##### 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 March 31, 2007
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
 Commission File Number 000-51491
 Kona Grill, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware
    
    20-0216690(State of Incorporation)
    
    (I.R.S. Employer Identification No.)
 7150 East Camelback Road, Suite 220
Scottsdale, Arizona 85251
(480) 922-8100  (Address, including zip code, and telephone number, including area code, of principal executive offices)
 Yes þ       No o
  o o þ
  o þ




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##### 



TABLE OF CONTENTS
 PART IFINANCIAL INFORMATIONPageItem 1.
    
    Unaudited Consolidated Financial StatementsConsolidated Balance Sheets as of March 31, 2007 and December 31, 2006
    
    
    2Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006
    
    
    3Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006
    
    
    4Notes to Unaudited Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    17Item 4.
    
    Controls and Procedures
    
    
    18PART IIOTHER INFORMATIONItem 1.
    
    Legal Proceedings
    
    
    19Item 1A.
    
    Risk Factors
    
    
    19Item 2.
    
    Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    19Item 3.
    
    Defaults Upon Senior Securities
    
    
    19Item 4.
    
    Submission of Matters to a Vote of Security Holders
    
    
    19Item 5.
    
    Other Information
    
    
    19Item 6.
    
    Exhibits
    
    
    19Exhibit 31.1Exhibit 31.2Exhibit 32.1Exhibit 32.2
   1




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##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Unaudited Consolidated Financial Statements
 
 KONA GRILL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 March 31,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,068
    
    
    $
    1,934Investments
    
    
    10,475
    
    
    
    14,249Receivables
    
    
    884
    
    
    
    949Other current assets
    
    
    1,152
    
    
    
    741Total current assets
    
    
    13,579
    
    
    
    17,873Other assets
    
    
    457
    
    
    
    407Property and equipment, net
    
    
    42,771
    
    
    
    40,516Total assets
    
    $
    56,807
    
    
    $
    58,796LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    3,128
    
    
    $
    4,616Accrued expenses
    
    
    3,168
    
    
    
    3,502Current portion of notes payable
    
    
    625
    
    
    
    613Total current liabilities
    
    
    6,921
    
    
    
    8,731Notes payable
    
    
    2,539
    
    
    
    2,700Deferred rent
    
    
    11,852
    
    
    
    11,543Total liabilities
    
    
    21,312
    
    
    
    22,974Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value,
2,000,000 shares authorized, none
issued at March 31, 2007 and December
31, 2006
    
    
    
    
    
    
    Common stock, $0.01 par value,
15,000,000 shares authorized, 5,862,096
and 5,847,593 shares issued and
outstanding at March 31, 2007 and
December 31, 2006, respectively
    
    
    59
    
    
    
    58Additional paid-in capital
    
    
    42,017
    
    
    
    41,722Accumulated deficit
    
    
    (6,580
    )
    
    
    (5,957
    )Accumulated other comprehensive loss
    
    
    (1
    )
    
    
    (1
    )Total stockholders equity
    
    
    35,495
    
    
    
    35,822Total liabilities and stockholders equity
    
    $
    56,807
    
    
    $
    58,796
   2




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##### Table of Contents



KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three Months Ended March 31,2007
    
    
    2006(Unaudited)Restaurant sales
    
    $
    15,666
    
    
    $
    10,194Costs and expenses:Cost of sales
    
    
    4,546
    
    
    
    2,895Labor
    
    
    5,075
    
    
    
    3,153Occupancy
    
    
    1,058
    
    
    
    706Restaurant operating expenses
    
    
    2,134
    
    
    
    1,446General and administrative
    
    
    1,769
    
    
    
    2,014Preopening expense
    
    
    488
    
    
    
    291Depreciation and amortization
    
    
    1,289
    
    
    
    730Total costs and expenses
    
    
    16,359
    
    
    
    11,235Loss from operations
    
    
    (693
    )
    
    
    (1,041
    )Nonoperating income (expense):Interest income
    
    
    160
    
    
    
    237Interest expense
    
    
    
    
    
    
    (79
    )Loss before provision for income taxes
    
    
    (533
    )
    
    
    (883
    )Provision for income taxes
    
    
    10
    
    
    
    5Net loss
    
    $
    (543
    )
    
    $
    (888
    )Net loss per share:Basic
    
    $
    (0.09
    )
    
    $
    (0.16
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.16
    )Weighted average shares used in computation:Basic
    
    
    5,854
    
    
    
    5,731Diluted
    
    
    5,854
    
    
    
    5,731
   3




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KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Three Months Ended March 31,2007
    
    
    2006Operating activities
    
    (Unaudited)Net loss
    
    $
    (543
    )
    
    $
    (888
    )Adjustments to reconcile net loss to net cash provided by operating activities:Depreciation and amortization
    
    
    1,289
    
    
    
    730Stock-based compensation expense
    
    
    202
    
    
    
    191Change in operating assets and liabilities:Receivables
    
    
    65
    
    
    
    (391
    )Other current assets
    
    
    (411
    )
    
    
    (194
    )Accounts payable
    
    
    (236
    )
    
    
    789Accrued expenses
    
    
    (399
    )
    
    
    326Deferred rent
    
    
    309
    
    
    
    181Net cash provided by operating activities
    
    
    276
    
    
    
    744Investing activitiesPurchase of property and equipment
    
    
    (4,796
    )
    
    
    (3,423
    )(Increase) decrease in other assets
    
    
    (50
    )
    
    
    17Net proceeds on purchase and sale of short-term investments
    
    
    3,774
    
    
    
    12Net cash used in investing activities
    
    
    (1,072
    )
    
    
    (3,394
    )Financing activitiesRepayments of notes payable
    
    
    (149
    )
    
    
    (186
    )Proceeds from issuance of common stock under the Employee Stock Purchase Plan and
exercise of stock options and warrants
    
    
    79
    
    
    
    16Net cash used in financing activities
    
    
    (70
    )
    
    
    (170
    )Net decrease in cash and cash equivalents
    
    
    (866
    )
    
    
    (2,820
    )Cash and cash equivalents at the beginning of the period
    
    
    1,934
    
    
    
    4,466Cash and cash equivalents at the end of the period
    
    $
    1,068
    
    
    $
    1,646Supplemental disclosures of cash flow informationCash paid for interest
    
    $
    65
    
    
    $
    79Noncash investing activities(Decrease) increase in accounts payable related to property and
equipment additions
    
    $
    (1,252
    )
    
    $
    1,347
   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
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Fair Value Measurements
  5




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KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 2. Net Loss Per Share
 Earnings Per Share
 Three Months Ended March 31,2007
    
    
    2006(In thousands, except per share data)Numerator:Net loss
    
    $
    (543
    )
    
    $
    (888
    )Denominator:Weighted average shares  basic
    
    
    5,854
    
    
    
    5,731Effect of dilutive stock options and warrants
    
    
    
    
    
    
    Weighted average shares  diluted
    
    
    5,854
    
    
    
    5,731Net loss per share:Basic
    
    $
    (0.09
    )
    
    $
    (0.16
    )Diluted
    
    $
    (0.09
    )
    
    $
    (0.16
    )
  3. Investments
  GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Losses
    
    
    Fair ValueMarch 31, 2007Auction rate municipal securities
    
    $
    9,325
    
    
    $
    
    
    
    $
    9,325Corporate securities
    
    
    1,151
    
    
    
    (1
    )
    
    
    1,150$
    10,476
    
    
    $
    (1
    )
    
    $
    10,475December 31, 2006Auction rate municipal securities
    
    $
    10,600
    
    
    $
    
    
    
    $
    10,600Government bonds
    
    
    3,000
    
    
    
    (1
    )
    
    
    2,999Corporate securities
    
    
    650
    
    
    
    
    
    
    
    650$
    14,250
    
    
    $
    (1
    )
    
    $
    14,249
   6




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##### Table of Contents



KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 4. Accrued Expenses
  March 31,
    
    
    December 31,2007
    
    
    2006Accrued payroll
    
    $
    1,070
    
    
    $
    1,471Sales taxes
    
    
    522
    
    
    
    485Business and income taxes
    
    
    393
    
    
    
    297Gift cards
    
    
    281
    
    
    
    372Accrued rent
    
    
    111
    
    
    
    166Other
    
    
    791
    
    
    
    711$
    3,168
    
    
    $
    3,502
 5. Stock-Based Compensation
  Share-Based Payment ,
  Three Months Ended March 31,2007
    
    
    2006Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %Expected volatility
    
    
    34.4
    %
    
    
    46.4
    %Risk-free interest rate
    
    
    4.9
    %
    
    
    4.6
    %Expected life (in years)
    
    
    3.8
    
    
    
    5.0Weighted average fair value per option granted
    
    $
    6.45
    
    
    $
    3.89
  Shares
    
    
    Weighted
    
    
    Weighted AverageUnder
    
    
    Average
    
    
    Remaining
    
    
    AggregateOption
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding options at December 31, 2006
    
    
    631,589
    
    
    $
    10.65Granted
    
    
    76,750
    
    
    
    19.36Forfeited
    
    
    (4,950
    )
    
    
    12.88Exercised
    
    
    (2,500
    )
    
    
    8.35Outstanding options at March 31, 2007
    
    
    700,889
    
    
    $
    11.59
    
    
    5.4 years
    
    $
    3,294,000Exercisable at March 31, 2007
    
    
    453,389
    
    
    $
    8.91
    
    
    5.8 years
    
    $
    3,042,000
  7




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##### Table of Contents



KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  6. Comprehensive Loss
  Three Months Ended March 31,2007
    
    
    2006Net loss
    
    $
    (543
    )
    
    $
    (888
    )Net unrealized losses on available-for-sale securities
    
    
    
    
    
    
    (15
    )Total comprehensive loss
    
    $
    (543
    )
    
    $
    (903
    )
 7. Income Taxes
 Accounting for Uncertainty in Income Taxes
   8. Commitments and Contingencies
   8




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




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Key Measures We Use to Evaluate Our Company
  Number of Restaurant Openings.
 Same-Store Sales Growth.
 Average Weekly Sales.
 Average Unit Volume.
 Restaurant Operating Profit.
 Sales Per Square Foot.
 Key Financial Definitions
 Restaurant Sales.
 Cost of Sales.
 Labor.
 Occupancy.
 Restaurant Operating Expenses.
 General and Administrative.  10
    Table of Contents   Preopening Expense.
 Depreciation and Amortization
 Interest Income.
 Interest Expense.
 Financial Performance Overview
  Three Months Ended March 31,2007
    
    
    2006Restaurant sales growth
    
    
    53.7
    %
    
    
    27.2
    %Same-store sales growth (1)
    
    
    1.4
    %
    
    
    6.2
    %Average weekly sales  comparable restaurant base (2)
    
    $
    94,690
    
    
    $
    93,399Average weekly sales  non-comparable restaurant base (3)
    
    $
    73,046
    
    
    $
    65,786Average unit volume (in thousands) (4)
    
    $
    1,162
    
    
    $
    1,214Sales per square foot (4)
    
    $
    165
    
    
    $
    174Restaurant operating profit (in thousands) (5)
    
    $
    2,853
    
    
    $
    1,994Restaurant operating profit as a percentage of sales (5)
    
    
    18.2
    %
    
    
    19.6
    %
 (1)
    
    Same-store sales growth reflects the periodic change in restaurant sales for the
comparable restaurant base. In calculating same-store sales growth, we include a
restaurant in the comparable restaurant base after it has been in operation for more
than 18 months.(2)
    
    Includes only those restaurants in the comparable restaurant base.(3)
    
    Includes only those restaurants that are not in the comparable restaurant base
that were open for the entire period.(4)
    
    Includes only those restaurants open for at least 12 months before the beginning
of the period measured.(5)
    
    Restaurant operating profit is not a financial measurement determined in
accordance with generally accepted accounting principles and should not be considered in
isolation or as an alternative to loss from operations. Restaurant operating profit may
not be comparable to the same or similarly titled measures computed by other companies.
The table below sets forth our calculation of restaurant operating profit and a
reconciliation to loss from operations, the most comparable GAAP measure.
  11




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Three Months Ended March 31,2007
    
    
    2006(In thousands)Restaurant sales
    
    $
    15,666
    
    
    $
    10,194Costs and expenses:Cost of sales
    
    
    4,546
    
    
    
    2,895Labor
    
    
    5,075
    
    
    
    3,153Occupancy
    
    
    1,058
    
    
    
    706Restaurant operating expenses
    
    
    2,134
    
    
    
    1,446Restaurant operating profit
    
    
    2,853
    
    
    
    1,994Deduct  other costs and expensesGeneral and administrative
    
    
    1,769
    
    
    
    2,014Preopening expense
    
    
    488
    
    
    
    291Depreciation and amortization
    
    
    1,289
    
    
    
    730Loss from operations
    
    $
    (693
    )
    
    $
    (1,041
    )
 Percentage ofRestaurant SalesThree Months Ended March 31,2007
    
    
    2006Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    29.0
    
    
    
    28.4Labor
    
    
    32.4
    
    
    
    30.9Occupancy
    
    
    6.8
    
    
    
    6.9Restaurant operating expenses
    
    
    13.6
    
    
    
    14.2Restaurant operating profit
    
    
    18.2
    
    
    
    19.6Deduct  other costs and expensesGeneral and administrative
    
    
    11.3
    
    
    
    19.7Preopening expense
    
    
    3.1
    
    
    
    2.9Depreciation and amortization
    
    
    8.2
    
    
    
    7.2Loss from operations
    
    
    (4.4
    )%
    
    
    (10.2
    )%
 Three Months Ended
    
    
    Year EndedMarch 31, 2007
    
    
    December 31, 2006Store Growth ActivityBeginning Restaurants
    
    
    14
    
    
    
    9Openings
    
    
    1
    
    
    
    5Closings
    
    
    
    
    
    
    Total
    
    
    15
    
    
    
    14
  12




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##### Table of Contents



Results of Operations
  Three Months Ended March 31,2007
    
    
    2006Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    29.0
    
    
    
    28.4Labor
    
    
    32.4
    
    
    
    30.9Occupancy
    
    
    6.8
    
    
    
    6.9Restaurant operating expenses
    
    
    13.6
    
    
    
    14.2General and administrative
    
    
    11.3
    
    
    
    19.7Preopening expense
    
    
    3.1
    
    
    
    2.9Depreciation and amortization
    
    
    8.2
    
    
    
    7.2Total costs and expenses
    
    
    104.4
    
    
    
    110.2Loss from operations
    
    
    (4.4
    )
    
    
    (10.2
    )Nonoperating income (expense):Interest income
    
    
    1.0
    
    
    
    2.3Interest expense
    
    
    
    
    
    
    (0.8
    )Loss before provision for income taxes
    
    
    (3.4
    )
    
    
    (8.7
    )Provision for income taxes
    
    
    0.1
    
    
    
    Net loss
    
    
    (3.5
    )%
    
    
    (8.7
    )%
 Three Months Ended March 31, 2007 Compared with Three Months Ended March 31, 2006
 Restaurant Sales.
 Cost of Sales
 Labor
 Occupancy
  13




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##### Table of Contents



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




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Potential Fluctuations in Quarterly Results and Seasonality
  
    
    timing of new restaurant openings and related expenses;
    
    restaurant operating costs and preopening costs for our newly-opened restaurants, which
are often materially greater during the first several months of operation than thereafter;
    
    labor availability and costs for hourly and management personnel;
    
    profitability of our restaurants, especially in new markets;
    
    increases and decreases in comparable restaurant sales;
    
    impairment of long-lived assets and any loss on restaurant closures;
    
    changes in borrowings and interest rates;
    
    general economic conditions;
    
    weather conditions or natural disasters;
    
    timing of certain holidays;
    
    new or revised regulatory requirements and accounting pronouncements;
    
    changes in consumer preferences and competitive conditions; and
    
    fluctuations in commodity prices.
  Liquidity and Capital Resources
 15
    Table of Contents   Equipment Loans
  Cash Flows
  Three Months Ended March 31,2007
    
    
    2006Net cash provided by (used in):Operating activities
    
    $
    276
    
    
    $
    744Investing activities
    
    
    (1,072
    )
    
    
    (3,394
    )Financing activities
    
    
    (70
    )
    
    
    (170
    )Net decrease in cash and cash equivalents
    
    $
    (866
    )
    
    $
    (2,820
    )
 Operating Activities.
 Investing activities.
 Financing Activities.
  16    Table of Contents  Critical Accounting Policies
   Accounting for Income Taxes
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Investments
  Primary Market Risk Exposures
 17
    Table of Contents  Inflation
  
 Item 4. Controls and Procedures
   18
    Table of Contents  PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. Exhibits
 (a)
    
    Exhibits
 31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
  19
    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)   20
    Table of Contents  EXHIBIT INDEX
 ExhibitNumber
    
    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.