##### 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, 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)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 Yes o No þ




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance Sheets as of June 30, 2009 (Unaudited) and December 31, 2008
    
    
    2Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June
30, 2009 and 2008
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 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 4. 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
    
    
    26Item 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)
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    4,994
    
    
    $
    2,477Investments
    
    
    7,036
    
    
    
    370Receivables
    
    
    351
    
    
    
    980Other current assets
    
    
    1,456
    
    
    
    938Total current assets
    
    
    13,837
    
    
    
    4,765Long-term investments
    
    
    
    
    
    
    6,491Other assets
    
    
    748
    
    
    
    794Property and equipment, net
    
    
    55,157
    
    
    
    53,504Total assets
    
    $
    69,742
    
    
    $
    65,554LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,938
    
    
    $
    4,335Accrued expenses
    
    
    6,072
    
    
    
    4,878Current portion of notes payable
    
    
    745
    
    
    
    717Line of credit
    
    
    6,586
    
    
    
    2,488Total current liabilities
    
    
    15,341
    
    
    
    12,418Notes payable
    
    
    940
    
    
    
    1,320Deferred rent
    
    
    15,506
    
    
    
    16,218Total liabilities
    
    
    31,787
    
    
    
    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, 9,257,321 shares
issued and 9,141,121 shares outstanding at June 30, 2009 and 6,628,191 shares
issued and 6,511,991 shares outstanding at December 31, 2008
    
    
    92
    
    
    
    66Additional paid-in capital
    
    
    57,380
    
    
    
    53,739Treasury stock, at cost, 116,200 shares at June 30, 2009 and December 31, 2008
    
    
    (1,000
    )
    
    
    (1,000
    )Accumulated deficit
    
    
    (18,517
    )
    
    
    (17,207
    )Total stockholders equity
    
    
    37,955
    
    
    
    35,598Total liabilities and stockholders equity
    
    $
    69,742
    
    
    $
    65,554
   2




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KONA GRILL, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
 (in thousands, except per share data)
 Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales
    
    $
    21,468
    
    
    $
    19,685
    
    
    $
    40,923
    
    
    $
    37,788Costs and expenses:Cost of sales
    
    
    5,461
    
    
    
    5,369
    
    
    
    10,558
    
    
    
    10,562Labor
    
    
    7,269
    
    
    
    6,380
    
    
    
    14,018
    
    
    
    12,507Occupancy
    
    
    1,536
    
    
    
    1,244
    
    
    
    3,056
    
    
    
    2,500Restaurant operating expenses
    
    
    3,242
    
    
    
    2,902
    
    
    
    6,272
    
    
    
    5,490General and administrative
    
    
    2,661
    
    
    
    2,026
    
    
    
    4,548
    
    
    
    3,878Preopening expense
    
    
    352
    
    
    
    541
    
    
    
    852
    
    
    
    719Depreciation and amortization
    
    
    1,812
    
    
    
    1,584
    
    
    
    3,553
    
    
    
    3,150Total costs and expenses
    
    
    22,333
    
    
    
    20,046
    
    
    
    42,857
    
    
    
    38,806Loss from operations
    
    
    (865
    )
    
    
    (361
    )
    
    
    (1,934
    )
    
    
    (1,018
    )Nonoperating income (expense):Interest income and other, net
    
    
    77
    
    
    
    105
    
    
    
    125
    
    
    
    309Interest expense
    
    
    (99
    )
    
    
    (17
    )
    
    
    (131
    )
    
    
    (51
    )Loss from continuing operations before provision
for income taxes
    
    
    (887
    )
    
    
    (273
    )
    
    
    (1,940
    )
    
    
    (760
    )Provision for income taxes
    
    
    30
    
    
    
    75
    
    
    
    60
    
    
    
    150Loss from continuing operations
    
    
    (917
    )
    
    
    (348
    )
    
    
    (2,000
    )
    
    
    (910
    )Gain (loss) from discontinued operations, net of tax
    
    
    703
    
    
    
    (187
    )
    
    
    690
    
    
    
    (298
    )Net loss
    
    $
    (214
    )
    
    $
    (535
    )
    
    $
    (1,310
    )
    
    $
    (1,208
    )Net (loss) income per sharebasic and diluted
(Note 5):Continuing operations
    
    $
    (0.11
    )
    
    $
    (0.04
    )
    
    $
    (0.25
    )
    
    $
    (0.11
    )Discontinued operations
    
    
    0.08
    
    
    
    (0.03
    )
    
    
    0.09
    
    
    
    (0.04
    )Net loss
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.16
    )
    
    $
    (0.15
    )Weighted average shares used in computation (Note
5):Basic
    
    
    8,278
    
    
    
    8,081
    
    
    
    8,147
    
    
    
    8,108Diluted
    
    
    8,278
    
    
    
    8,081
    
    
    
    8,147
    
    
    
    8,108
   3




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KONA GRILL, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (in thousands)
 Six Months Ended June 30,2009
    
    
    2008Operating activitiesNet loss
    
    $
    (1,310
    )
    
    $
    (1,208
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    3,553
    
    
    
    3,333Stock-based compensation expense
    
    
    307
    
    
    
    265Amortization of debt discount
    
    
    70
    
    
    
    Change in operating assets and liabilities:Receivables
    
    
    629
    
    
    
    (769
    )Other current assets
    
    
    (518
    )
    
    
    (104
    )Accounts payable
    
    
    20
    
    
    
    790Accrued expenses
    
    
    1,194
    
    
    
    190Deferred rent
    
    
    (712
    )
    
    
    1,112Net cash provided by operating activities
    
    
    3,233
    
    
    
    3,609Investing activitiesPurchase of property and equipment
    
    
    (7,623
    )
    
    
    (6,539
    )Decrease (increase) in other assets
    
    
    46
    
    
    
    (47
    )Net purchases and sales of investments
    
    
    (175
    )
    
    
    7,222Net cash (used in) provided by investing activities
    
    
    (7,752
    )
    
    
    636Financing activitiesNet borrowings on line of credit
    
    
    4,098
    
    
    
    Proceeds from bridge loan
    
    
    1,200
    
    
    
    Repayment of bridge loan
    
    
    (1,200
    )
    
    
    Repayments of notes payable
    
    
    (352
    )
    
    
    (326
    )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
    
    
    45
    
    
    
    46Purchase of treasury stock
    
    
    
    
    
    
    (1,000
    )Net cash provided by (used in) financing activities
    
    
    7,036
    
    
    
    (1,280
    )Net increase in cash and cash equivalents
    
    
    2,517
    
    
    
    2,965Cash and cash equivalents at the beginning of the period
    
    
    2,477
    
    
    
    4,991Cash and cash equivalents at the end of the period
    
    $
    4,994
    
    
    $
    7,956Supplemental disclosure of cash flow informationCash paid for interest, net of capitalization
    
    $
    62
    
    
    $
    51Noncash investing activitiesDecrease in accounts payable related to property and equipment
    
    $
    (2,417
    )
    
    $
    (661
    )
   4




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KONA GRILL, INC.
 
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 1. Basis of Presentation
    Recent Accounting Pronouncements
 Fair Value Measurements
 The Fair Value Option for Financial Assets
and Financial Liabilities
  
    
    FSP FAS 157-4, Determining Fair Value When the Volume and Level of Activity for the Asset
or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,
provides guidance on how to determine the fair value of assets and liabilities when the volume
and level of activity for the asset or liability has significantly decreased. This FSP
reaffirms the need to use judgment to ascertain if a formerly active market has become
inactive and in determining fair values when markets have become inactive. In addition, this
FSP requires disclosure in interim and annual periods of the inputs and valuation techniques
used to measure fair value and a discussion of changes in valuation techniques.
 
    
    FSP FAS 115-2 and FAS 124-2 Recognition and Presentation of Other-Than-Temporary
Impairments, amends the requirements for the recognition and measurement of
other-than-temporary impairments for debt securities by modifying the pre-existing intent and
ability indicator. Under FSP FAS 115-2 and FAS 124-2, an other-than-temporary impairment is
triggered when there is an intent to sell the security, it is more likely than not that the
security will be required to be sold before recovery, or the security is not expected to
recover the entire amortized cost basis of the security. Additionally, this FSP changes the
presentation of an other-than-temporary impairment in the income statement for those
impairments involving credit losses. The credit loss component is recognized in earnings and
the remainder of the impairment is recorded in other comprehensive income.
  5




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
    
    FSP FAS 107-1 and APB 28-1, Interim Disclosures about Fair Value of Financial
Instruments, requires interim disclosures regarding the fair values of financial instruments
that are not currently reflected on the balance sheet at fair value. Additionally, this FSP
requires disclosure on the methods and significant assumptions used to estimate the fair value
of financial instruments on an interim basis as well as changes of the methods and significant
assumptions from prior periods.
  Subsequent Events
 2. Discontinued Operations
 Accounting for Costs Associated with Exit or Disposal Activities
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales
    
    $
    
    
    
    $
    498
    
    
    $
    
    
    
    $
    1,191Gain (loss) from discontinued operations before income tax benefit
    
    $
    703
    
    
    $
    (212
    )
    
    $
    690
    
    
    $
    (348
    )Income tax benefit
    
    
    
    
    
    
    25
    
    
    
    
    
    
    
    50Gain (loss) from discontinued operations, net of tax
    
    $
    703
    
    
    $
    (187
    )
    
    $
    690
    
    
    $
    (298
    )
  Balance at December 31, 2008
    
    $
    1,417Cash payments
    
    
    Non-cash activity
    
    
    (690
    )Balance at June 30, 2009
    
    $
    727
   6




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##### Table of Contents



3. Investments
  GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Losses
    
    
    Fair ValueJune 30, 2009Short-term investments:Certificates of deposit
    
    $
    170
    
    
    $
    
    
    
    $
    170Money market securities
    
    
    314
    
    
    
    
    
    
    
    314Auction rate securities
    
    
    5,965
    
    
    
    
    
    
    
    5,965Put option on auction rate securities
    
    
    587
    
    
    
    
    
    
    
    587Total investments
    
    $
    7,036
    
    
    $
    
    
    
    $
    7,036December 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
  The Fair Value Option for Financial
Assets and Financial Liabilities, Accounting
for Derivative Instruments and Hedging Activities
  7




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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 Company 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.
   Fair Value Measurements at Reporting Date UsingQuoted Prices in
    
    
    SignificantActive Markets
    
    
    Other
    
    
    Significantfor Identical
    
    
    Observable
    
    
    UnobservableAssets
    
    
    Inputs
    
    
    InputsDescription
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    June 30, 2009Certificates of deposit
    
    $
    170
    
    
    $
    
    
    
    $
    
    
    
    $
    170Money market securities
    
    
    314
    
    
    
    
    
    
    
    
    
    
    
    314Auction rate securities
    
    
    
    
    
    
    
    
    
    
    5,965
    
    
    
    5,965Put option on auction rate securities
    
    
    
    
    
    
    
    
    
    
    587
    
    
    
    587$
    484
    
    
    $
    
    
    
    $
    6,552
    
    
    $
    7,036
  8




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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
    
    
    107
    
    
    
    (46
    )Included in other comprehensive loss
    
    
    
    
    
    
    Net settlements
    
    
    
    
    
    
    Balance at June 30, 2009
    
    $
    5,965
    
    
    $
    587
 5. Net Loss Per Share
   Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands, except per share data)Numerator:Loss from continuing operations
    
    $
    (917
    )
    
    $
    (348
    )
    
    $
    (2,000
    )
    
    $
    (910
    )Gain (loss) from discontinued operations
    
    
    703
    
    
    
    (187
    )
    
    
    690
    
    
    
    (298
    )Net loss
    
    $
    (214
    )
    
    $
    (535
    )
    
    $
    (1,310
    )
    
    $
    (1,208
    )Denominator:Weighted average shares  Basic
    
    
    8,278
    
    
    
    8,081
    
    
    
    8,147
    
    
    
    8,108Effect of dilutive stock options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares  Diluted
    
    
    8,278
    
    
    
    8,081
    
    
    
    8,147
    
    
    
    8,108Basic and diluted net (loss) income per share:Loss from continuing operations
    
    $
    (0.11
    )
    
    $
    (0.04
    )
    
    $
    (0.25
    )
    
    $
    (0.11
    )Gain (loss) from discontinued operations
    
    
    0.08
    
    
    
    (0.03
    )
    
    
    0.09
    
    
    
    (0.04
    )Net loss
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.16
    )
    
    $
    (0.15
    )
 Earnings per
Share
   9




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6. Accrued Expenses
  June 30,
    
    
    December 31,2009
    
    
    2008Accrued payroll
    
    $
    2,306
    
    
    $
    1,846Business and income taxes
    
    
    679
    
    
    
    663Lease termination accrual
    
    
    667
    
    
    
    Sales taxes
    
    
    596
    
    
    
    643Gift cards
    
    
    569
    
    
    
    654Accrued occupancy
    
    
    141
    
    
    
    255Other
    
    
    1,114
    
    
    
    817$
    6,072
    
    
    $
    4,878
 7. Debt and Credit Agreements
 Credit Facility
  Bridge Loan
    10




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8. Rights Offering
  9. Stock-Based Compensation
   Six Months Ended June 30,2009
    
    
    2008Expected volatility
    
    
    55.0
    %
    
    
    35.7
    %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
    
    
    $
    3.53
  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
    
    
    (116,000
    )
    
    
    9.56Exercised
    
    
    
    
    
    
    Outstanding options at June 30, 2009
    
    
    905,156
    
    
    $
    10.26
    
    
    3.4 years
    
    
    $
    230,000Exercisable at June 30, 2009
    
    
    580,743
    
    
    $
    10.88
    
    
    3.2 years
    
    
    $
    35,000
   11




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10. Comprehensive Loss
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (214
    )
    
    $
    (535
    )
    
    $
    (1,310
    )
    
    $
    (1,208
    )Net unrealized loss on available-for-sale securities
    
    
    
    
    
    
    (105
    )
    
    
    
    
    
    
    (458
    )Total comprehensive loss
    
    $
    (214
    )
    
    $
    (640
    )
    
    $
    (1,310
    )
    
    $
    (1,666
    )
 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 June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales growth
    
    
    9.1
    %
    
    
    5.8
    %
    
    
    8.3
    %
    
    
    13.1
    %Same-store sales percentage change (1)
    
    
    (9.5
    )%
    
    
    (5.6
    )%
    
    
    (9.6
    )%
    
    
    (4.1
    )%Average weekly sales  comparable restaurant base (2)
    
    $
    79,470
    
    
    $
    87,853
    
    
    $
    76,409
    
    
    $
    84,488Average weekly sales  non-comparable restaurant base (3)
    
    $
    69,190
    
    
    $
    84,328
    
    
    $
    67,891
    
    
    $
    82,025Average unit volume (in thousands) (4)
    
    $
    1,014
    
    
    $
    1,130
    
    
    $
    1,949
    
    
    $
    2,192Sales per square foot (4)
    
    $
    144
    
    
    $
    161
    
    
    $
    276
    
    
    $
    311Restaurant operating profit (in thousands) (5)
    
    $
    3,960
    
    
    $
    3,790
    
    
    $
    7,019
    
    
    $
    6,729Restaurant operating profit as a percentage of sales (5)
    
    
    18.4
    %
    
    
    19.3
    %
    
    
    17.2
    %
    
    
    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 June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008(In thousands)Restaurant sales
    
    $
    21,468
    
    
    $
    19,685
    
    
    $
    40,923
    
    
    $
    37,788Costs and expenses:Cost of sales
    
    
    5,461
    
    
    
    5,369
    
    
    
    10,558
    
    
    
    10,562Labor
    
    
    7,269
    
    
    
    6,380
    
    
    
    14,018
    
    
    
    12,507Occupancy
    
    
    1,536
    
    
    
    1,244
    
    
    
    3,056
    
    
    
    2,500Restaurant operating expenses
    
    
    3,242
    
    
    
    2,902
    
    
    
    6,272
    
    
    
    5,490Restaurant operating profit
    
    
    3,960
    
    
    
    3,790
    
    
    
    7,019
    
    
    
    6,729Deduct  other costs and expensesGeneral and administrative
    
    
    2,661
    
    
    
    2,026
    
    
    
    4,548
    
    
    
    3,878Preopening expense
    
    
    352
    
    
    
    541
    
    
    
    852
    
    
    
    719Depreciation and amortization
    
    
    1,812
    
    
    
    1,584
    
    
    
    3,553
    
    
    
    3,150Loss from operations
    
    $
    (865
    )
    
    $
    (361
    )
    
    $
    (1,934
    )
    
    $
    (1,018
    )
 Percentage of
    
    
    Percentage ofRestaurant Sales
    
    
    Restaurant SalesThree Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    25.4
    
    
    
    27.3
    
    
    
    25.8
    
    
    
    27.9Labor
    
    
    33.9
    
    
    
    32.4
    
    
    
    34.3
    
    
    
    33.1Occupancy
    
    
    7.2
    
    
    
    6.3
    
    
    
    7.5
    
    
    
    6.6Restaurant operating expenses
    
    
    15.1
    
    
    
    14.7
    
    
    
    15.3
    
    
    
    14.5Restaurant operating profit
    
    
    18.4
    
    
    
    19.3
    
    
    
    17.2
    
    
    
    17.8Deduct  other costs and expensesGeneral and administrative
    
    
    12.4
    
    
    
    10.3
    
    
    
    11.1
    
    
    
    10.3Preopening expense
    
    
    1.6
    
    
    
    2.8
    
    
    
    2.1
    
    
    
    1.9Depreciation and amortization
    
    
    8.4
    
    
    
    8.0
    
    
    
    8.7
    
    
    
    8.3Loss from operations
    
    
    (4.0
    )%
    
    
    (1.8
    )%
    
    
    (4.7
    )%
    
    
    (2.7
    )%
   Six Months Ended
    
    
    Year EndedJune 30, 2009
    
    
    December 31, 2008Beginning of period
    
    
    20
    
    
    
    18Openings
    
    
    2
    
    
    
    3Closings
    
    
    
    
    
    
    (1
    )End of period
    
    
    22
    
    
    
    20
  16




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    25.4
    
    
    
    27.3
    
    
    
    25.8
    
    
    
    27.9Labor
    
    
    33.9
    
    
    
    32.4
    
    
    
    34.3
    
    
    
    33.1Occupancy
    
    
    7.2
    
    
    
    6.3
    
    
    
    7.5
    
    
    
    6.6Restaurant operating expenses
    
    
    15.1
    
    
    
    14.7
    
    
    
    15.3
    
    
    
    14.5General and administrative
    
    
    12.4
    
    
    
    10.3
    
    
    
    11.1
    
    
    
    10.3Preopening expense
    
    
    1.6
    
    
    
    2.8
    
    
    
    2.1
    
    
    
    1.9Depreciation and amortization
    
    
    8.4
    
    
    
    8.0
    
    
    
    8.7
    
    
    
    8.3Total costs and expenses
    
    
    104.0
    
    
    
    101.8
    
    
    
    104.7
    
    
    
    102.7Loss from operations
    
    
    (4.0
    )
    
    
    (1.8
    )
    
    
    (4.7
    )
    
    
    (2.7
    )Nonoperating income (expense):Interest income and other, net
    
    
    0.4
    
    
    
    0.5
    
    
    
    0.3
    
    
    
    0.8Interest expense
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    (0.3
    )
    
    
    (0.1
    )Loss from continuing operations before provision
for income taxes
    
    
    (4.1
    )
    
    
    (1.4
    )
    
    
    (4.7
    )
    
    
    (2.0
    )Provision for income taxes
    
    
    0.2
    
    
    
    0.4
    
    
    
    0.2
    
    
    
    0.4Loss from continuing operations
    
    
    (4.3
    )
    
    
    (1.8
    )
    
    
    (4.9
    )
    
    
    (2.4
    )Gain (loss) from discontinued operations, net of tax
    
    
    3.3
    
    
    
    (0.9
    )
    
    
    1.7
    
    
    
    (0.8
    )Net loss
    
    
    (1.0
    )%
    
    
    (2.7
    )%
    
    
    (3.2
    )%
    
    
    (3.2
    )%
  Three Months Ended June 30, 2009 Compared with Three Months Ended June 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.
  18




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##### Table of Contents



Provision for Income Taxes
 Gain from Discontinued Operations Accounting for Costs Associated with Exit or Disposal
Activities
 Six Months Ended June 30, 2009 Compared with Six Months Ended June 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 Accounting for Costs Associated with Exit or Disposal
Activities
 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;
  20




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##### Table of Contents




    
    changes in borrowings and interest rates;
 
    
    general economic conditions;
 
    
    weather conditions or natural disasters;
 
    
    timing of certain holidays;
 
    
    changes in government regulations;
 
    
    outside shareholder activities;
 
    
    new or revised regulatory requirements and accounting pronouncements;
 
    
    changes in consumer preferences and competitive conditions; and
 
    
    fluctuations in commodity prices.
  Liquidity and Capital Resources
  June 30,
    
    
    December 31,2009
    
    
    2008Cash and investments
    
    $
    12,030
    
    
    $
    2,847Net working capital (deficit)(1)
    
    
    (1,504
    )
    
    
    (7,653
    )
 (1)
    
    The working capital deficit at June 30, 2009, is primarily
attributable to accruals for legal, severance, and the Naples lease
settlement. 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. Six Months Ended June 30,2009
    
    
    2008Cash provided by operating activities
    
    $
    3,233
    
    
    $
    3,609Capital expenditures
    
    
    7,623
    
    
    
    6,539
   21




---



##### Table of Contents



Future Capital Requirements
   Bridge Loan
  Rights Offering
   22




---



##### Table of Contents



Equipment Loans
  Credit Facility
  Cash Flows
  Six Months Ended June 30,2009
    
    
    2008Net cash provided by (used in):Operating activities
    
    $
    3,233
    
    
    $
    3,609Investing activities
    
    
    (7,752
    )
    
    
    636Financing activities
    
    
    7,036
    
    
    
    (1,280
    )Net increase in cash and cash equivalents
    
    $
    2,517
    
    
    $
    2,965
 Operating Activities.
 Investing Activities.
 Financing Activities.
  23




---



##### Table of Contents



Critical Accounting Policies
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Primary Market Risk Exposures
  
 Item 4. 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
  Withheld/For
    
    
    Against1. Election of Class I member of
our Board of Directors for a term
expiring in 2012:Marcus E. Jundt
    
    
    2,846,518
    
    
    
    3,194,842
 For
    
    
    Against
    
    
    Abstain2. Proposal to approve an amendment
to the 2005 Stock Award Plan
    
    
    3,609,306
    
    
    
    1,322,832
    
    
    
    3,980
 For
    
    
    Against
    
    
    Abstain3. Proposal to approve the Rights
Agreement, dated May 27, 2008
between the Company and Continental
Stock Transfer and Trust Company,
as rights agent
    
    
    2,123,342
    
    
    
    2,769,887
    
    
    
    42,889
  25




---



##### Table of Contents



Item 5. Other Information
  
 Item 6. 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)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.  26




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##### Table of Contents



SIGNATURES
  Kona Grill, Inc./s/ Mark L. BartholomayMark L. BartholomayInterim President and Chief 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
 Exhibit No.
    
    Description3.1
    
    
    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)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.