##### Table of Contents



UNITED STATES
 SECURITIES AND EXCHANGE COMMISSION
 WASHINGTON, D.C. 20549
 
 FORM 10-Q
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended September 30, 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 September 30, 2008 (Unaudited) and December 31, 2007
    
    
    2Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2008 and 2007
    
    
    3Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 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
    
    
    24Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Consolidated Financial Statements
 KONA GRILL, INC.
 
 CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 September 30,
    
    
    December 31,2008
    
    
    2007(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,613
    
    
    $
    4,991Investments
    
    
    367
    
    
    
    14,188Receivables
    
    
    3,051
    
    
    
    1,096Other current assets
    
    
    1,481
    
    
    
    1,393Total current assets
    
    
    7,512
    
    
    
    21,668Long-term investments
    
    
    5,971
    
    
    
    Other assets
    
    
    573
    
    
    
    495Property and equipment, net
    
    
    53,665
    
    
    
    47,311Total assets
    
    $
    67,721
    
    
    $
    69,474LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,050
    
    
    $
    3,324Accrued expenses
    
    
    4,289
    
    
    
    4,025Current portion of notes payable
    
    
    703
    
    
    
    663Total current liabilities
    
    
    10,042
    
    
    
    8,012Notes payable
    
    
    1,504
    
    
    
    2,037Deferred rent
    
    
    16,006
    
    
    
    12,994Total liabilities
    
    
    27,552
    
    
    
    23,043Commitments and contingencies (Note 9)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, 6,618,070
and 6,608,078 shares issued and outstanding at September 30, 2008 and
December 31, 2007, respectively
    
    
    66
    
    
    
    66Additional paid-in capital
    
    
    53,540
    
    
    
    53,071Treasury stock, at cost, 116,200 shares and zero shares at September 30,
2008 and December 31, 2007, respectively
    
    
    (1,000
    )
    
    
    Accumulated deficit
    
    
    (11,808
    )
    
    
    (6,706
    )Accumulated other comprehensive loss
    
    
    (629
    )
    
    
    Total stockholders equity
    
    
    40,169
    
    
    
    46,431Total liabilities and stockholders equity
    
    $
    67,721
    
    
    $
    69,474
   2




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##### Table of Contents



KONA GRILL, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales
    
    $
    19,454
    
    
    $
    18,652
    
    
    $
    57,242
    
    
    $
    52,064Costs and expenses:Cost of sales
    
    
    5,254
    
    
    
    5,166
    
    
    
    15,816
    
    
    
    14,700Labor
    
    
    6,496
    
    
    
    5,581
    
    
    
    19,003
    
    
    
    15,942Occupancy
    
    
    1,260
    
    
    
    1,153
    
    
    
    3,760
    
    
    
    3,313Restaurant operating expenses
    
    
    2,978
    
    
    
    2,514
    
    
    
    8,468
    
    
    
    7,084General and administrative
    
    
    2,079
    
    
    
    1,885
    
    
    
    5,957
    
    
    
    5,486Preopening expense
    
    
    471
    
    
    
    367
    
    
    
    1,190
    
    
    
    1,205Depreciation and amortization
    
    
    1,656
    
    
    
    1,394
    
    
    
    4,806
    
    
    
    3,980Total costs and expenses
    
    
    20,194
    
    
    
    18,060
    
    
    
    59,000
    
    
    
    51,710(Loss) income from operations
    
    
    (740
    )
    
    
    592
    
    
    
    (1,758
    )
    
    
    354Nonoperating income (expense):Interest income
    
    
    62
    
    
    
    140
    
    
    
    371
    
    
    
    431Interest expense
    
    
    
    
    
    
    (37
    )
    
    
    (51
    )
    
    
    (79
    )(Loss) income from continuing operations
before provision for income taxes
    
    
    (678
    )
    
    
    695
    
    
    
    (1,438
    )
    
    
    706Provision for income taxes
    
    
    55
    
    
    
    74
    
    
    
    205
    
    
    
    147(Loss) income from continuing operations
    
    
    (733
    )
    
    
    621
    
    
    
    (1,643
    )
    
    
    559Loss from discontinued operations, net of tax
    
    
    (3,161
    )
    
    
    (177
    )
    
    
    (3,459
    )
    
    
    (345
    )Net (loss) income
    
    $
    (3,894
    )
    
    $
    444
    
    
    $
    (5,102
    )
    
    $
    214Net (loss) income per share  Basic:Continuing operations
    
    $
    (0.11
    )
    
    $
    0.11
    
    
    $
    (0.25
    )
    
    $
    0.10Loss from discontinued operations, net of tax
    
    
    (0.49
    )
    
    
    (0.03
    )
    
    
    (0.53
    )
    
    
    (0.06
    )Net (loss) income
    
    $
    (0.60
    )
    
    $
    0.08
    
    
    $
    (0.78
    )
    
    $
    0.04Net (loss) income per share  Diluted:Continuing operations
    
    $
    (0.11
    )
    
    $
    0.10
    
    
    $
    (0.25
    )
    
    $
    0.09Loss from discontinued operations, net of tax
    
    
    (0.49
    )
    
    
    (0.03
    )
    
    
    (0.53
    )
    
    
    (0.06
    )Net (loss) income
    
    $
    (0.60
    )
    
    $
    0.07
    
    
    $
    (0.78
    )
    
    $
    0.03Weighted average shares used in computation:Basic
    
    
    6,498
    
    
    
    5,891
    
    
    
    6,557
    
    
    
    5,870Diluted
    
    
    6,498
    
    
    
    6,238
    
    
    
    6,557
    
    
    
    6,231
   3




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KONA GRILL, INC.
 
 UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Months Ended September 30,2008
    
    
    2007Operating activitiesNet (loss) income
    
    $
    (5,102
    )
    
    $
    214Adjustments to reconcile net (loss) income to net cash provided by
operating activities:Depreciation and amortization
    
    
    5,063
    
    
    
    4,252Stock-based compensation expense
    
    
    403
    
    
    
    451Asset impairment charge in discontinued operations
    
    
    2,158
    
    
    
    Tax benefit on exercise of stock options
    
    
    
    
    
    
    5Change in operating assets and liabilities:Receivables
    
    
    (1,955
    )
    
    
    326Other current assets
    
    
    (88
    )
    
    
    (692
    )Accounts payable
    
    
    667
    
    
    
    (952
    )Accrued expenses
    
    
    264
    
    
    
    634Deferred rent
    
    
    3,012
    
    
    
    286Net cash provided by operating activities
    
    
    4,422
    
    
    
    4,524Investing activitiesPurchase of property and equipment
    
    
    (12,516
    )
    
    
    (9,184
    )Increase in other assets
    
    
    (78
    )
    
    
    (32
    )Net proceeds on purchase and sale of investments
    
    
    7,221
    
    
    
    5,671Net cash used in investing activities
    
    
    (5,373
    )
    
    
    (3,545
    )Financing activitiesRepayments of notes payable
    
    
    (493
    )
    
    
    (456
    )Purchase of treasury stock
    
    
    (1,000
    )
    
    
    Proceeds from issuance of common stock under the Employee Stock Purchase Plan
and exercise of stock options
    
    
    66
    
    
    
    241Net cash used in financing activities
    
    
    (1,427
    )
    
    
    (215
    )Net (decrease) increase in cash and cash equivalents
    
    
    (2,378
    )
    
    
    764Cash and cash equivalents at the beginning of the period
    
    
    4,991
    
    
    
    1,934Cash and cash equivalents at the end of the period
    
    $
    2,613
    
    
    $
    2,698Supplemental disclosure of cash flow informationCash paid for interest, net of capitalization
    
    $
    51
    
    
    $
    79Noncash investing activitiesIncrease (decrease) in accounts payable related to property and equipment
    
    $
    1,059
    
    
    $
    (1,648
    )
   4




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##### Table of Contents



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 ,
 Determining the Fair
Value of a Financial Asset When the Market for That Asset is Not Active
  5




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2. Discontinued Operations
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales
    
    $
    340
    
    
    $
    558
    
    
    $
    1,531
    
    
    $
    2,135Loss from discontinued operations before income tax benefit
    
    $
    (3,186
    )
    
    $
    (191
    )
    
    $
    (3,534
    )
    
    $
    (387
    )Income tax benefit
    
    
    25
    
    
    
    14
    
    
    
    75
    
    
    
    42Loss from discontinued operations, net of tax
    
    $
    (3,161
    )
    
    $
    (177
    )
    
    $
    (3,459
    )
    
    $
    (345
    )
 3. Investments
  GrossAdjusted
    
    
    UnrealizedCost
    
    
    Losses
    
    
    Fair ValueSeptember 30, 2008Short-term investments:Certificates of deposit
    
    $
    367
    
    
    $
    
    
    
    $
    367Long-term investments:Auction rate securities
    
    
    6,600
    
    
    
    (629
    )
    
    
    5,971Total investments
    
    $
    6,967
    
    
    $
    (629
    )
    
    $
    6,338December 31, 2007Short-term investments:Auction rate securities
    
    $
    8,650
    
    
    $
    
    
    
    $
    8,650Corporate debt securities
    
    
    5,538
    
    
    
    
    
    
    
    5,538Total investments
    
    $
    14,188
    
    
    $
    
    
    
    $
    14,188
   6




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The
Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments,
 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
    
    
    Inputs
    
    
    September 30,Description
    
    (Level 1)
    
    
    (Level 2)
    
    
    (Level 3)
    
    
    2008Certificates of deposit
    
    $
    367
    
    
    $
    
    
    
    $
    
    
    
    $
    367Auction rate securities
    
    
    
    
    
    
    
    
    
    
    5,971
    
    
    
    5,971$
    367
    
    
    $
    
    
    
    $
    5,971
    
    
    $
    6,338
  7




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##### Table of Contents



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
    
    
    (629
    )Net settlements
    
    
    (2,050
    )Balance at September 30, 2008
    
    $
    5,971
 5. Net (Loss) Income Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands, except per share data)Numerator:(Loss) income from continuing operations
    
    $
    (733
    )
    
    $
    621
    
    
    $
    (1,643
    )
    
    $
    559Loss from discontinued operations
    
    
    (3,161
    )
    
    
    (177
    )
    
    
    (3,459
    )
    
    
    (345
    )Net (loss) income
    
    $
    (3,894
    )
    
    $
    444
    
    
    $
    (5,102
    )
    
    $
    214Denominator:Weighted average shares  Basic
    
    
    6,498
    
    
    
    5,891
    
    
    
    6,557
    
    
    
    5,870Effect of dilutive stock options and warrants
    
    
    
    
    
    
    347
    
    
    
    
    
    
    
    361Weighted average shares  Diluted
    
    
    6,498
    
    
    
    6,238
    
    
    
    6,557
    
    
    
    6,231Basic net (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.11
    )
    
    $
    0.11
    
    
    $
    (0.25
    )
    
    $
    0.10Loss from discontinued operations
    
    
    (0.49
    )
    
    
    (0.03
    )
    
    
    (0.53
    )
    
    
    (0.06
    )Net (loss) income
    
    $
    (0.60
    )
    
    $
    0.08
    
    
    $
    (0.78
    )
    
    $
    0.04Diluted net (loss) income per share:(Loss) income from continuing operations
    
    $
    (0.11
    )
    
    $
    0.10
    
    
    $
    (0.25
    )
    
    $
    0.09Loss from discontinued operations
    
    
    (0.49
    )
    
    
    (0.03
    )
    
    
    (0.53
    )
    
    
    (0.06
    )Net (loss) income
    
    $
    (0.60
    )
    
    $
    0.07
    
    
    $
    (0.78
    )
    
    $
    0.03
   8




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##### Table of Contents



6. Accrued Expenses
  September 30,
    
    
    December 31,2008
    
    
    2007Accrued payroll
    
    $
    1,611
    
    
    $
    1,358Business and income taxes
    
    
    635
    
    
    
    629Sales taxes
    
    
    539
    
    
    
    517Gift cards
    
    
    362
    
    
    
    533Accrued occupancy
    
    
    249
    
    
    
    227Other
    
    
    893
    
    
    
    761$
    4,289
    
    
    $
    4,025
 7. Stock-Based Compensation
   Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Expected volatility
    
    
    38.7
    %
    
    
    33.1
    %
    
    
    36.0
    %
    
    
    33.8
    %Risk-free interest rate
    
    
    2.6
    %
    
    
    4.8
    %
    
    
    2.5
    %
    
    
    4.8
    %Expected option life (in years)
    
    
    4.0
    
    
    
    4.0
    
    
    
    3.7
    
    
    
    3.9Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average fair value per option granted
    
    $
    2.21
    
    
    $
    6.03
    
    
    $
    3.42
    
    
    $
    6.26
  Weighted AverageShares Under
    
    
    Weighted Average
    
    
    Remaining
    
    
    AggregateOption
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding options at December 31, 2007
    
    
    655,439
    
    
    $
    12.59Granted
    
    
    185,417
    
    
    
    11.24Forfeited
    
    
    (13,700
    )
    
    
    10.21Exercised
    
    
    (2,000
    )
    
    
    6.00Outstanding options at September 30, 2008
    
    
    825,156
    
    
    $
    12.34
    
    
    3.8 years
    
    
    $
    77,000Exercisable at September 30, 2008
    
    
    518,989
    
    
    $
    11.26
    
    
    3.8 years
    
    
    $
    77,000
  9




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8. Comprehensive (Loss) Income
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Net (loss) income
    
    $
    (3,894
    )
    
    $
    444
    
    
    $
    (5,102
    )
    
    $
    214Net unrealized (losses) gains on available-for-sale securities
    
    
    (171
    )
    
    
    
    
    
    
    (629
    )
    
    
    1Total comprehensive (loss) income
    
    $
    (4,065
    )
    
    $
    444
    
    
    $
    (5,731
    )
    
    $
    215
 9. Commitments and Contingencies
  10. Stockholder Rights Plan
  11. Subsequent Events
   10




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##### Table of Contents



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




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##### Table of Contents



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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##### Table of Contents



Preopening Expense.
 Depreciation and Amortization
 Interest Income.
 Interest Expense.
 Financial Performance Overview
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales growth
    
    
    4.3
    %
    
    
    35.0
    %
    
    
    9.9
    %
    
    
    45.1
    %Same-store sales percentage change (1)
    
    
    (10.3
    )%
    
    
    4.9
    %
    
    
    (6.4
    )%
    
    
    4.0
    %Average weekly sales  comparable restaurant base (2)
    
    $
    84,888
    
    
    $
    94,659
    
    
    $
    86,006
    
    
    $
    91,919Average weekly sales  non-comparable restaurant base (3)
    
    $
    78,933
    
    
    $
    90,739
    
    
    $
    75,331
    
    
    $
    84,200Average unit volume (in thousands) (4)
    
    $
    1,095
    
    
    $
    1,235
    
    
    $
    3,287
    
    
    $
    3,687Sales per square foot (4)
    
    $
    156
    
    
    $
    176
    
    
    $
    467
    
    
    $
    525Restaurant operating profit (in thousands) (5)
    
    $
    3,466
    
    
    $
    4,238
    
    
    $
    10,195
    
    
    $
    11,025Restaurant operating profit as a percentage of sales (5)
    
    
    17.8
    %
    
    
    22.7
    %
    
    
    17.8
    %
    
    
    21.2
    %
 (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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##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007(In thousands)Restaurant sales
    
    $
    19,454
    
    
    $
    18,652
    
    
    $
    57,242
    
    
    $
    52,064Costs and expenses:Cost of sales
    
    
    5,254
    
    
    
    5,166
    
    
    
    15,816
    
    
    
    14,700Labor
    
    
    6,496
    
    
    
    5,581
    
    
    
    19,003
    
    
    
    15,942Occupancy
    
    
    1,260
    
    
    
    1,153
    
    
    
    3,760
    
    
    
    3,313Restaurant operating expenses
    
    
    2,978
    
    
    
    2,514
    
    
    
    8,468
    
    
    
    7,084Restaurant operating profit
    
    
    3,466
    
    
    
    4,238
    
    
    
    10,195
    
    
    
    11,025Deduct  other costs and expensesGeneral and administrative
    
    
    2,079
    
    
    
    1,885
    
    
    
    5,957
    
    
    
    5,486Preopening expense
    
    
    471
    
    
    
    367
    
    
    
    1,190
    
    
    
    1,205Depreciation and amortization
    
    
    1,656
    
    
    
    1,394
    
    
    
    4,806
    
    
    
    3,980(Loss) income from operations
    
    $
    (740
    )
    
    $
    592
    
    
    $
    (1,758
    )
    
    $
    354
 Percentage of
    
    
    Percentage ofRestaurant Sales
    
    
    Restaurant SalesThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    27.0
    
    
    
    27.7
    
    
    
    27.6
    
    
    
    28.2Labor
    
    
    33.4
    
    
    
    29.9
    
    
    
    33.2
    
    
    
    30.6Occupancy
    
    
    6.5
    
    
    
    6.2
    
    
    
    6.6
    
    
    
    6.4Restaurant operating expenses
    
    
    15.3
    
    
    
    13.5
    
    
    
    14.8
    
    
    
    13.6Restaurant operating profit
    
    
    17.8
    
    
    
    22.7
    
    
    
    17.8
    
    
    
    21.2Deduct  other costs and expensesGeneral and administrative
    
    
    10.7
    
    
    
    10.1
    
    
    
    10.4
    
    
    
    10.5Preopening expense
    
    
    2.4
    
    
    
    2.0
    
    
    
    2.1
    
    
    
    2.3Depreciation and amortization
    
    
    8.5
    
    
    
    7.5
    
    
    
    8.4
    
    
    
    7.6(Loss) income from operations
    
    
    (3.8
    )%
    
    
    3.2
    %
    
    
    (3.1
    )%
    
    
    0.7
    %
  Nine Months Ended
    
    
    Year EndedSeptember 30, 2008
    
    
    December 31, 2007Store Growth ActivityBeginning
Restaurants
    
    
    18
    
    
    
    14Openings
    
    
    1
    
    
    
    4Closings
    
    
    (1
    )
    
    
    Total
    
    
    18
    
    
    
    18
  14




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##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2008
    
    
    2007
    
    
    2008
    
    
    2007Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    27.0
    
    
    
    27.7
    
    
    
    27.6
    
    
    
    28.2Labor
    
    
    33.4
    
    
    
    29.9
    
    
    
    33.2
    
    
    
    30.6Occupancy
    
    
    6.5
    
    
    
    6.2
    
    
    
    6.6
    
    
    
    6.4Restaurant operating expenses
    
    
    15.3
    
    
    
    13.5
    
    
    
    14.8
    
    
    
    13.6General and administrative
    
    
    10.7
    
    
    
    10.1
    
    
    
    10.4
    
    
    
    10.5Preopening expense
    
    
    2.4
    
    
    
    2.0
    
    
    
    2.1
    
    
    
    2.3Depreciation and amortization
    
    
    8.5
    
    
    
    7.5
    
    
    
    8.4
    
    
    
    7.6Total costs and expenses
    
    
    103.8
    
    
    
    96.8
    
    
    
    103.1
    
    
    
    99.3(Loss) income from operations
    
    
    (3.8
    )
    
    
    3.2
    
    
    
    (3.1
    )
    
    
    0.7Nonoperating income (expense):Interest income
    
    
    0.3
    
    
    
    0.8
    
    
    
    0.6
    
    
    
    0.8Interest expense
    
    
    
    
    
    
    (0.2
    )
    
    
    (0.1
    )
    
    
    (0.2
    )(Loss) income from continuing operations
before provision for income taxes
    
    
    (3.5
    )
    
    
    3.7
    
    
    
    (2.5
    )
    
    
    1.4Provision for income taxes
    
    
    0.3
    
    
    
    0.4
    
    
    
    0.4
    
    
    
    0.3(Loss) income from continuing operations
    
    
    (3.8
    )
    
    
    3.3
    
    
    
    (2.9
    )
    
    
    1.1Loss from discontinued operations, net of tax
    
    
    (16.2
    )
    
    
    (0.9
    )
    
    
    (6.0
    )
    
    
    (0.7
    )Net (loss) income
    
    
    (20.0
    )%
    
    
    2.4
    %
    
    
    (8.9
    )%
    
    
    0.4
    %
  Three Months Ended September 30, 2008 Compared with Three Months Ended September 30, 2007
 Restaurant Sales.
 Cost of Sales
  15




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##### Table of Contents



Labor
 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



Nine Months Ended September 30, 2008 Compared with Nine Months Ended September 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
    Equipment Loans
   19




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##### Table of Contents



Cash Flows
  Nine Months Ended September 30,2008
    
    
    2007Net cash provided by (used in):Operating activities
    
    $
    4,422
    
    
    $
    4,524Investing activities
    
    
    (5,373
    )
    
    
    (3,545
    )Financing activities
    
    
    (1,427
    )
    
    
    (215
    )Net (decrease) increase in cash and cash equivalents
    
    $
    (2,378
    )
    
    $
    764
 Operating Activities.
 Investing Activities.
 Financing Activities.
 Critical Accounting Policies
   20




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##### Table of Contents



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




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##### Table of Contents



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
  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



Recent disruptions in the capital and credit markets may adversely affect our business, including
the availability and cost of funding, which could adversely affect our results of operations, cash
flows, and financial condition.
   Our stockholders rights plan may adversely affect existing stockholders.
   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
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 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.  24




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##### Table of Contents



SIGNATURES
  Kona Grill, Inc./s/ Marcus E. Jundt

Marcus E. JundtChairman of the Board, President, and
Chief Executive Officer/s/ Mark S. Robinow

Mark S. RobinowExecutive Vice President, Chief
Financial Officer, and Secretary(Principal Accounting and Financial Officer)
   25




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##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.1
    
    
    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.  26