
    
    2,700Deferred rent
    
    
    11,650
    
    
    
    11,543Total liabilities
    
    
    20,438
    
    
    
    22,974Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value,
2,000,000 shares authorized, none
issued at June 30, 2007 and
December 31, 2006
    
    
    
    
    
    
    Common stock, $0.01 par value,
15,000,000 shares authorized, 5,871,949
and 5,847,593 shares issued and
outstanding at June 30, 2007 and
December 31, 2006, respectively
    
    
    59
    
    
    
    58Additional paid-in capital
    
    
    42,239
    
    
    
    41,722Accumulated deficit
    
    
    (6,267
    )
    
    
    (5,957
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (1
    )Total stockholders equity
    
    
    36,031
    
    
    
    35,822Total liabilities and stockholders equity
    
    $
    56,469
    
    
    $
    58,796
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##### Table of Contents



KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)Restaurant sales
    
    $
    19,322
    
    
    $
    11,877
    
    
    $
    34,988
    
    
    $
    22,071Costs and expenses:Cost of sales
    
    
    5,487
    
    
    
    3,299
    
    
    
    10,033
    
    
    
    6,194Labor
    
    
    5,970
    
    
    
    3,578
    
    
    
    11,045
    
    
    
    6,731Occupancy
    
    
    1,205
    
    
    
    812
    
    
    
    2,263
    
    
    
    1,518Restaurant operating expenses
    
    
    2,742
    
    
    
    1,480
    
    
    
    4,876
    
    
    
    2,926General and administrative
    
    
    1,832
    
    
    
    1,625
    
    
    
    3,601
    
    
    
    3,639Preopening expense
    
    
    350
    
    
    
    689
    
    
    
    838
    
    
    
    980Depreciation and amortization
    
    
    1,477
    
    
    
    823
    
    
    
    2,766
    
    
    
    1,553Total costs and expenses
    
    
    19,063
    
    
    
    12,306
    
    
    
    35,422
    
    
    
    23,541Income (loss) from operations
    
    
    259
    
    
    
    (429
    )
    
    
    (434
    )
    
    
    (1,470
    )Nonoperating income (expense):Interest income
    
    
    131
    
    
    
    246
    
    
    
    291
    
    
    
    483Interest expense
    
    
    (42
    )
    
    
    (75
    )
    
    
    (42
    )
    
    
    (154
    )Income (loss) before provision for income
taxes
    
    
    348
    
    
    
    (258
    )
    
    
    (185
    )
    
    
    (1,141
    )Provision for income taxes
    
    
    35
    
    
    
    45
    
    
    
    45
    
    
    
    50Net income (loss)
    
    $
    313
    
    
    $
    (303
    )
    
    $
    (230
    )
    
    $
    (1,191
    )Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.21
    )Diluted
    
    $
    0.05
    
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.21
    )Weighted average shares used in computation:Basic
    
    
    5,866
    
    
    
    5,793
    
    
    
    5,860
    
    
    
    5,762Diluted
    
    
    6,233
    
    
    
    5,793
    
    
    
    5,860
    
    
    
    5,762
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KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months Ended June 30,2007
    
    
    2006Operating activities
    
    (Unaudited)Net loss
    
    $
    (230
    )
    
    $
    (1,191
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    2,766
    
    
    
    1,553Stock-based compensation expense
    
    
    341
    
    
    
    402Tax benefit on exercise of stock options
    
    
    5
    
    
    
    Change in operating assets and liabilities:Receivables
    
    
    602
    
    
    
    (2,048
    )Other current assets
    
    
    (648
    )
    
    
    (437
    )Accounts payable
    
    
    (901
    )
    
    
    394Accrued expenses
    
    
    107
    
    
    
    639Deferred rent
    
    
    107
    
    
    
    2,528Net cash provided by operating activities
    
    
    2,149
    
    
    
    1,840Investing activitiesPurchase of property and equipment
    
    
    (6,516
    )
    
    
    (9,050
    )(Increase) decrease in other assets
    
    
    (35
    )
    
    
    11Net proceeds on purchase and sale of short-term investments
    
    
    5,821
    
    
    
    4,504Net cash used in investing activities
    
    
    (730
    )
    
    
    (4,535
    )Financing activitiesRepayments of notes payable
    
    
    (301
    )
    
    
    (375
    )Proceeds from issuance of common stock under the Employee Stock Purchase Plan and
exercise of stock options and warrants
    
    
    157
    
    
    
    35Net cash used in financing activities
    
    
    (144
    )
    
    
    (340
    )Net increase (decrease) in cash and cash equivalents
    
    
    1,275
    
    
    
    (3,035
    )Cash and cash equivalents at the beginning of the period
    
    
    1,934
    
    
    
    4,466Cash and cash equivalents at the end of the period
    
    $
    3,209
    
    
    $
    1,431Supplemental disclosures of cash flow informationCash paid for interest
    
    $
    127
    
    
    $
    154Noncash investing activities(Decrease) increase in accounts payable related to property and
equipment additions
    
    $
    (1,613
    )
    
    $
    1,552
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KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation and Significant Accounting Policies
    Cash and Cash Equivalents
  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Fair Value Measurements
  5




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KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 2. Net Income (Loss) Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share data)Numerator:Net income (loss)
    
    $
    313
    
    
    $
    (303
    )
    
    $
    (230
    )
    
    $
    (1,191
    )Denominator:Weighted average shares  Basic
    
    
    5,866
    
    
    
    5,793
    
    
    
    5,860
    
    
    
    5,762Effect of dilutive stock options and warrants
    
    
    367
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares  Diluted
    
    
    6,233
    
    
    
    5,793
    
    
    
    5,860
    
    
    
    5,762Net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.21
    )Diluted
    
    $
    0.05
    
    
    $
    (0.05
    )
    
    $
    (0.04
    )
    
    $
    (0.21
    )
  3. Investments
  GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Losses
    
    
    Fair ValueJune 30, 2007Auction rate municipal securities
    
    $
    8,275
    
    
    $
    
    
    
    $
    8,275Corporate securities
    
    
    154
    
    
    
    
    
    
    
    154$
    8,429
    
    
    $
    
    
    
    $
    8,429December 31, 2006Auction rate municipal securities
    
    $
    10,600
    
    
    $
    
    
    
    $
    10,600Government bonds
    
    
    3,000
    
    
    
    (1
    )
    
    
    2,999Corporate securities
    
    
    650
    
    
    
    
    
    
    
    650$
    14,250
    
    
    $
    (1
    )
    
    $
    14,249
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KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 4. Accrued Expenses
  June 30,
    
    
    December 31,2007
    
    
    2006Accrued payroll
    
    $
    1,283
    
    
    $
    1,471Sales taxes
    
    
    564
    
    
    
    485Business and income taxes
    
    
    459
    
    
    
    297Gift cards
    
    
    350
    
    
    
    372Accrued occupancy
    
    
    244
    
    
    
    166Other
    
    
    774
    
    
    
    711$
    3,674
    
    
    $
    3,502
 5. Stock-Based Compensation
  Share-Based Payment ,
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    34.4
    %
    
    
    36.5
    %
    
    
    34.4
    %
    
    
    40.3
    %Risk-free interest rate
    
    
    4.9
    %
    
    
    5.0
    %
    
    
    4.9
    %
    
    
    4.9
    %Expected life (in years)
    
    
    3.8
    
    
    
    3.9
    
    
    
    3.8
    
    
    
    4.3Weighted average fair value per option granted
    
    $
    6.45
    
    
    $
    4.44
    
    
    $
    6.45
    
    
    $
    4.23
  Shares
    
    
    Weighted
    
    
    Weighted AverageUnder
    
    
    Average
    
    
    Remaining
    
    
    AggregateOption
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding options at December 31, 2006
    
    
    631,589
    
    
    $
    10.65Granted
    
    
    76,750
    
    
    
    19.36Forfeited
    
    
    (26,950
    )
    
    
    15.76Exercised
    
    
    (11,250
    )
    
    
    7.18Outstanding options at June 30, 2007
    
    
    670,139
    
    
    $
    11.50
    
    
    5.1 years
    
    
    $
    4,629,000Exercisable at June 30, 2007
    
    
    475,826
    
    
    $
    9.24
    
    
    5.4 years
    
    
    $
    4,292,000
  7




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KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  6. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    313
    
    
    $
    (303
    )
    
    $
    (230
    )
    
    $
    (1,191
    )Net unrealized gains (losses) on available-for-sale securities
    
    
    1
    
    
    
    (2
    )
    
    
    1
    
    
    
    (17
    )Total comprehensive income (loss)
    
    $
    314
    
    
    $
    (305
    )
    
    $
    (229
    )
    
    $
    (1,208
    )
 7. Income Taxes
 Accounting for Uncertainty in Income Taxes
   8. Commitments and Contingencies
   8




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     9




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Key Measures We Use to Evaluate Our Company
  Number of Restaurant Openings.
 Same-Store Sales Growth.
 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.
 Preopening Expense.
  10




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Depreciation and Amortization
 Interest Income.
 Interest Expense.
 Financial Performance Overview
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Restaurant sales growth
    
    
    62.7
    %
    
    
    33.2
    %
    
    
    58.5
    %
    
    
    30.4
    %Same-store sales growth (1)
    
    
    5.0
    %
    
    
    5.8
    %
    
    
    3.4
    %
    
    
    6.0
    %Average weekly sales  comparable restaurant base (2)
    
    $
    99,083
    
    
    $
    94,348
    
    
    $
    97,161
    
    
    $
    93,933Average weekly sales  non-comparable restaurant base (3)
    
    $
    82,815
    
    
    $
    76,595
    
    
    $
    77,555
    
    
    $
    71,983Average unit volume (in thousands)(4)
    
    $
    1,288
    
    
    $
    1,331
    
    
    $
    2,450
    
    
    $
    2,545Sales per square foot (4)
    
    $
    183
    
    
    $
    190
    
    
    $
    348
    
    
    $
    364Restaurant operating profit (in thousands) (5)
    
    $
    3,918
    
    
    $
    2,708
    
    
    $
    6,771
    
    
    $
    4,702Restaurant operating profit as a percentage of sales (5)
    
    
    20.3
    %
    
    
    22.8
    %
    
    
    19.4
    %
    
    
    21.3
    %
 (1)
    
    Same-store sales growth reflects the periodic change in restaurant sales for the
comparable restaurant base. In calculating same-store sales growth, 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 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. The table below sets forth our calculation of restaurant operating profit and
reconciliation to income (loss) from operations, the most comparable GAAP measure.
  11




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Restaurant sales
    
    $
    19,322
    
    
    $
    11,877
    
    
    $
    34,988
    
    
    $
    22,071Costs and expenses:Cost of sales
    
    
    5,487
    
    
    
    3,299
    
    
    
    10,033
    
    
    
    6,194Labor
    
    
    5,970
    
    
    
    3,578
    
    
    
    11,045
    
    
    
    6,731Occupancy
    
    
    1,205
    
    
    
    812
    
    
    
    2,263
    
    
    
    1,518Restaurant operating expenses
    
    
    2,742
    
    
    
    1,480
    
    
    
    4,876
    
    
    
    2,926Restaurant operating profit
    
    
    3,918
    
    
    
    2,708
    
    
    
    6,771
    
    
    
    4,702Deduct  other costs and expensesGeneral and administrative
    
    
    1,832
    
    
    
    1,625
    
    
    
    3,601
    
    
    
    3,639Preopening expense
    
    
    350
    
    
    
    689
    
    
    
    838
    
    
    
    980Depreciation and amortization
    
    
    1,477
    
    
    
    823
    
    
    
    2,766
    
    
    
    1,553Income (loss) from operations
    
    $
    259
    
    
    $
    (429
    )
    
    $
    (434
    )
    
    $
    (1,470
    )
 Percentage of
    
    
    Percentage ofRestaurant Sales
    
    
    Restaurant SalesThree Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    28.4
    
    
    
    27.8
    
    
    
    28.7
    
    
    
    28.1Labor
    
    
    30.9
    
    
    
    30.1
    
    
    
    31.6
    
    
    
    30.5Occupancy
    
    
    6.2
    
    
    
    6.8
    
    
    
    6.5
    
    
    
    6.9Restaurant operating expenses
    
    
    14.2
    
    
    
    12.5
    
    
    
    13.9
    
    
    
    13.2Restaurant operating profit
    
    
    20.3
    
    
    
    22.8
    
    
    
    19.4
    
    
    
    21.3Deduct  other costs and expensesGeneral and administrative
    
    
    9.5
    
    
    
    13.7
    
    
    
    10.3
    
    
    
    16.5Preopening expense
    
    
    1.8
    
    
    
    5.8
    
    
    
    2.4
    
    
    
    4.5Depreciation and amortization
    
    
    7.6
    
    
    
    6.9
    
    
    
    7.9
    
    
    
    7.0Income (loss) from operations
    
    
    1.3
    %
    
    
    (3.6
    )%
    
    
    (1.2
    )%
    
    
    (6.7
    )%
  Six Months Ended
    
    
    Year EndedJune 30, 2007
    
    
    December 31, 2006Store Growth ActivityBeginning Restaurants
    
    
    14
    
    
    
    9Openings
    
    
    2
    
    
    
    5Closings
    
    
    
    
    
    
    Total
    
    
    16
    
    
    
    14
  12




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Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    28.4
    
    
    
    27.8
    
    
    
    28.7
    
    
    
    28.1Labor
    
    
    30.9
    
    
    
    30.1
    
    
    
    31.6
    
    
    
    30.5Occupancy
    
    
    6.2
    
    
    
    6.8
    
    
    
    6.5
    
    
    
    6.9Restaurant operating expenses
    
    
    14.2
    
    
    
    12.5
    
    
    
    13.9
    
    
    
    13.2General and administrative
    
    
    9.5
    
    
    
    13.7
    
    
    
    10.3
    
    
    
    16.5Preopening expense
    
    
    1.8
    
    
    
    5.8
    
    
    
    2.4
    
    
    
    4.5Depreciation and amortization
    
    
    7.6
    
    
    
    6.9
    
    
    
    7.9
    
    
    
    7.0Total costs and expenses
    
    
    98.7
    
    
    
    103.6
    
    
    
    101.2
    
    
    
    106.7Income (loss) from operations
    
    
    1.3
    
    
    
    (3.6
    )
    
    
    (1.2
    )
    
    
    (6.7
    )Nonoperating income (expense):Interest income
    
    
    0.7
    
    
    
    2.1
    
    
    
    0.8
    
    
    
    2.2Interest expense
    
    
    (0.2
    )
    
    
    (0.6
    )
    
    
    (0.1
    )
    
    
    (0.7
    )Income (loss) before provision for income taxes
    
    
    1.8
    
    
    
    (2.1
    )
    
    
    (0.5
    )
    
    
    (5.2
    )Provision for income taxes
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.1
    
    
    
    0.2Net income (loss)
    
    
    1.6
    %
    
    
    (2.5
    )%
    
    
    (0.7
    )%
    
    
    (5.4
    )%
  Three Months Ended June 30, 2007 Compared with Three Months Ended June 30, 2006
 Restaurant Sales.
 Cost of Sales
 Labor
  13




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##### Table of Contents



Occupancy
 Restaurant Operating Expenses
 General and Administrative
 Preopening Expense
 Depreciation and Amortization
 Interest Income.
 Interest Expense.
 Provision for Income Taxes
  14




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##### Table of Contents



Six Months Ended June 30, 2007 Compared with Six Months Ended June 30, 2006
 Restaurant Sales.
 Cost of Sales
 Labor
 Occupancy
 Restaurant Operating Expenses
 General and Administrative
 Preopening Expense
 Depreciation and Amortization
 Interest Income.
  15




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##### Table of Contents



Interest Expense.
 Provision for Income Taxes
 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;
    
    general economic conditions;
    
    weather conditions or natural disasters;
    
    timing of certain holidays;
    
    new or revised regulatory requirements and accounting pronouncements;
    
    changes in consumer preferences and competitive conditions; and
    
    fluctuations in commodity prices.
   16




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##### Table of Contents



Liquidity and Capital Resources
  Equipment Loans
  Cash Flows
  Six Months Ended June 30,2007
    
    
    2006Net cash provided by (used in):Operating activities
    
    $
    2,149
    
    
    $
    1,840Investing activities
    
    
    (730
    )
    
    
    (4,535
    )Financing activities
    
    
    (144
    )
    
    
    (340
    )Net increase (decrease) in cash and cash equivalents
    
    $
    1,275
    
    
    $
    (3,035
    )
 Operating Activities.
 Investing activities.
  17




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##### Table of Contents



Financing Activities.
 Critical Accounting Policies
   Accounting for Income Taxes
     18




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##### Table of Contents



Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Investments
  Primary Market Risk Exposures
  Inflation
  
 Item 4. Controls and Procedures
   19




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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
  Withheld/For
    
    
    Against1.  Election of Class II members
of our Board of Directors for a
term expiring in 2010:Mark L. Bartholomay
    
    
    4,651,496
    
    
    
    23,493Anthony L. Winczewski
    
    
    4,549,077
    
    
    
    125,912Douglas G. Hipskind
    
    
    4,508,095
    
    
    
    166,894For
    
    
    Against
    
    
    Abstain2.  Proposal to approve the
amendments to our 2005 Stock
Award Plan (a) to increase the
number of shares of common stock
reserved for issuance under the
plan by 175,000 shares and (b)
to require stockholder approval
for any actions that may be
treated as stock option
repricing
    
    
    2,817,706
    
    
    
    211,912
    
    
    
    4,4233.  Proposal to approve the
ratification of the appointment
of Ernst & Young LLP as the
Companys independent auditors
for the fiscal year ending
December 31, 2007
    
    
    4,672,513
    
    
    
    350
    
    
    
    2,126
 
 Item 5. Other Information
  
 Item 6. Exhibits
 (a)
    
    Exhibits
 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 amended.31.2
    
    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 amended.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
  20




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##### Table of Contents



SIGNATURES
  Kona Grill, Inc./s/ Marcus E. JundtMarcus E. JundtChairman of the Board, President, andChief Executive Officer/s/ Mark S. RobinowMark S. RobinowExecutive Vice President, Chief Financial
Officer, and Secretary (Principal
Accounting and Financial Officer)   21




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description31.1
    
    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 amended.31.2
    
    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 amended.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
  22