##### 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, 2007
 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 000-51491
 
 Kona Grill, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware(State or other jurisdiction of incorporation)
    
    20-0216690(I.R.S. Employer Identification No.)
 7150 East Camelback Road, Suite 220
Scottsdale, Arizona 85251
(480) 922-8100  (Address, including zip code, and telephone number, including area code, of principal executive offices)
 þ o
  o o þ
  o þ




---



##### 



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




---



##### Table of Contents



PART I  FINANCIAL INFORMATION
 
 Item 1. Unaudited Consolidated Financial Statements
 
 KONA GRILL, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
 September 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    2,698
    
    
    $
    1,934Investments
    
    
    8,579
    
    
    
    14,249Receivables
    
    
    623
    
    
    
    949Other current assets
    
    
    1,433
    
    
    
    741Total current assets
    
    
    13,333
    
    
    
    17,873Other assets
    
    
    439
    
    
    
    407Property and equipment, net
    
    
    43,800
    
    
    
    40,516Total assets
    
    $
    57,572
    
    
    $
    58,796LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    2,016
    
    
    $
    4,616Accrued expenses
    
    
    4,201
    
    
    
    3,502Current portion of notes payable
    
    
    650
    
    
    
    613Total current liabilities
    
    
    6,867
    
    
    
    8,731Notes payable
    
    
    2,207
    
    
    
    2,700Deferred rent
    
    
    11,829
    
    
    
    11,543Total liabilities
    
    
    20,903
    
    
    
    22,974Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value,
2,000,000 shares authorized, none
issued at September 30, 2007
and December 31, 2006
    
    
    
    
    
    
    Common stock, $0.01 par value,
15,000,000 shares authorized, 5,896,576
and 5,847,593 shares issued and
outstanding at September 30, 2007 and
December 31, 2006, respectively
    
    
    59
    
    
    
    58Additional paid-in capital
    
    
    42,433
    
    
    
    41,722Accumulated deficit
    
    
    (5,823
    )
    
    
    (5,957
    )Accumulated other comprehensive loss
    
    
    
    
    
    
    (1
    )Total stockholders equity
    
    
    36,669
    
    
    
    35,822Total liabilities and stockholders equity
    
    $
    57,572
    
    
    $
    58,796
   2




---



##### Table of Contents



KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three Months Ended September 30,
    
    
    Nine Months Ended September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(Unaudited)Restaurant sales
    
    $
    19,210
    
    
    $
    13,812
    
    
    $
    54,198
    
    
    $
    35,883Costs and expenses:Cost of sales
    
    
    5,346
    
    
    
    3,962
    
    
    
    15,379
    
    
    
    10,156Labor
    
    
    5,875
    
    
    
    4,311
    
    
    
    16,920
    
    
    
    11,042Occupancy
    
    
    1,204
    
    
    
    905
    
    
    
    3,467
    
    
    
    2,423Restaurant operating expenses
    
    
    2,646
    
    
    
    1,909
    
    
    
    7,522
    
    
    
    4,835General and administrative
    
    
    1,885
    
    
    
    1,713
    
    
    
    5,486
    
    
    
    5,352Preopening expense
    
    
    367
    
    
    
    491
    
    
    
    1,205
    
    
    
    1,471Depreciation and amortization
    
    
    1,486
    
    
    
    1,157
    
    
    
    4,252
    
    
    
    2,710Total costs and expenses
    
    
    18,809
    
    
    
    14,448
    
    
    
    54,231
    
    
    
    37,989Income (loss) from operations
    
    
    401
    
    
    
    (636
    )
    
    
    (33
    )
    
    
    (2,106
    )Nonoperating income (expense):Interest income
    
    
    140
    
    
    
    240
    
    
    
    431
    
    
    
    723Interest expense
    
    
    (37
    )
    
    
    (72
    )
    
    
    (79
    )
    
    
    (226
    )Income (loss) before provision for income
taxes
    
    
    504
    
    
    
    (468
    )
    
    
    319
    
    
    
    (1,609
    )Provision for income taxes
    
    
    60
    
    
    
    
    
    
    
    105
    
    
    
    50Net income (loss)
    
    $
    444
    
    
    $
    (468
    )
    
    $
    214
    
    
    $
    (1,659
    )Net income (loss) per share:Basic
    
    $
    0.08
    
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    (0.29
    )Diluted
    
    $
    0.07
    
    
    $
    (0.08
    )
    
    $
    0.03
    
    
    $
    (0.29
    )Weighted average shares used in computation:Basic
    
    
    5,891
    
    
    
    5,805
    
    
    
    5,870
    
    
    
    5,776Diluted
    
    
    6,238
    
    
    
    5,805
    
    
    
    6,231
    
    
    
    5,776
   3




---



##### Table of Contents



KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Months Ended September 30,2007
    
    
    2006Operating activities
    
    (Unaudited)Net income (loss)
    
    $
    214
    
    
    $
    (1,659
    )Adjustments to reconcile net income (loss) to net cash provided by operating
activities:Depreciation and amortization
    
    
    4,252
    
    
    
    2,710Stock-based compensation expense
    
    
    451
    
    
    
    665Tax benefit on exercise of stock options
    
    
    5
    
    
    
    Change in operating assets and liabilities:Receivables
    
    
    326
    
    
    
    (1,339
    )Other current assets.
    
    
    (692
    )
    
    
    (623
    )Accounts payable
    
    
    (952
    )
    
    
    1,698Accrued expenses
    
    
    634
    
    
    
    1,061Deferred rent
    
    
    286
    
    
    
    3,223Net cash provided by operating activities
    
    
    4,524
    
    
    
    5,736Investing activitiesPurchase of property and equipment
    
    
    (9,184
    )
    
    
    (14,656
    )(Increase) decrease in other assets
    
    
    (32
    )
    
    
    20Net proceeds on purchase and sale of short-term investments
    
    
    5,671
    
    
    
    6,299Net cash used in investing activities
    
    
    (3,545
    )
    
    
    (8,337
    )Financing activitiesRepayments of notes payable
    
    
    (456
    )
    
    
    (568
    )Proceeds from issuance of common stock under the Employee Stock Purchase Plan and
exercise of stock options and warrants
    
    
    241
    
    
    
    147Net cash used in financing activities
    
    
    (215
    )
    
    
    (421
    )Net increase (decrease) in cash and cash equivalents
    
    
    764
    
    
    
    (3,022
    )Cash and cash equivalents at the beginning of the period
    
    
    1,934
    
    
    
    4,466Cash and cash equivalents at the end of the period
    
    $
    2,698
    
    
    $
    1,444Supplemental disclosure of cash flow informationCash paid for interest
    
    $
    186
    
    
    $
    226Noncash investing activities(Decrease) increase in accounts payable related to property and
equipment additions
    
    $
    (1,648
    )
    
    $
    1,971
   4




---



##### 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
 Accounting for Uncertainty in Income Taxes Accounting for Income Taxes
 Fair Value Measurements
  5




---



##### Table of Contents



KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 2. Net Income (Loss) Per Share
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands, except per share data)Numerator:Net income (loss)
    
    $
    444
    
    
    $
    (468
    )
    
    $
    214
    
    
    $
    (1,659
    )Denominator:Weighted average shares  Basic
    
    
    5,891
    
    
    
    5,805
    
    
    
    5,870
    
    
    
    5,776Effect of dilutive stock options and warrants
    
    
    347
    
    
    
    
    
    
    
    361
    
    
    
    Weighted average shares  Diluted
    
    
    6,238
    
    
    
    5,805
    
    
    
    6,231
    
    
    
    5,776Net income (loss) per share:Basic
    
    $
    0.08
    
    
    $
    (0.08
    )
    
    $
    0.04
    
    
    $
    (0.29
    )Diluted
    
    $
    0.07
    
    
    $
    (0.08
    )
    
    $
    0.03
    
    
    $
    (0.29
    )
  3. Investments
  GrossAdjusted
    
    
    Unrealized
    
    
    EstimatedCost
    
    
    Losses
    
    
    Fair ValueSeptember 30, 2007Auction rate municipal securities
    
    $
    8,425
    
    
    $
    
    
    
    $
    8,425Corporate securities
    
    
    154
    
    
    
    
    
    
    
    154$
    8,579
    
    
    $
    
    
    
    $
    8,579December 31, 2006Auction rate municipal securities
    
    $
    10,600
    
    
    $
    
    
    
    $
    10,600Government bonds
    
    
    3,000
    
    
    
    (1
    )
    
    
    2,999Corporate securities
    
    
    650
    
    
    
    
    
    
    
    650$
    14,250
    
    
    $
    (1
    )
    
    $
    14,249
   6




---



##### Table of Contents



KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
 4. Accrued Expenses
  September 30,
    
    
    December 31,2007
    
    
    2006Accrued payroll
    
    $
    1,552
    
    
    $
    1,471Business and income taxes
    
    
    566
    
    
    
    297Sales taxes
    
    
    502
    
    
    
    485Gift cards
    
    
    338
    
    
    
    372Accrued occupancy
    
    
    336
    
    
    
    166Other
    
    
    907
    
    
    
    711$
    4,201
    
    
    $
    3,502
 5. Stock-Based Compensation
  Share-Based Payment ,
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Expected volatility
    
    
    33.1
    %
    
    
    37.1
    %
    
    
    33.8
    %
    
    
    39.3
    %Risk-free interest rate
    
    
    4.8
    %
    
    
    4.6
    %
    
    
    4.8
    %
    
    
    4.8
    %Expected option life (in years)
    
    
    4.0
    
    
    
    5.0
    
    
    
    3.9
    
    
    
    4.5Dividend yield
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %
    
    
    0.0
    %Weighted average fair value per option granted
    
    $
    6.03
    
    
    $
    5.48
    
    
    $
    6.26
    
    
    $
    4.61
  Shares
    
    
    Weighted
    
    
    Weighted AverageUnder
    
    
    Average
    
    
    Remaining
    
    
    AggregateOption
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding options at December 31, 2006
    
    
    631,589
    
    
    $
    10.65Granted
    
    
    136,750
    
    
    
    18.80Forfeited
    
    
    (41,303
    )
    
    
    15.63Exercised
    
    
    (19,347
    )
    
    
    9.46Outstanding options at September 30, 2007
    
    
    707,689
    
    
    $
    11.96
    
    
    4.9 years
    
    $
    4,280,000Exercisable at September 30, 2007
    
    
    487,814
    
    
    $
    9.55
    
    
    5.2 years
    
    $
    4,024,000
  7




---



##### Table of Contents



KONA GRILL, INC.
NOTES TO UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS
  6. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Net income (loss)
    
    $
    444
    
    
    $
    (468
    )
    
    $
    214
    
    
    $
    (1,659
    )Net unrealized gains (losses) on available-for-sale securities
    
    
    
    
    
    
    9
    
    
    
    1
    
    
    
    (7
    )Total comprehensive income (loss)
    
    $
    444
    
    
    $
    (459
    )
    
    $
    215
    
    
    $
    (1,666
    )
 7. Income Taxes
 Accounting for Uncertainty in Income Taxes
   8. Commitments and Contingencies
  9.
Subsequent Event
   8




---



##### Table of Contents



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




---



##### Table of Contents



Key Measures We Use to Evaluate Our Company
  Number of Restaurant Openings.
 Same-Store Sales Growth.
 Average Weekly Sales.
 Average Unit Volume.
 Sales Per Square Foot.
 Restaurant Operating Profit.
 Key Financial Definitions
 Restaurant Sales.
 Cost of Sales.
 Labor.
 Occupancy.
 Restaurant Operating Expenses.
 General and Administrative.
  10




---



##### Table of Contents



Preopening Expense.
 Depreciation and Amortization
 Interest Income.
 Interest Expense.
 Financial Performance Overview
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Restaurant sales growth
    
    
    39.1
    %
    
    
    46.1
    %
    
    
    51.0
    %
    
    
    36.0
    %Same-store sales growth (1)
    
    
    4.9
    %
    
    
    4.0
    %
    
    
    4.0
    %
    
    
    5.1
    %Average weekly sales  comparable restaurant base (2)
    
    $
    99,098
    
    
    $
    94,494
    
    
    $
    97,858
    
    
    $
    94,135Average weekly sales  non-comparable restaurant base (3)
    
    $
    83,912
    
    
    $
    75,068
    
    
    $
    79,780
    
    
    $
    72,970Average unit volume (in thousands)(4)
    
    $
    1,235
    
    
    $
    1,328
    
    
    $
    3,687
    
    
    $
    3,873Sales per square foot (4)
    
    $
    176
    
    
    $
    190
    
    
    $
    525
    
    
    $
    554Restaurant operating profit (in thousands) (5)
    
    $
    4,139
    
    
    $
    2,725
    
    
    $
    10,910
    
    
    $
    7,427Restaurant operating profit as a percentage of sales (5)
    
    
    21.5
    %
    
    
    19.7
    %
    
    
    20.1
    %
    
    
    20.7
    %
 (1)
    
    Same-store sales growth reflects the periodic change in restaurant sales for the
comparable restaurant base. In calculating same-store sales growth, we include a
restaurant in the comparable restaurant base after it has been in operation for more
than 18 months.(2)
    
    Includes only those restaurants in the comparable restaurant base.(3)
    
    Includes only those restaurants that are not in the comparable restaurant base
that were open for the entire period.(4)
    
    Includes only those restaurants open for at least 12 months before the beginning
of the period measured.(5)
    
    Restaurant operating profit is not a financial measurement determined in
accordance with generally accepted accounting principles and should not be considered in
isolation or as an alternative to income (loss) from operations. Restaurant operating
profit may not be comparable to the same or similarly titled measures computed by other
companies. The table below sets forth our calculation of restaurant operating profit and
reconciliation to income (loss) from operations, the most comparable GAAP measure.
  11




---



##### Table of Contents



Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006(In thousands)Restaurant sales
    
    $
    19,210
    
    
    $
    13,812
    
    
    $
    54,198
    
    
    $
    35,883Costs and expenses:Cost of sales
    
    
    5,346
    
    
    
    3,962
    
    
    
    15,379
    
    
    
    10,156Labor
    
    
    5,875
    
    
    
    4,311
    
    
    
    16,920
    
    
    
    11,042Occupancy
    
    
    1,204
    
    
    
    905
    
    
    
    3,467
    
    
    
    2,423Restaurant operating expenses
    
    
    2,646
    
    
    
    1,909
    
    
    
    7,522
    
    
    
    4,835Restaurant operating profit
    
    
    4,139
    
    
    
    2,725
    
    
    
    10,910
    
    
    
    7,427Deduct  other costs and expensesGeneral and administrative
    
    
    1,885
    
    
    
    1,713
    
    
    
    5,486
    
    
    
    5,352Preopening expense
    
    
    367
    
    
    
    491
    
    
    
    1,205
    
    
    
    1,471Depreciation and amortization
    
    
    1,486
    
    
    
    1,157
    
    
    
    4,252
    
    
    
    2,710Income (loss) from operations
    
    $
    401
    
    
    $
    (636
    )
    
    $
    (33
    )
    
    $
    (2,106
    )
 Percentage of
    
    
    Percentage ofRestaurant Sales
    
    
    Restaurant SalesThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    27.8
    
    
    
    28.7
    
    
    
    28.4
    
    
    
    28.3Labor
    
    
    30.6
    
    
    
    31.2
    
    
    
    31.2
    
    
    
    30.8Occupancy
    
    
    6.3
    
    
    
    6.6
    
    
    
    6.4
    
    
    
    6.7Restaurant operating expenses
    
    
    13.8
    
    
    
    13.8
    
    
    
    13.9
    
    
    
    13.5Restaurant operating profit
    
    
    21.5
    
    
    
    19.7
    
    
    
    20.1
    
    
    
    20.7Deduct  other costs and expensesGeneral and administrative
    
    
    9.8
    
    
    
    12.4
    
    
    
    10.1
    
    
    
    14.9Preopening expense
    
    
    1.9
    
    
    
    3.5
    
    
    
    2.2
    
    
    
    4.1Depreciation and amortization
    
    
    7.7
    
    
    
    8.4
    
    
    
    7.8
    
    
    
    7.6Income (loss) from operations
    
    
    2.1
    %
    
    
    (4.6
    )%
    
    
    (0.1
    )%
    
    
    (5.9
    )%
  Nine Months Ended
    
    
    Year EndedSeptember 30, 2007
    
    
    December 31, 2006Store Growth ActivityBeginning Restaurants
    
    
    14
    
    
    
    9Openings
    
    
    2
    
    
    
    5Closings
    
    
    
    
    
    
    Total
    
    
    16
    
    
    
    14
  12




---



##### Table of Contents



Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    27.8
    
    
    
    28.7
    
    
    
    28.4
    
    
    
    28.3Labor
    
    
    30.6
    
    
    
    31.2
    
    
    
    31.2
    
    
    
    30.8Occupancy
    
    
    6.3
    
    
    
    6.6
    
    
    
    6.4
    
    
    
    6.7Restaurant operating expenses
    
    
    13.8
    
    
    
    13.8
    
    
    
    13.9
    
    
    
    13.5General and administrative
    
    
    9.8
    
    
    
    12.4
    
    
    
    10.1
    
    
    
    14.9Preopening expense
    
    
    1.9
    
    
    
    3.5
    
    
    
    2.2
    
    
    
    4.1Depreciation and amortization
    
    
    7.7
    
    
    
    8.4
    
    
    
    7.8
    
    
    
    7.6Total costs and expenses
    
    
    97.9
    
    
    
    104.6
    
    
    
    100.1
    
    
    
    105.9Income (loss) from operations
    
    
    2.1
    
    
    
    (4.6
    )
    
    
    (0.1
    )
    
    
    (5.9
    )Nonoperating income (expense):Interest income
    
    
    0.7
    
    
    
    1.7
    
    
    
    0.8
    
    
    
    2.0Interest expense
    
    
    (0.2
    )
    
    
    (0.5
    )
    
    
    (0.1
    )
    
    
    (0.6
    )Income (loss) before provision for income taxes
    
    
    2.6
    
    
    
    (3.4
    )
    
    
    0.6
    
    
    
    (4.5
    )Provision for income taxes
    
    
    0.3
    
    
    
    
    
    
    
    0.2
    
    
    
    0.1Net income (loss)
    
    
    2.3
    %
    
    
    (3.4
    )%
    
    
    0.4
    %
    
    
    (4.6
    )%
  Three Months Ended September 30, 2007 Compared with Three Months Ended September 30, 2006
 Restaurant Sales.
 Cost of Sales
 Labor
  13




---



##### Table of Contents



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




---



##### Table of Contents



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




---



##### Table of Contents



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;
    
    weather conditions or natural disasters;
    
    timing of certain holidays;
    
    new or revised regulatory requirements and accounting pronouncements;
    
    changes in consumer preferences and competitive conditions; and
    
    fluctuations in commodity prices.
   16




---



##### Table of Contents



Liquidity and Capital Resources
    Equipment Loans
   17




---



##### Table of Contents



Cash Flows
  Nine Months Ended September 30,2007
    
    
    2006Net cash provided by (used in):Operating activities
    
    $
    4,524
    
    
    $
    5,736Investing activities
    
    
    (3,545
    )
    
    
    (8,337
    )Financing activities
    
    
    (215
    )
    
    
    (421
    )Net increase (decrease) in cash and cash equivalents
    
    $
    764
    
    
    $
    (3,022
    )
 Operating Activities.
 Investing activities.
 Financing Activities.
 Critical Accounting Policies
    18




---



##### Table of Contents



Accounting for Income Taxes
    
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Investments
  Primary Market Risk Exposures
  Inflation
   19




---



##### Table of Contents



Item 4. Controls and Procedures
  
 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
  3.3
    
    Amended and Restated Bylaws of Kona Grill, Inc. (1)10.17
    
    Securities Purchase Agreement, dated November 1, 2007,
among Kona Grill, Inc. and the investor parties thereto. (2)31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a)
and Rule 15d-14(a), promulgated under the Securities Exchange Act of
1934, as amended.32.1
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant
to Section 906 of the Sarbanes-Oxley Act of 2002.
 
    20




---



##### 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)   21




---



##### Table of Contents



EXHIBIT INDEX
 ExhibitNo.
    
    Description3.3
    
    Amended and Restated Bylaws of Kona Grill, Inc. (1)10.17
    
    Securities Purchase Agreement, dated November 1, 2007,
among Kona Grill, Inc. and the investor parties thereto. (2)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.
 
    22