##### 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, 2006
 or
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
  
 Kona Grill, Inc.
 (Exact Name of Registrant as Specified in Its Charter)
 Delaware(State 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




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##### 



TABLE OF CONTENTS
 PART I
 FINANCIAL INFORMATION
 PageItem 1.
    
    Unaudited Consolidated Financial StatementsConsolidated Balance Sheets as of September 30, 2006 and December 31, 2005
    
    
    2Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2006 and 2005
    
    
    3Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2006 and 2005
    
    
   4Notes to Consolidated Financial Statements
    
    
    5Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3.
    
    Quantitative and Qualitative Disclosures About Market Risk
    
    
    19Item 4.
    
    Controls and Procedures
    
    
    19PART 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




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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)
 September 30,
    
    
    December 31,2006
    
    
    2005(Unaudited)
    
    
    (Note 1)ASSETSCurrent assets:Cash and cash equivalents
    
    $
    1,444
    
    
    $
    4,466Investments
    
    
    17,894
    
    
    
    24,200Receivables
    
    
    1,436
    
    
    
    97Inventories
    
    
    469
    
    
    
    403Prepaids and other
    
    
    718
    
    
    
    161Total current assets
    
    
    21,961
    
    
    
    29,327Other assets
    
    
    454
    
    
    
    474Property and equipment, net
    
    
    36,534
    
    
    
    22,617Total assets
    
    $
    58,949
    
    
    $
    52,418LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    5,268
    
    
    $
    1,599Accrued expenses
    
    
    3,388
    
    
    
    2,327Current portion of equipment notes
    
    
    616
    
    
    
    729Total current liabilities
    
    
    9,272
    
    
    
    4,655Equipment notes
    
    
    2,858
    
    
    
    3,313Deferred rent
    
    
    10,362
    
    
    
    7,139Total liabilities
    
    
    22,492
    
    
    
    15,107Commitments and contingenciesStockholders equity:Preferred stock, $0.01 par value,
2,000,000 shares authorized, none
issued at September 30, 2006 and
20,000,000 shares authorized, none
issued at December 31, 2005
    
    
    
    
    
    
    Common stock, $0.01 par value,
15,000,000 shares authorized,
5,822,194 shares issued and
outstanding at September 30, 2006 and
40,000,000 shares authorized,
5,706,420 shares issued and
outstanding at December 31, 2005
    
    
    58
    
    
    
    57Additional paid-in capital
    
    
    41,278
    
    
    
    40,467Accumulated deficit
    
    
    (4,872
    )
    
    
    (3,213
    )Accumulated other comprehensive loss
    
    
    (7
    )
    
    
    Total stockholders equity
    
    
    36,457
    
    
    
    37,311Total liabilities and stockholders equity
    
    $
    58,949
    
    
    $
    52,418
   2




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##### Table of Contents



KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(Unaudited)Restaurant sales
    
    $
    13,812
    
    
    $
    9,455
    
    
    $
    35,883
    
    
    $
    26,385Costs and expenses:Cost of sales
    
    
    3,962
    
    
    
    2,699
    
    
    
    10,156
    
    
    
    7,588Labor
    
    
    4,311
    
    
    
    2,873
    
    
    
    11,042
    
    
    
    7,940Occupancy
    
    
    905
    
    
    
    600
    
    
    
    2,423
    
    
    
    1,773Restaurant operating expenses
    
    
    1,909
    
    
    
    1,195
    
    
    
    4,835
    
    
    
    3,202General and administrative
    
    
    1,713
    
    
    
    1,019
    
    
    
    5,352
    
    
    
    3,410Preopening expense
    
    
    491
    
    
    
    462
    
    
    
    1,471
    
    
    
    569Depreciation and amortization
    
    
    1,157
    
    
    
    602
    
    
    
    2,710
    
    
    
    1,651Total costs and expenses
    
    
    14,448
    
    
    
    9,450
    
    
    
    37,989
    
    
    
    26,133(Loss) income from operations
    
    
    (636
    )
    
    
    5
    
    
    
    (2,106
    )
    
    
    252Nonoperating income (expense):Interest income
    
    
    240
    
    
    
    91
    
    
    
    723
    
    
    
    96Interest expense
    
    
    (72
    )
    
    
    (396
    )
    
    
    (226
    )
    
    
    (759
    )Loss before provision for income taxes
    
    
    (468
    )
    
    
    (300
    )
    
    
    (1,609
    )
    
    
    (411
    )Provision for income taxes
    
    
    
    
    
    
    6
    
    
    
    50
    
    
    
    24Net loss
    
    $
    (468
    )
    
    $
    (306
    )
    
    $
    (1,659
    )
    
    $
    (435
    )Net loss per share :Basic
    
    $
    (0.08
    )
    
    $
    (0.09
    )
    
    $
    (0.29
    )
    
    $
    (0.20
    )Diluted
    
    $
    (0.08
    )
    
    $
    (0.09
    )
    
    $
    (0.29
    )
    
    $
    (0.20
    )Weighted average shares used in computation:Basic
    
    
    5,805
    
    
    
    3,570
    
    
    
    5,776
    
    
    
    2,165Diluted
    
    
    5,805
    
    
    
    3,570
    
    
    
    5,776
    
    
    
    2,165
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KONA GRILL, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
 Nine Months Ended September 30,2006
    
    
    2005(Unaudited)Operating activitiesNet loss
    
    $
    (1,659
    )
    
    $
    (435
    )Adjustments to reconcile net loss to net cash provided by
operating activities:Depreciation and amortization
    
    
    2,710
    
    
    
    1,651Compensation expense for issuance of stock options and
accelerated vesting of stock options
    
    
    665
    
    
    
    197Amortization of debt discount
    
    
    
    
    
    
    343Change in operating assets and liabilities:Receivables
    
    
    (1,339
    )
    
    
    491Inventories
    
    
    (66
    )
    
    
    (61
    )Prepaids and other current assets
    
    
    (557
    )
    
    
    (222
    )Accounts payable
    
    
    1,698
    
    
    
    (819
    )Accrued expenses
    
    
    1,061
    
    
    
    441Deferred rent
    
    
    3,223
    
    
    
    1,757Net cash provided by operating activities
    
    
    5,736
    
    
    
    3,343Investing activitiesPurchase of property and equipment
    
    
    (14,656
    )
    
    
    (7,835
    )Decrease in other assets
    
    
    20
    
    
    
    15Net proceeds on purchase and sale of short-term investments
    
    
    6,299
    
    
    
    (23,900
    )Net cash used in investing activities
    
    
    (8,337
    )
    
    
    (31,720
    )Financing activitiesProceeds from issuance of notes payable
    
    
    
    
    
    
    1,094Repayments of notes payable
    
    
    (568
    )
    
    
    (449
    )Proceeds from stock options exercised and employee stock purchases
    
    
    147
    
    
    
    38Proceeds from the issuance of common stock, net of issuance costs
    
    
    
    
    
    
    28,090Net cash (used in) provided by financing activities
    
    
    (421
    )
    
    
    28,773Net (decrease) increase in cash and cash equivalents
    
    
    (3,022
    )
    
    
    396Cash and cash equivalents at the beginning of the period
    
    
    4,466
    
    
    
    3,098Cash and cash equivalents at the end of the period
    
    $
    1,444
    
    
    $
    3,494Supplemental disclosures of cash flow informationCash paid for interest
    
    $
    226
    
    
    $
    416Noncash investing and financing activitiesIncrease (decrease) in accounts payable related to property and equipment additions
    
    $
    1,971
    
    
    $
    (1,169
    )Conversion of convertible promissory note to preferred stock
    
    $
    
    
    
    $
    3,000
   4




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KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 1. Basis of Presentation
    Reclassifications
  2. Summary of Significant Accounting Policies
 Cash
  Deferred Rent
   5




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KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Accounting
for Rental Costs Incurred During a Construction Period
 Preopening Expense
  Net Income (Loss) Per Share
 Earnings Per Share
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands, except per share data)Numerator:Net loss
    
    $
    (468
    )
    
    $
    (306
    )
    
    $
    (1,659
    )
    
    $
    (435
    )Denominator:Weighted average shares  Basic
    
    
    5,805
    
    
    
    3,570
    
    
    
    5,776
    
    
    
    2,165Effect of dilutive securities:Stock options and warrants
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Convertible shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average shares  Diluted
    
    
    5,805
    
    
    
    3,570
    
    
    
    5,776
    
    
    
    2,165Net loss per share:Basic
    
    $
    (0.08
    )
    
    $
    (0.09
    )
    
    $
    (0.29
    )
    
    $
    (0.20
    )Diluted
    
    $
    (0.08
    )
    
    $
    (0.09
    )
    
    $
    (0.29
    )
    
    $
    (0.20
    )
  Recent Accounting Pronouncements
 Accounting for Uncertainty in Income
Taxes Accounting for Income
Taxes
  6




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KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Fair Value Measurements
 3. Investments
  GrossUnrealized
    
    
    Estimated FairAdjusted Cost
    
    
    Losses
    
    
    ValueAuction rate municipal securities
    
    $
    14,250
    
    
    $
    
    
    
    $
    14,250Government bonds
    
    
    3,000
    
    
    
    (6
    )
    
    
    2,994Corporate securities
    
    
    651
    
    
    
    (1
    )
    
    
    650$
    17,901
    
    
    $
    (7
    )
    
    $
    17,894
  4. Accrued Expenses
  September 30,
    
    
    December 31,2006
    
    
    2005Accrued payroll
    
    $
    1,494
    
    
    $
    798Sales tax
    
    
    384
    
    
    
    299Accrued rent
    
    
    279
    
    
    
    126Gift cards
    
    
    270
    
    
    
    395Business and income taxes
    
    
    259
    
    
    
    284Other
    
    
    702
    
    
    
    425$
    3,388
    
    
    $
    2,327
 5. Stock-Based Compensation
  Accounting for Stock Issued to Employees Accounting for Stock-Based Compensation.
  7




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KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
   Three Months Ended
    
    
    Nine Months EndedSeptember 30, 2005
    
    
    September 30, 2005Net loss, as reported
    
    $
    (306
    )
    
    $
    (435
    )Add: Stock-based compensation
expense included in reported
earnings, net of related tax
effect(a)
    
    
    
    
    
    
    151Deduct: Total stock-based
compensation income (expense)
determined under fair value
based method for all awards,
net of related tax
effect(a)
    
    
    6
    
    
    
    (341
    )Pro forma net loss
    
    $
    (300
    )
    
    $
    (625
    )Net loss per share:Basic, as reported
    
    $
    (0.09
    )
    
    $
    (0.20
    )Basic, pro forma
    
    $
    (0.08
    )
    
    $
    (0.29
    )Diluted, as reported
    
    $
    (0.09
    )
    
    $
    (0.20
    )Diluted, pro forma
    
    $
    (0.08
    )
    
    $
    (0.29
    )
 
 (a)
    
    Income taxes have been offset by a valuation allowance. See Note 7 of Notes to Consolidated Financial Statements. Share-Based Payment,
    8




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KONA GRILL, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
  Three Months Ended
    
    Nine Months EndedSeptember 30, 2006
    
    September 30, 2006Dividend yield
    
    0.0%
    
    0.0%Expected volatility
    
    37.1%
    
    39.3%Risk-free interest rate
    
    4.6%
    
    4.8%Expected life (in years)
    
    5.0
    
    4.5
  Shares
    
    
    Weighted
    
    
    Weighted AverageUnder
    
    
    Average
    
    
    Remaining
    
    
    AggregateOption
    
    
    Exercise Price
    
    
    Contractual Term
    
    
    Intrinsic ValueOutstanding options at December 31, 2005
    
    
    475,879
    
    
    $
    5.56Granted
    
    
    328,000
    
    
    
    12.64Forfeited
    
    
    (98,764
    )
    
    
    5.09Exercised
    
    
    (124,776
    )
    
    
    5.60Outstanding options at September 30, 2006
    
    
    580,339
    
    
    $
    9.63
    
    
    5.84 years
    
    $
    3,110,000Exercisable
    
    
    383,839
    
    
    $
    7.79
    
    
    6.42 years
    
    $
    2,763,000
  6. Comprehensive Income (Loss)
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Net loss
    
    $
    (468
    )
    
    $
    (306
    )
    
    $
    (1,659
    )
    
    $
    (435
    )Net unrealized gains
(losses) on
available-for-sale
securities
    
    
    9
    
    
    
    
    
    
    
    (7
    )
    
    
    Total comprehensive loss
    
    $
    (459
    )
    
    $
    (306
    )
    
    $
    (1,666
    )
    
    $
    (435
    )
 7. Income Taxes
  8. Commitments and Contingencies
   9




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
  Overview
     10




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Key Measures We Use to Evaluate Our Company
  Number of Restaurant Openings.
 Same-store Sales Growth.
 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.
 Preopening Expense.
  11




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Depreciation and Amortization
 Interest Income.
 Interest Expense.
 Financial Performance Overview
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restaurant sales growth
    
    
    46.1
    %
    
    
    44.0
    %
    
    
    36.0
    %
    
    
    51.4
    %Same-store sales growth (1)
    
    
    4.0
    %
    
    
    3.4
    %
    
    
    5.1
    %
    
    
    4.6
    %Average unit volume (in thousands) (2)
    
    $
    1,328
    
    
    $
    1,335
    
    
    $
    3,873
    
    
    $
    3,917Sales per square foot (2)
    
    $
    190
    
    
    $
    196
    
    
    $
    554
    
    
    $
    574Restaurant operating profit (in thousands) (3)
    
    $
    2,725
    
    
    $
    2,088
    
    
    $
    7,427
    
    
    $
    5,882Restaurant operating profit as a percentage of
sales (3)
    
    
    19.7
    %
    
    
    22.2
    %
    
    
    20.7
    %
    
    
    22.3
    %
 
 (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 open for at least 12 months before the beginning
of the period measured.(3)
    
    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
a reconciliation to (loss) income from operations, the most comparable GAAP measure. Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005(In thousands)Restaurant sales
    
    $
    13,812
    
    
    $
    9,455
    
    
    $
    35,883
    
    
    $
    26,385Costs and expenses:Cost of sales
    
    
    3,962
    
    
    
    2,699
    
    
    
    10,156
    
    
    
    7,588Labor
    
    
    4,311
    
    
    
    2,873
    
    
    
    11,042
    
    
    
    7,940Occupancy
    
    
    905
    
    
    
    600
    
    
    
    2,423
    
    
    
    1,773Restaurant operating expenses
    
    
    1,909
    
    
    
    1,195
    
    
    
    4,835
    
    
    
    3,202Restaurant operating profit
    
    
    2,725
    
    
    
    2,088
    
    
    
    7,427
    
    
    
    5,882Deduct  other costs and expensesGeneral and administrative
    
    
    1,713
    
    
    
    1,019
    
    
    
    5,352
    
    
    
    3,410Preopening expense
    
    
    491
    
    
    
    462
    
    
    
    1,471
    
    
    
    569Depreciation and amortization
    
    
    1,157
    
    
    
    602
    
    
    
    2,710
    
    
    
    1,651(Loss) income from operations
    
    $
    (636
    )
    
    $
    5
    
    
    $
    (2,106
    )
    
    $
    252
  12




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##### Table of Contents



Percentage of
    
    
    Percentage ofRestaurant Sales
    
    
    Restaurant SalesThree Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    28.7
    
    
    
    28.5
    
    
    
    28.3
    
    
    
    28.8Labor
    
    
    31.2
    
    
    
    30.4
    
    
    
    30.8
    
    
    
    30.1Occupancy
    
    
    6.6
    
    
    
    6.3
    
    
    
    6.7
    
    
    
    6.7Restaurant operating expenses
    
    
    13.8
    
    
    
    12.6
    
    
    
    13.5
    
    
    
    12.1Restaurant operating profit
    
    
    19.7
    
    
    
    22.2
    
    
    
    20.7
    
    
    
    22.3Deduct  other costs and expensesGeneral and administrative
    
    
    12.4
    
    
    
    10.8
    
    
    
    14.9
    
    
    
    12.9Preopening expense
    
    
    3.5
    
    
    
    4.9
    
    
    
    4.1
    
    
    
    2.1Depreciation and amortization
    
    
    8.4
    
    
    
    6.4
    
    
    
    7.6
    
    
    
    6.3(Loss) income from operations
    
    
    (4.6
    )%
    
    
    0.1
    %
    
    
    (5.9
    )%
    
    
    1.0
    %
 Nine Months Ended
    
    
    Year EndedSeptember 30, 2006
    
    
    December 31, 2005Store Growth ActivityBeginning Restaurants
    
    
    9
    
    
    
    7Openings
    
    
    3
    
    
    
    2Closings
    
    
    
    
    
    
    Total
    
    
    12
    
    
    
    9
 Critical Accounting Policies and Estimates
  Accounting for Stock Options
 Share-Based Payment,
   13




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Results of Operations
  Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2006
    
    
    2005
    
    
    2006
    
    
    2005Restaurant sales
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %
    
    
    100.0
    %Costs and expenses:Cost of sales
    
    
    28.7
    
    
    
    28.5
    
    
    
    28.3
    
    
    
    28.8Labor
    
    
    31.2
    
    
    
    30.4
    
    
    
    30.8
    
    
    
    30.1Occupancy
    
    
    6.6
    
    
    
    6.3
    
    
    
    6.7
    
    
    
    6.7Restaurant operating expenses
    
    
    13.8
    
    
    
    12.6
    
    
    
    13.5
    
    
    
    12.1General and administrative
    
    
    12.4
    
    
    
    10.8
    
    
    
    14.9
    
    
    
    12.9Preopening expense
    
    
    3.5
    
    
    
    4.9
    
    
    
    4.1
    
    
    
    2.1Depreciation and amortization
    
    
    8.4
    
    
    
    6.4
    
    
    
    7.6
    
    
    
    6.3Total costs and expenses
    
    
    104.6
    
    
    
    99.9
    
    
    
    105.9
    
    
    
    99.0(Loss) income from operations
    
    
    (4.6
    )
    
    
    0.1
    
    
    
    (5.9
    )
    
    
    1.0Nonoperating income (expense):Interest income
    
    
    1.7
    
    
    
    1.0
    
    
    
    2.0
    
    
    
    0.4Interest expense
    
    
    (0.5
    )
    
    
    (4.2
    )
    
    
    (0.6
    )
    
    
    (2.9
    )Loss before provision for income taxes
    
    
    (3.4
    )
    
    
    (3.1
    )
    
    
    (4.5
    )
    
    
    (1.5
    )Provision for income taxes
    
    
    
    
    
    
    0.1
    
    
    
    0.1
    
    
    
    0.1Net loss
    
    
    (3.4
    )%
    
    
    (3.2
    )%
    
    
    (4.6
    )%
    
    
    (1.6
    )%
 Three Months Ended September 30, 2006 Compared with Three Months Ended September 30, 2005
 Restaurant Sales.
 Cost of Sales
 Labor
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##### Table of Contents



Occupancy
 Restaurant Operating Expenses
 General and Administrative
 Preopening Expense Accounting for Rental
Costs Incurred During a Construction Period.
 Depreciation and Amortization
 Interest Income.
 Interest Expense.
 Provision for Income Taxes
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##### Table of Contents



Nine Months Ended September 30, 2006 Compared with Nine Months Ended September 30, 2005
 Restaurant Sales.
 Cost of Sales
 Labor
 Occupancy
 Restaurant Operating Expenses
 General and Administrative
 Preopening Expense
 Depreciation and Amortization
  16




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##### 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.
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##### Table of Contents



Liquidity and Capital Resources
  Equipment Loans
  Cash Flows
  Nine Months Ended September 30,2006
    
    
    2005Net cash provided by (used in):Operating activities
    
    $
    5,736
    
    
    $
    3,343Investing activities
    
    
    (8,337
    )
    
    
    (31,720
    )Financing activities
    
    
    (421
    )
    
    
    28,773Net (decrease) increase in cash and cash equivalents
    
    $
    (3,022
    )
    
    $
    396
 Operating Activities.
 Investing activities.
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##### Table of Contents



Financing Activities.
 Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Investments
  Primary Market Risk Exposures
  Inflation
  
 Item 4. Controls and Procedures
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##### Table of Contents



PART II  OTHER INFORMATION
 
 Item 1. Legal Proceedings
  
 Item 1A. Risk Factors
  
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 3. Defaults Upon Senior Securities
  
 Item 4. Submission of Matters to a Vote of Security Holders
  
 Item 5. Other Information
  
 Item 6. 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.
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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)   21