##### 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, 2008
 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
  Large accelerated filer o
    
    Accelerated filer o
    
    Non-accelerated filer þ
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



TABLE OF CONTENTS
 PagePART I. FINANCIAL INFORMATIONItem 1. Consolidated Financial StatementsConsolidated Balance Sheets as of June 30, 2008 (Unaudited) and December 31, 2007
    
    
    2Unaudited Consolidated Statements of Operations for the Three and Six Months Ended June
30, 2008 and 2007
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008
and 2007
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    21Item 4. Controls and Procedures
    
    
    22PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    22Item 1A. Risk Factors
    
    
    22Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 3. Defaults Upon Senior Securities
    
    
    24Item 4. Submission of Matters to a Vote of Security Holders
    
    
    24Item 5. Other Information
    
    
    24Item 6. Exhibits
    
    
    25Exhibit 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 31,2008
    
    
    2007(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    7,956
    
    
    $
    4,991Investments
    
    
    366
    
    
    
    14,188Receivables
    
    
    1,865
    
    
    
    1,096Other current assets
    
    
    1,497
    
    
    
    1,393Total current assets
    
    
    11,684
    
    
    
    21,668Long-term investments
    
    
    6,142
    
    
    
    Other assets
    
    
    542
    
    
    
    495Property and equipment, net
    
    
    49,856
    
    
    
    47,311Total assets
    
    $
    68,224
    
    
    $
    69,474LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,453
    
    
    $
    3,324Accrued expenses
    
    
    4,215
    
    
    
    4,025Current portion of notes payable
    
    
    689
    
    
    
    663Total current liabilities
    
    
    8,357
    
    
    
    8,012Notes payable
    
    
    1,685
    
    
    
    2,037Deferred rent
    
    
    14,106
    
    
    
    12,994Total liabilities
    
    
    24,148
    
    
    
    23,043Commitments and contingencies (Note 9)Stockholders equity:Preferred stock, $0.01 par value, 2,000,000 shares authorized, none issued
    
    
    
    
    
    
    Series A junior participating preferred stock, $0.01 par value, 10,000
shares and zero shares authorized at June 30, 2008 and December 31, 2007,
respectively, none issued
    
    
    
    
    
    
    Common stock, $0.01 par value, 15,000,000 shares authorized, 6,614,358
and 6,608,078 shares issued and outstanding at June 30, 2008 and December
31, 2007, respectively
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    53,382
    
    
    
    53,071Treasury stock, at cost, 116,200 shares and zero shares at June 30, 2008
and December 31, 2007, respectively
    
    
    (1,000
    )
    
    
    Accumulated deficit
    
    
    (7,914
    )
    
    
    (6,706
    )Accumulated other comprehensive loss
    
    
    (458
    )
    
    
    Total stockholders equity
    
    
    44,076
    
    
    
    46,431Total liabilities and stockholders equity
    
    $
    68,224
    
    
    $
    69,474
   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 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales
    
    $
    20,183
    
    
    $
    19,322
    
    
    $
    38,979
    
    
    $
    34,988Costs and expenses:Cost of sales
    
    
    5,517
    
    
    
    5,487
    
    
    
    10,924
    
    
    
    10,033Labor
    
    
    6,656
    
    
    
    5,970
    
    
    
    13,115
    
    
    
    11,045Occupancy
    
    
    1,296
    
    
    
    1,205
    
    
    
    2,604
    
    
    
    2,263Restaurant operating expenses
    
    
    3,045
    
    
    
    2,742
    
    
    
    5,772
    
    
    
    4,876General and administrative
    
    
    2,026
    
    
    
    1,832
    
    
    
    3,878
    
    
    
    3,601Preopening expense
    
    
    541
    
    
    
    350
    
    
    
    719
    
    
    
    838Depreciation and amortization
    
    
    1,675
    
    
    
    1,477
    
    
    
    3,333
    
    
    
    2,766Total costs and expenses
    
    
    20,756
    
    
    
    19,063
    
    
    
    40,345
    
    
    
    35,422(Loss) income from operations
    
    
    (573
    )
    
    
    259
    
    
    
    (1,366
    )
    
    
    (434
    )Nonoperating income (expense):Interest income
    
    
    105
    
    
    
    131
    
    
    
    309
    
    
    
    291Interest expense
    
    
    (17
    )
    
    
    (42
    )
    
    
    (51
    )
    
    
    (42
    )(Loss) income before provision for income taxes
    
    
    (485
    )
    
    
    348
    
    
    
    (1,108
    )
    
    
    (185
    )Provision for income taxes
    
    
    50
    
    
    
    35
    
    
    
    100
    
    
    
    45Net (loss) income
    
    $
    (535
    )
    
    $
    313
    
    
    $
    (1,208
    )
    
    $
    (230
    )Net (loss) income per share:Basic
    
    $
    (0.08
    )
    
    $
    0.05
    
    
    $
    (0.18
    )
    
    $
    (0.04
    )Diluted
    
    $
    (0.08
    )
    
    $
    0.05
    
    
    $
    (0.18
    )
    
    $
    (0.04
    )Weighted average shares used in computation:Basic
    
    
    6,565
    
    
    
    5,866
    
    
    
    6,587
    
    
    
    5,860Diluted
    
    
    6,565
    
    
    
    6,233
    
    
    
    6,587
    
    
    
    5,860
   3




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KONA GRILL, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Six Months Ended June 30,2008
    
    
    2007Operating activitiesNet loss
    
    $
    (1,208
    )
    
    $
    (230
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    3,333
    
    
    
    2,766Stock-based compensation expense
    
    
    265
    
    
    
    341Tax benefit on exercise of stock options
    
    
    
    
    
    
    5Change in operating assets and liabilities:Receivables
    
    
    (769
    )
    
    
    602Other current assets
    
    
    (104
    )
    
    
    (648
    )Accounts payable
    
    
    790
    
    
    
    (901
    )Accrued expenses
    
    
    190
    
    
    
    107Deferred rent
    
    
    1,112
    
    
    
    107Net cash provided by operating activities
    
    
    3,609
    
    
    
    2,149Investing activitiesPurchase of property and equipment
    
    
    (6,539
    )
    
    
    (6,516
    )Increase in other assets
    
    
    (47
    )
    
    
    (35
    )Net proceeds on purchase and sale of investments
    
    
    7,222
    
    
    
    5,821Net cash provided by (used in) investing activities
    
    
    636
    
    
    
    (730
    )Financing activitiesRepayments of notes payable
    
    
    (326
    )
    
    
    (301
    )Purchase of treasury stock
    
    
    (1,000
    )
    
    
    Proceeds from issuance of common stock under the Employee Stock Purchase Plan and exercise
of stock options
    
    
    46
    
    
    
    157Net cash used in financing activities
    
    
    (1,280
    )
    
    
    (144
    )Net increase in cash and cash equivalents
    
    
    2,965
    
    
    
    1,275Cash and cash equivalents at the beginning of the period
    
    
    4,991
    
    
    
    1,934Cash and cash equivalents at the end of the period
    
    $
    7,956
    
    
    $
    3,209Supplemental disclosure of cash flow informationCash paid for interest, net of capitalization
    
    $
    51
    
    
    $
    42Noncash investing activitiesDecrease in accounts payable related to property and equipment additions
    
    $
    (661
    )
    
    $
    (1,613
    )
   4




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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
 Fair
Value Measurements
 Effective Date of FASB Statement No. 157 ,
  5




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KONA GRILL, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 2. Investments
  GrossAdjusted
    
    
    UnrealizedCost
    
    
    Losses
    
    
    Fair ValueJune 30, 2008Short-term investments:Certificates of deposit
    
    $
    366
    
    
    $
    
    
    
    $
    366Long-term investments:Auction rate securities
    
    
    6,600
    
    
    
    (458
    )
    
    
    6,142Total investments
    
    $
    6,966
    
    
    $
    (458
    )
    
    $
    6,508December 31, 2007Short-term investments:Auction rate securities
    
    $
    8,650
    
    
    $
    
    
    
    $
    8,650Corporate debt securities
    
    
    5,538
    
    
    
    
    
    
    
    5,538Total investments
    
    $
    14,188
    
    
    $
    
    
    
    $
    14,188
   The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,
  6




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KONA GRILL, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 3. 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, 2008Certificates of deposit
    
    $
    366
    
    
    $
    
    
    
    $
    
    
    
    $
    366Auction rate securities
    
    
    
    
    
    
    
    
    
    
    6,142
    
    
    
    6,142$
    366
    
    
    $
    
    
    
    $
    6,142
    
    
    $
    6,508
  Fair Value Measurements ofAssets Using Level 3 InputsLong-term InvestmentsBalance at December 31, 2007
    
    $
    Transfer to Level 3
    
    
    8,650Total gains or losses (realized and unrealized)Included in earnings
    
    
    Included in other comprehensive loss
    
    
    (458
    )Net settlements
    
    
    (2,050
    )Balance at June 30, 2008
    
    $
    6,142
  7




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KONA GRILL, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 4. Net (Loss) Income Per Share
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per share data)Numerator:Net (loss) income
    
    $
    (535
    )
    
    $
    313
    
    
    $
    (1,208
    )
    
    $
    (230
    )Denominator:Weighted average shares  Basic
    
    
    6,565
    
    
    
    5,866
    
    
    
    6,587
    
    
    
    5,860Effect of dilutive stock options and warrants
    
    
    
    
    
    
    367
    
    
    
    
    
    
    
    Weighted average shares  Diluted
    
    
    6,565
    
    
    
    6,233
    
    
    
    6,587
    
    
    
    5,860Net (loss) income per share:Basic
    
    $
    (0.08
    )
    
    $
    0.05
    
    
    $
    (0.18
    )
    
    $
    (0.04
    )Diluted
    
    $
    (0.08
    )
    
    $
    0.05
    
    
    $
    (0.18
    )
    
    $
    (0.04
    )
  5. Accrued Expenses
  June 30,
    
    
    December 31,2008
    
    
    2007Accrued payroll
    
    $
    1,542
    
    
    $
    1,358Business and income taxes
    
    
    593
    
    
    
    629Sales taxes
    
    
    605
    
    
    
    517Gift cards
    
    
    393
    
    
    
    533Accrued occupancy
    
    
    223
    
    
    
    227Other
    
    
    859
    
    
    
    761$
    4,215
    
    
    $
    4,025
 6. Stock Repurchase Plan
   8




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KONA GRILL, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 7. Stock-Based Compensation
   Six Months Ended June 30,2008
    
    
    2007Expected volatility
    
    
    35.7
    %
    
    
    34.4
    %Risk-free interest rate
    
    
    2.5
    %
    
    
    4.9
    %Expected life (in years)
    
    
    3.7
    
    
    
    3.8Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Weighted average fair value per option granted
    
    $
    3.53
    
    
    $
    6.45
  Shares
    
    
    Weighted
    
    
    Weighted AverageUnder
    
    
    Average
    
    
    Remaining
    
    
    AggregateOption
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding options at December 31, 2007
    
    
    655,439
    
    
    $
    12.59Granted
    
    
    170,417
    
    
    
    11.66Forfeited
    
    
    (7,250
    )
    
    
    12.29Exercised
    
    
    (2,000
    )
    
    
    6.00Outstanding options at June 30, 2008
    
    
    816,606
    
    
    $
    12.41
    
    
    4.1 years
    
    
    $
    511,000Exercisable at June 30, 2008
    
    
    479,439
    
    
    $
    10.78
    
    
    4.1 years
    
    
    $
    510,000
   9




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KONA GRILL, INC.
 NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 8. Comprehensive (Loss) Income
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (535
    )
    
    $
    313
    
    
    $
    (1,208
    )
    
    $
    (230
    )Net unrealized (losses) gains on available-for-sale securities
    
    
    (105
    )
    
    
    1
    
    
    
    (458
    )
    
    
    1Total comprehensive (loss) income
    
    $
    (640
    )
    
    $
    314
    
    
    $
    (1,666
    )
    
    $
    (229
    )
 9. Commitments and Contingencies
  10. Stockholder Rights Plan
   10




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     11




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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.
  12




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Preopening Expense.
 Depreciation and Amortization
 Interest Income.
 Interest Expense.
 Financial Performance Overview
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales growth
    
    
    4.5
    %
    
    
    62.7
    %
    
    
    11.4
    %
    
    
    58.5
    %Same-store sales percentage change (1)
    
    
    (5.6
    )%
    
    
    5.0
    %
    
    
    (4.1
    )%
    
    
    3.4
    %Average weekly sales  comparable restaurant base (2)
    
    $
    89,955
    
    
    $
    95,256
    
    
    $
    86,638
    
    
    $
    90,371Average weekly sales  non-comparable restaurant base (3)
    
    $
    76,659
    
    
    $
    82,815
    
    
    $
    76,456
    
    
    $
    77,555Average unit volume (in thousands) (4)
    
    $
    1,088
    
    
    $
    1,288
    
    
    $
    2,123
    
    
    $
    2,450Sales per square foot (4)
    
    $
    155
    
    
    $
    183
    
    
    $
    301
    
    
    $
    348Restaurant operating profit (in thousands) (5)
    
    $
    3,669
    
    
    $
    3,918
    
    
    $
    6,564
    
    
    $
    6,771Restaurant operating profit as a percentage of sales (5)
    
    
    18.2
    %
    
    
    20.3
    %
    
    
    16.8
    %
    
    
    19.4
    %
 (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 generally accepted accounting principles and should not be considered in
isolation or as an alternative to (loss) income 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 (loss) income from operations, the most comparable GAAP measure.  13




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Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Restaurant sales
    
    $
    20,183
    
    
    $
    19,322
    
    
    $
    38,979
    
    
    $
    34,988Costs and expenses:Cost of sales
    
    
    5,517
    
    
    
    5,487
    
    
    
    10,924
    
    
    
    10,033Labor
    
    
    6,656
    
    
    
    5,970
    
    
    
    13,115
    
    
    
    11,045Occupancy
    
    
    1,296
    
    
    
    1,205
    
    
    
    2,604
    
    
    
    2,263Restaurant operating expenses
    
    
    3,045
    
    
    
    2,742
    
    
    
    5,772
    
    
    
    4,876Restaurant operating profit
    
    
    3,669
    
    
    
    3,918
    
    
    
    6,564
    
    
    
    6,771Deduct  other costs and expensesGeneral and administrative
    
    
    2,026
    
    
    
    1,832
    
    
    
    3,878
    
    
    
    3,601Preopening expense
    
    
    541
    
    
    
    350
    
    
    
    719
    
    
    
    838Depreciation and amortization
    
    
    1,675
    
    
    
    1,477
    
    
    
    3,333
    
    
    
    2,766(Loss) income from operations
    
    $
    (573
    )
    
    $
    259
    
    
    $
    (1,366
    )
    
    $
    (434
    )
 Percentage of
    
    
    Percentage ofRestaurant Sales
    
    
    Restaurant SalesThree Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    27.3
    
    
    
    28.4
    
    
    
    28.0
    
    
    
    28.7Labor
    
    
    33.0
    
    
    
    30.9
    
    
    
    33.6
    
    
    
    31.6Occupancy
    
    
    6.4
    
    
    
    6.2
    
    
    
    6.7
    
    
    
    6.5Restaurant operating expenses
    
    
    15.1
    
    
    
    14.2
    
    
    
    14.8
    
    
    
    13.9Restaurant operating profit
    
    
    18.2
    
    
    
    20.3
    
    
    
    16.8
    
    
    
    19.4Deduct  other costs and expensesGeneral and administrative
    
    
    10.0
    
    
    
    9.5
    
    
    
    9.9
    
    
    
    10.3Preopening expense
    
    
    2.7
    
    
    
    1.8
    
    
    
    1.8
    
    
    
    2.4Depreciation and amortization
    
    
    8.3
    
    
    
    7.6
    
    
    
    8.6
    
    
    
    7.9(Loss) income from operations
    
    
    (2.8
    )%
    
    
    1.3
    %
    
    
    (3.5
    )%
    
    
    (1.2
    )%
  Six Months Ended
    
    
    Year EndedJune 30, 2008
    
    
    December 31, 2007Store Growth ActivityBeginning
Restaurants
    
    
    18
    
    
    
    14Openings
    
    
    1
    
    
    
    4Closings
    
    
    
    
    
    
    Total
    
    
    19
    
    
    
    18
  14




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##### Table of Contents



Results of Operations
  Three Months Ended June 30,
    
    
    Six Months Ended June 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    27.3
    
    
    
    28.4
    
    
    
    28.0
    
    
    
    28.7Labor
    
    
    33.0
    
    
    
    30.9
    
    
    
    33.6
    
    
    
    31.6Occupancy
    
    
    6.4
    
    
    
    6.2
    
    
    
    6.7
    
    
    
    6.5Restaurant operating expenses
    
    
    15.1
    
    
    
    14.2
    
    
    
    14.8
    
    
    
    13.9General and administrative
    
    
    10.0
    
    
    
    9.5
    
    
    
    9.9
    
    
    
    10.3Preopening expense
    
    
    2.7
    
    
    
    1.8
    
    
    
    1.8
    
    
    
    2.4Depreciation and amortization
    
    
    8.3
    
    
    
    7.6
    
    
    
    8.6
    
    
    
    7.9Total costs and expenses
    
    
    102.8
    
    
    
    98.7
    
    
    
    103.5
    
    
    
    101.2(Loss) income from operations
    
    
    (2.8
    )
    
    
    1.3
    
    
    
    (3.5
    )
    
    
    (1.2
    )Nonoperating income (expense):Interest income
    
    
    0.5
    
    
    
    0.7
    
    
    
    0.8
    
    
    
    0.8Interest expense
    
    
    (0.1
    )
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.1
    )(Loss) income before provision for income taxes
    
    
    (2.4
    )
    
    
    1.8
    
    
    
    (2.8
    )
    
    
    (0.5
    )Provision for income taxes
    
    
    0.2
    
    
    
    0.2
    
    
    
    0.3
    
    
    
    0.1Net (loss) income
    
    
    (2.7
    )%
    
    
    1.6
    %
    
    
    (3.1
    )%
    
    
    (0.7
    )%
  Three Months Ended June 30, 2008 Compared with Three Months Ended June 30, 2007
 Restaurant Sales.
 Cost of Sales
 Labor
  15




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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
  16




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##### Table of Contents



Six Months Ended June 30, 2008 Compared with Six Months Ended June 30, 2007
 Restaurant Sales.
 Cost of Sales
 Labor
 Occupancy
 Restaurant Operating Expenses
 General and Administrative
 Preopening Expense
  17




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##### Table of Contents



Depreciation and Amortization
 Interest Income.
 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, including changes in consumer spending patterns;
 
    
    weather conditions or natural disasters;
 
    
    timing of certain holidays;
 
    
    new or revised regulatory requirements and accounting pronouncements;
 
    
    changes in consumer preferences and competitive conditions;
 
    
    fluctuations in commodity prices; and
 
    
    fluctuations in energy prices, especially fuel and utilities.
  18




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##### Table of Contents



Liquidity and Capital Resources
    Stock Repurchase Program
   19




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##### Table of Contents



Equipment Loans
  Cash Flows
  Six Months Ended June 30,2008
    
    
    2007Net cash provided by (used in):Operating activities
    
    $
    3,609
    
    
    $
    2,149Investing activities
    
    
    636
    
    
    
    (730
    )Financing activities
    
    
    (1,280
    )
    
    
    (144
    )Net increase in cash and cash equivalents
    
    $
    2,965
    
    
    $
    1,275
 Operating Activities.
 Investing activities.
 Financing Activities.
  20




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##### Table of Contents



Critical Accounting Policies
  Investments
 Accounting for Certain Investments in Debt and Equity
Securities
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  Investments
   21




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##### Table of Contents



Primary Market Risk Exposures
  
 Item 4. Controls and Procedures
 Evaluation of Disclosure Controls and Procedures
  Changes in Internal Control over Financial Reporting
  
 PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  New Risk Factors
 We may be required to record impairment charges in future quarters as a result of the decline in
value of our investments in auction rate securities.
   22




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##### Table of Contents



Our stockholders rights plan may adversely affect existing stockholders.
   Updated and Revised Risk Factors
 A decline in visitors to any of the retail centers, shopping malls, or entertainment centers where
our restaurants are located could negatively affect our restaurant sales and may require us to
record an impairment charge for restaurants performing below expectations.
   23




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##### Table of Contents



Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  Total Number of Shares
    
    
    Maximum Number ofTotal Number
    
    
    Average
    
    
    Purchased as Part of
    
    
    Shares that May Yet Beof Shares
    
    
    Price Paid
    
    
    Publicly Announced
    
    
    Purchased Under theMonth
    
    Purchased
    
    
    per Share
    
    
    Plans or Programs (1)
    
    
    Plans or Programs (2)April 1  April 30, 2008
    
    
    
    
    
    $
    
    
    
    
    
    
    
    
    600,000May 1  May 31, 2008
    
    
    76,435
    
    
    
    8.73
    
    
    
    76,435
    
    
    
    523,565June 1  June 30, 2008
    
    
    39,765
    
    
    
    8.35
    
    
    
    39,765
    
    
    
    483,800Total
    
    
    116,200
    
    
    
    
    
    
    
    116,200
 (1)
    
    During April 2008, our Board of Directors approved a stock repurchase program under which we
are authorized to repurchase up to 600,000 shares of our common stock in the open market at
prevailing market prices. The authorization does not have an expiration date and it does not
require us to purchase a specific number of shares. No shares were repurchased other than
through our publicly announced repurchase program during the three months ended June 30, 2008.(2)
    
    Repurchases are subject to prevailing market prices and may be made in open market
transactions. There can be no assurance that we will repurchase all of the shares authorized
under the stock repurchase program. 
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  Withheld/For
    
    
    Against1. Election of Class III members
of our Board of Directors for a
term expiring in 2011:Kent D. Carlson
    
    
    4,571,746
    
    
    
    177,901Richard J. Hauser
    
    
    4,427,161
    
    
    
    322,486W. Kirk Patterson
    
    
    4,571,243
    
    
    
    178,404
 For
    
    
    Against
    
    
    Abstain2. 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, 2008
    
    
    4,734,639
    
    
    
    8,011
    
    
    
    6,997
 
 Item 5. Other Information
   24




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##### Table of Contents



Item 6. Exhibits
  3.1
    
    Amended and Restated Certificate of Incorporation of the Registrant (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)4.5
    
    Rights Agreement, dated May 27, 2008 between Kona Grill, Inc. and Continental
Stock Transfer & Trust, as rights agent (4)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.
 
 (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.  25




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##### Table of Contents



SIGNATURES
  Kona Grill, Inc./s/ Marcus E. JundtMarcus E. JundtChairman of the Board, President, and
Chief Executive Officer/s/ Mark S. RobinowMark S. RobinowExecutive Vice President, 
Chief Financial Officer, and Secretary(Principal Accounting and Financial Officer)   26




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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.
  27