Kona Grill, Inc. (KONA - $11.28) Initiating Coverage Growth

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1 Mark W. Moeller (612) Upscale Casual Restaurants September 30, 2005 Financial Summary Rev(mil) 2004A 2005E 2006E Mar $5.3 $8.0A $10.3E Jun $5.6 $8.9A $11.5E Sep $6.6 $9.0E $13.3E Dec $7.6 $10.2E $15.0E FY $25.1 $36.1E $50.1E P/Sales 2.5x 1.7x 1.3x EPS 2004A 2005E 2006E Mar $0.18 ($0.21)A ($0.04)E Jun $0.16 $0.06A ($0.05)E Sep $0.07 ($0.12)E ($0.03)E Dec ($0.48) $0.00E ($0.01)E FY $0.17 ($0.21)E ($0.13)E P/E na na na Price: $ Week Range: $ $11.00 Target: $13 Rating: Buy Shares Outstanding: 5.6 mil Mkt. Capitalization: $63 mil Ave. Volume: 42,000 Instit. Ownership: na BV / Share: $6.33 Debt / Tot. Cap.: 11% Est. LT EPS Growth: 20-40% Company Description Kona Grill, Inc. develops and operates upscale casual dining restaurants offering an eclectic American menu featuring steaks, chicken, pasta, sandwiches, salads, appetizers, and sushi. The décor includes large salt-water aquariums, a sushi bar, and indoor and outdoor lounges. As of October 2005, the company operated nine restaurants in Arizona, Missouri, Nevada, Colorado, Nebraska, Indiana, and Texas. Restaurants are located in retail centers, shopping malls, lifestyle centers, and entertainment centers. Kona Grill, Inc. (KONA - $11.28) Initiating Coverage Growth BUY Key Points: Restaurant Popularity: Established Kona Grill restaurants typically generate more weekly revenue than nearby competitors (with the exception of Cheesecake Factory). The atmosphere is elegant but comfortable, the food is hearty yet eclectic, and the sushi is always some of the best in town. Customer loyalty seems to be driving some of the best unit sales growth in the industry. Strong Unit Economics: Kona Grill generates about 35% of its revenue from high-margin alcohol. Its indoor/outdoor lounges are separated from the dining areas to allow for distinct experiences. To the extent this product mix holds up, Kona Grill generates a margin advantage over comparable restaurants whose average alcohol mix is 15% - 20%. Its established units generate more revenue than P.F. Chang s or McCormick & Schmick s, two very successful stocks. At the unit-level, we expect Kona Grill to return 20% profit margins, allowing for good leverage as the Company expands its number of units. Unit Expansion: In its first six years, the Company built seven restaurants. It built two more in Its August IPO will fuel the construction of five new units in 2006, followed by an estimated five-to-seven units in This will bring its 2006 total to 14 units and is 2007 total to units. With a $2.3 million cash investment per unit, and about $28 million in cash on-hand, we believe the Company is sufficiently capitalized to expand through Experienced Management: The Company s top management comes from similar positions at Caribou Coffee, McDonalds, Burger King, and Rainforest Café. We believe they understand the importance of site selection, the drivers of unit profit contribution, and the perils of over-expansion. Investment Recommendation: We believe that management is experienced in the restaurant unit expansion process and will exhibit tight control over its parameters. The ultimate success-driver will be the sustained revenue-generation of each unit. Our team has visited three units in the last month and reported overwhelmingly positive experiences from food to service to atmosphere. We think Kona Grill has a great chance at long-term success and rate the stock a BUY with a price target of $13. Feltl and Company Research Department. Please see important disclosures on pages 7 to South Sixth Street, Suite 4200 Minneapolis, MN

2 Investment Overview: Kona Grill operates an eclectic restaurant chain that some people call the P.F. Chang s of sushi. P.F. Chang s successfully created a unique ambiance for Asian food at over 100 locations nationwide. Kona Grill is attempting a similar feat with award-winning sushi and creative American dishes such as lemongrass-crusted swordfish, five-spice baby back ribs, and macadamia nut chicken. The two restaurants even look similar: Kona Grill P.F. Chang s Kona Grill generates in excess of $5 million in revenue per restaurant with established units leading the way. Management claims that same-store sales grew 7.3% from 2003 to Margins are higher-than-average because alcohol represents 35% of revenue. As a result, the average restaurant unit generates almost 20% operating margins. This is the amount that flows to corporate to fund general and administrative expenses, pre-opening expenses, interest expenses, and taxes. In a steady-state casual restaurant business, these charges usually total less than 10% of revenue, suggesting that Kona Grill could become a nicely profitable corporation as it grows and matures. Kona Grill currently operates nine restaurants in Arizona, Missouri, Nevada, Nebraska, Colorado, Indiana, and Texas. Its units average about 7100 SF with 270 seats, drawing an average check of about $22. It intends to add five more units in At fourteen units, it should generate annual sales of about $70 million. Kona Grill is headquartered in Scottsdale, Arizona, where it opened its first restaurant in It financed its operations privately (using both debt and equity) as it opened six more restaurants over the following six years. It conducted an initial public offering on August 16, 2005, selling 2,875,000 shares at $11 per share for gross proceeds of $31.6 million Market Opportunity: Restaurants can generally be divided into five categories: Fine Dining ($30+ check), Casual Dining ($8 - $20 check), Family dining ($7 - $12 check), Fast Casual ($6 - $10 check) and Quick Service (fast food). Kona Grill is positioned at the high-end of the casual dining segment with an average check of $22. Other restaurants in this segment include P.F. Chang s and the Cheesecake Factory. The successful companies typically operate a few dozen to a few hundred restaurant units across the United States, but generally less than 400. To succeed, an upscale-casual dining restaurant must offer high quality food with upscale appeal, mid-market prices, and must be located in high-traffic locations. These factors help to keep the Company s fixed capital utilized at high rates. Kona Grill believes that it is accomplishing this with its unique menu that allows for a top-quality sushi experience while offering a range of hearty-to-eclectic fare for the non-sushi enthusiasts. Management believes the concept is scalable to over 200 units nationally. Page 2 Kona Grill, Inc. (KONA) 9/30/05

3 The Menu Popular dinner entrees include: Macadamia Nut Chicken with white cheddar mashed potatoes ($14.95), Sweet-Chili Glazed Salmon with shrimp and pork island rice, Szechwan beans and coconut-curry sauce ($16.95), Big Island Meatloaf with andouille sausage ($14.75), or a variety of certified Angus steaks or thick-cut pork chops ($ $29.95). Diners can also select from several pasta, pizza, or sandwich options including Pad Thai, Jerk Chicken Sandwich, Maui Tacos, or the 14-oz. Big Kahuna Cheese Burger with caramelized onions and Swiss cheese for $8.95. Also, Kona Grill s sushi chefs will prepare virtually any sushi item you can imagine including yellowtail, eel, dragon rolls, tempura, soft-shell crab, or our favorite: Three-Layer Tuna Tartare, which includes tuna sashimi, cream cheese, and avocado, tossed in mandarin-orange vinaigrette, served on top of crispy won-ton wafers. We took a few self-proclaimed sushi snobs from California to the Indianapolis Kona Grill and they described the sushi as among the best we ever had. Restaurants can succeed or fail for a variety of reasons, including a dull menu. We do not believe that this will be a problem for the Kona Grill. Unit Economics The Company s restaurant units range from 5,900 SF (240-seats) to 7,400 SF (320-seat) depending on the nature of the location and require a total investment of approximately $5 million to $6 million (including about $300K in pre-opening expense) depending on the size of the unit and the land-value associated with the location. The Company puts up an average of $2.3 million in cash per unit and leases the remainder over year periods. All leases are accounted for as operating leases. During 2004, the average unit volume of the restaurants open the entire year was $5.5 million, or $777 per square foot. This performance surpasses that of P.F. Chang s and McCormick & Schmick s, two very successful companies with strong stocks. We do not expect all units to average this level of revenue. In fact, management generally expects new units to generate about $4.5 million per year and trend up over time as locals become more familiar with the restaurant. Remember, the $5.5 million units have been opened for several years and are well-know in their areas. However, average unit revenue between $4.5 and $5 million should be sufficient to generate net profits (less expenses associated with expansion). That said, the Company will be expanding. It expects to open five new restaurants in 2006, bringing its total to fourteen, followed by five-seven new units in It does not expect to report profits during 2006 due to this expansion. However, we expect the Company will turn a profit in 2007 due to decreases in expansion costs (pre-opening expenses) and G&A as a percent of sales. A combination of unit-volume growth and unit-expansion should create double-digit profit growth in 2007 and beyond. In addition, about 35% of revenue comes from alcohol, which carries about 78% gross margins. This suggests that about 90% of gross profit comes from alcohol sales, allowing the Company to heavily subsidize its food items, which helps to explain the high-quality menu at seemingly modest prices. We believe this product mix is a key driver of the Company s success. Management: Donald Dempsey President, CEO: Mr. Dempsey has served as President and CEO since Prior to joining the Company, Mr. Dempsey served as President and CEO of Caribou Coffee from 1999 to 2003, President of McDonald s Corporation Hong Kong and Mainland China from 1996 to 1999, and Executive Vice President of Burger King prior to that. Page 3 Kona Grill, Inc. (KONA) 9/30/05

4 Mark Robinow CFO: Mr. Robinow has served as CFO since Prior to joining the Company, he served as CFO of Integrated Decisions and Systems, Inc. from 2000 to 2004, CFO of Rainforest Café from 1995 to 2000, CFO of Ringer Corporation from 1986 to 1993, and served as a senior auditor with Deloitte & Touche from 1980 to Jason Merritt - COO: Mr. Merritt has served as COO since 2003, and as the Director of Operations since Prior to joining the Company, he served in various executive management positions at Sushi On, Inc., Juice Island, Inc., Golden Corral, Inc., and Two Pesos, Inc. Recent Results Q2, 2005: For the quarter ended June 30, 2005, Kona Grill reported revenues of $8.9 million, compared with revenues of $5.6 million for the same period in Net income for the quarter was $175,000 (or $0.06 per diluted share) compared with net income of $365,000 (or $0.16 per diluted share) for the same period in The Company opened three new restaurants between these reporting periods, generating the increased revenue. Also, during the same time-frame the Company hired much of its current top management, implemented SOX compliance, initiated its growth phase, and began the IPO process. This resulted in almost $800,000 more quarterly expense. Going forward, G&A expenses will not grow as a percent of sales like they did over the last twelve months. This should allow higher percentages of future revenue increases to flow to the bottom line. Balance Sheet After the IPO, the Company has about $28 million in cash, and $4 million in debt. It reports $20 million in plant, property, and equipment and $6 million in deferred rent, which represents the expected contingent portion of future rent expenses. Because some of the rent due is contingent upon restaurant sales, higher sales will be partially offset by higher rent expenses. By our calculation, the Company has about $15 million in operating lease obligations (present value), which are not carried on the balance sheet. Had these leases been classified as capital leases, the Company would report an additional $15 million in liabilities on its balance sheet. The total reported book equity is about $30 million. The operating lease classification is widely used with restaurants. However, investors should be aware of these off-balance sheet obligations. We believe that the Company is very-well capitalized and should not need additional cash prior to the completion of its 14 th restaurant unit near the end of Its cash needs in 2007 and beyond will be dictated by its expansion plans. The Company has been a steady user of stock options and warrants as compensation for its employees and directors. Therefore, investors should expect a degree of ownership dilution. It currently has about 700,000 outstanding stock options and warrants, all of which are inthe-money. Therefore, when it reports GAAP profitable results, a fully-diluted share count of about 6.3 million will apply. The Company currently uses APB Opinion #25 to account for stock options. When the Company transition to SFAS #123 in 2006, it will ensure that existing options and warrants are fully-vested in order to minimize option compensation expense. We expect on-going option grants to have a minimal effect on GAAP earnings. Outlook and Valuation: Every time the Company adds a new restaurant unit, it adds the potential for $4.5 million to $5.5 million in additional annual revenue. Based on its current expansion plan, we estimate that at the end of 2006, Kona Grill should have 14 units and about $50 million in annual revenue. However, on a fully annualized basis, these 14 units should produce about $70 million in revenue. Similar Casual Dining Restaurant stocks are currently trading at about 22x forward earnings and at enterprise values of about 1.1x forward revenue estimates. Kona Grill is not likely to generate annual earnings until 2007 due to its large growth plans relative to its base of operating restaurants. However, we expect it to eventually generate higher than average Page 4 Kona Grill, Inc. (KONA) 9/30/05

5 profit margins for this segment. Applying an enterprise value-to-sales ratio of 1.1x to $70 million in revenue generates a value of about $77 million. With $8 million in anticipated net cash (cash less debt), we think a fair market capitalization should be about $85 million, or $13 per share, assuming a fully diluted share count of 6.3 million. Our comparable restaurant base includes Applebee s (APPB), PF Chang s (PFCB), Cheesecake Factory (CAKE), Famous Dave s (DAVE), California Pizza Kitchen (CPKI), and McCormick & Schmick s (MSSR). None of these restaurants are identical to Kona Grill. However, we believe that we have Kona Grill surrounded as far as average check sizes, unit revenue, and net profit margins. Forward Price/Earnings Ratio 30.0 The average forward PE ratio of our comparable base is about 22x PE/Ratio APPB PFCB CAKE DAVE CPKI MSSR Casual Dining Restaurants Forward Enterprise Value/Revenue Ratio The average forward Enterprise Value to Revenue ratio is about 1.1x. EV/Rev Ratio APPB PFCB CAKE DAVE CPKI MSSR Casual Dining Restaurants Many restaurant valuations have declined recently due to the perception that energy prices may eat into consumer s disposable income. Therefore, current valuations are lower than historic norms. McCormick & Schmick s is the youngest of this base and is expanding the fastest. Although its EV/Rev ratio is lower than the others, its stock has almost doubled in the last twelve months as it opened many new units. Risks: Most pure-play restaurant companies face the risk associated with changing consumer preferences. The Company may have limited ability to alter its appeal in the face of unanticipated competition or diminished appetite for its products. Also, each incremental restaurant unit faces its own risks associated with construction delays and site selection. The Company cannot guarantee that each additional unit will perform up to investor expectations. At this time, most of the Company s capital needs are provided through its leasing arrangements. Should the nature of these relationships change, the Company may not be able to access capital or enter into leases on equally favorable terms. In addition, the stock is a thinly traded new issue, averaging less than 50,000 shares per day. Low liquidity creates an added risk for large investors. However we believe that this stock will become more liquid over time. Page 5 Kona Grill, Inc. (KONA) 9/30/05

6 Income Statement Kona Grill, Inc. Mark W. Moeller (612) Fiscal Year End December (in thousands) 9/29/2005 Fiscal Year Mar-04 Jun-04 Sep-04 Dec-04 Fiscal Year Mar-05 Jun-05 Sep-05 Dec-05 Fiscal Year Mar-06 Jun-06 Sep-06 Dec-06 Fiscal Year 2003A Q1A Q2 A Q3 A Q4 A 2004A Q1A Q2 A Q3 E Q4 E 2005E Q1E Q2 E Q3 E Q4 E 2006E Restaurant Revenue 16,608 5,272 5,590 6,566 7,622 25,050 8,011 8,919 8,986 10,197 36,113 10,347 11,498 13,265 15,036 50,146 Cost of Sales Cost of Sales 4,952 1,541 1,646 1,949 2,235 7,371 2,335 2,554 2,651 3,008 10,548 3,052 3,392 3,913 4,436 14,793 Labor 5,105 1,549 1,636 2,009 2,308 7,502 2,509 2,558 2,651 3,008 10,726 3,052 3,392 3,913 4,436 14,793 Occupancy 1, , , ,053 3,510 Operating 2, ,089 3, ,032 1,184 1,330 4,521 1,348 1,486 1,698 1,910 6,442 Pre-Opening Expense ,500 General & Administrative 2, ,217 1,214 1,177 1,283 1,398 5,072 1,524 1,661 1,811 1,974 6,971 Depreciation & Amortization , , ,850 Operating Income (87) (532) 691 (122) 369 (485) (38) (276) (234) (299) (161) (19) (712) Interest Expense, net (260) (47) (47) (119) (147) (360) (182) (176) (176) 10 (524) 3 (10) (20) (35) (61) Other Income, net Pretax Income (347) (679) 520 (304) 193 (661) (28) (801) (231) (308) (181) (54) (773) Income Tax Tax Rate 0% 0% 5% 9% -2% 0% 0% 9% 0% 0% 37% Net Income, Common (347) (694) 465 (304) 175 (661) (28) (819) (231) (308) (181) (54) (773) Diluted Shares Outstanding 1,438 2,295 2,294 2,794 1,460 2,815 1,463 2,975 5,640 5,696 3,944 5,753 5,811 5,869 5,928 5,840 Fully Diluted Common EPS (0.24) (0.48) 0.17 (0.21) 0.06 (0.12) (0.00) (0.21) (0.04) (0.05) (0.03) (0.01) (0.13) Income Statement (% of Rev) Cost of Sales 29.8% 29.2% 29.4% 29.7% 29.3% 29.4% 29.1% 28.6% 29.5% 29.5% 29.2% 29.5% 29.5% 29.5% 29.5% 29.5% Labor 30.7% 29.4% 29.3% 30.6% 30.3% 29.9% 31.3% 28.7% 29.5% 29.5% 29.7% 29.5% 29.5% 29.5% 29.5% 29.5% Occupancy 7.3% 7.2% 7.0% 7.1% 6.7% 7.0% 7.3% 6.6% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% 7.0% Operating 13.9% 13.4% 12.6% 13.3% 14.3% 13.5% 12.2% 11.6% 13.2% 13.0% 12.5% 13.0% 12.9% 12.8% 12.7% 12.8% Pre-Opening Expense 1.5% 0.0% 2.3% 1.2% 8.8% 3.5% 0.1% 1.1% 5.6% 1.5% 2.1% 1.9% 3.5% 3.4% 3.0% 3.0% General & Administrative 12.4% 6.9% 6.9% 8.1% 12.3% 8.9% 15.2% 13.2% 14.3% 13.7% 14.0% 14.7% 14.4% 13.7% 13.1% 13.9% Depreciation & Amortization 5.0% 5.1% 4.8% 5.1% 5.3% 5.1% 6.4% 6.0% 6.4% 6.2% 6.2% 6.6% 5.7% 5.4% 5.3% 5.7% Operating Income -0.5% 8.7% 7.7% 5.0% -7.0% 2.8% -1.5% 4.1% -5.4% -0.4% -0.8% -2.3% -2.6% -1.2% -0.1% -1.4% Interest Expense, net -1.6% -0.9% -0.8% -1.8% -1.9% -1.4% -2.3% -2.0% -2.0% 0.1% -1.5% 0.0% -0.1% -0.1% -0.2% -0.1% Operating Margin -0.5% 8.7% 7.7% 5.0% -7.0% 2.8% -1.5% 4.1% -5.4% -0.4% -0.8% -2.3% -2.6% -1.2% -0.1% -1.4% Net Margin (Fully Taxed) -2.1% 7.9% 6.5% 2.9% -9.1% 1.9% -3.8% 2.0% -7.4% -0.3% -2.3% -2.2% -2.7% -1.4% -0.4% -1.5% Balance Sheet Data Cash and Equivalents, net 3,107 3, ,582 25,224 22,680 20,698 17,627 13,518 Property Plant and Equipment 8,634 17,041 20,474 22,401 24,274 23,594 25,433 28,471 32,674 Total Assets 12,697 22,413 23,174 50,854 51,555 47,872 47,907 48,147 48,514 Shareholders' Equity 5,425 6,131 6,199 35,717 35,103 34,590 33,697 32,539 31,114 Book Value Per Share $3.77 $2.18 $2.08 $6.33 $8.90 $6.01 $5.80 $5.54 $5.33 Page 6 Kona Grill, Inc. (KONA) 9/30/05

7 Analyst Certification I, Mark Moeller, certify that the views expressed in this research report accurately reflect my personal views about the subject company and its securities. I also certify that I have not been, am not, and will not be receiving direct or indirect compensation related to the specific recommendations expressed in this report. Important Disclosures: The analyst or any member of his/her household does not hold a long or short position, options, warrants, rights or futures of this security in their personal account(s). As of the end of the month preceding the date of publication of this report, Feltl & Co. did not beneficially own 1% or more of any class of common equity securities of the subject company. There is not any actual material conflict of interest that either the analyst or Feltl and Company is aware of. The analyst has not received any compensation for any investment banking business with this company in the past twelve months and does not expect to receive any in the next three months. Feltl & Co. has been engaged for investment banking services with the subject company during the past twelve months and does not anticipate receiving compensation for such services in the next three months. Investors should assume that Feltl and Company is seeking or will seek investment banking or other business from the companies in our research universe. Feltl & Co. has not served as a broker, either as agent or principal, buying back stock for the subject company s account as part of the company s authorized stock buy-back program in the last twelve months. Feltl & Co. may possibly serve as the company s broker, either as agent or principal, as part of the company s authorized buy-back program in the next three months. No director, officer or employee of Feltl & Co. serves as a director, officer or advisory board member to the subject company. Feltl and Company Rating System: Feltl and Company utilizes a four tier rating system for potential total returns over the next 12 months. Strong Buy: The stock is expected to have total return potential of at least 30%. Catalysts exist to generate higher valuations, and positions should be initiated at current levels. Buy: The stock is expected to have total return potential of at least 15%. Near term catalysts may not exist and the common stock needs further time to develop. Investors requiring time to build positions may consider current levels attractive. Hold: The stock is expected to have total return potential of less than 15%. Fundamental events are not present to make it either a Buy or a Sell. The stock is an acceptable longer-term holding. Sell: Expect a negative total return. Current positions may be used as a source of funds. Other Public Companies Mentioned in This Report P.F. Chang s China Bistro, Inc. (PFCB - $44.14, not rated) Cheesecake Factory, Inc. (CAKE - $31.15, not rated) McCormick & Schmick s Seafood Restaurants, Inc. (MSSR - $20.83, not rated) Applebee s International, Inc. (APPB - $20.03, not rated) California Pizza Kitchen, Inc. (CPKI - $29.08, not rated) Famous Dave s of America, Inc. (DAVE - $12.25, HOLD) Page 7 Kona Grill, Inc. (KONA) 9/30/05

8 9/1/2005 Ratings Distribution for Feltl and Company Investment Banking Number of Percent Number of Percent of Rating Stocks of Total Stocks Rating category SB/Buy 29 67% 1 3% Hold 11 26% 0 0% Sell 3 7% 0 0% % 1 2% The above represents our ratings distribution on the stocks in the Feltl and Company research universe, together with the number in (and percentage of) each category for which Feltl and Company provided investment-banking services in the previous twelve months. 09/30/05 Buy Target: $13 Date Nature of Report Rating Price Target 09/30/05 Initiating Coverage Buy $13 Feltl & Company does make a market in the subject security at the date of publication of this report. As a market maker, Feltl & Co. could act as principal or agent with respect to the purchase or sale of those securities. Page 8 Kona Grill, Inc. (KONA) 9/30/05

9 Valuation and Price Target Methodology: Similar Casual Dining Restaurant stocks are currently trading at about 22x forward earnings and at enterprise values of about 1.1x forward revenue estimates. Kona Grill is not likely to generate annual earnings until 2007 due to its large growth plans relative to its base of operating restaurants. However, we expect it to eventually generate higher than average profit margins for this segment. Applying an enterprise value-tosales ratio of 1.1x to $70 million in revenue generates a value of about $77 million. With $8 million in anticipated net cash (cash less debt), we think a fair market capitalization should be about $85 million, or $13 per share, assuming a fully diluted share count of 6.3 million. Risks to Achievement of Estimates and Price Target: Consumer Preferences: Although the concept has performed well to date, each restaurant unit has about $3 million in lease obligations, resulting in large fixed costs. If consumer preferences change for any reason, the Company may have difficulty adapting the menu and décor to meet these changes. To reduce this risk, some restaurant companies own different restaurants with different themes. Kona Grill operates on a single theme. Therefore, the risk associated with changing customer preferences is higher than average. Delays: If the construction or equipment procurement process is delayed at new restaurant units, the company s financial results could be negatively impacted. Kona Grill initiates lease payments prior to the opening of the associated restaurant unit. Also, the Company spends approximately $2.3 million in up-front expenses on each unit, which will not generate a return until the unit is operating. This risk is higher in the near-term as more restaurants are being added. In the long-run, this risk should diminish. Site Selection: The Company relies on the site selection skills of management. Although considerable thought has been put into ideal site characteristics, the process may become more challenging over time. Eventually, the Company may determine that some of its selected sites are less-than-optimal. For example, it believes that its Denver location is suffering from poor access to parking. Unfortunately, investors will not know if a site was a poor selection until long after the capital has been committed. As management collects data on unit performance, it may be able to reduce site selection risks in the future. Development Agreements: The Company s development agreements with leasing companies offer a reliable source of capital at known costs. If this relationship suffers for any reason, the Company may experience reduced access to capital or higher capital costs. Margins: Casual Dining Restaurants typically generate low profit margins at the unit level. Management typically attempts to leverage corporate expenses by operating a growing number of units. Therefore, any factor that reduces profit margins at the unit level may substantially reduce returns to investors in the corporation. Management has limited ability to keep competition away, or pass on price increases to its customers. Therefore, the Company s equity investors bare most of the risk associated with fluctuating profit margins. Other Disclosures: The information contained in this report is based on sources considered to be reliable, but not guaranteed, to be accurate or complete. Any opinions or estimates expressed herein reflect a judgment made as of this date, and are subject to change without notice. This report has been prepared solely for informative purposes and is not a solicitation or an offer to buy or sell any security. The securities described may not be qualified for purchase in all jurisdictions. Because of individual requirements, advice regarding securities mentioned in this report should not be construed as suitable for all accounts. This report does not take into account the investment objectives, financial situation and needs of any particular client of Feltl and Company. Some securities mentioned herein relate to small speculative companies that may not be suitable for some accounts. Feltl and Company suggests that prior to acting on any of the recommendations herein, the recipient should consider whether such a recommendation is appropriate given their investment objectives and current financial circumstances. Past performance does not guarantee future results. From time to time, Feltl and Company, or its officers, directors or agents, or members of their families, may have a position in securities mentioned and may make purchases or sales of the same in the open market or otherwise, and may own options, rights or warrants to purchase the same. Additional information is available upon request. Page 9 Kona Grill, Inc. (KONA) 9/30/05

10 EQUITY CAPITAL MARKETS DIRECTORY RESEARCH DEPARTMENT Clinton H. Morrison, CFA Director of Equity Research (612) Ernest W. Andberg, CFA (612) INSTITUTIONAL SALES: (866) Thomas Pierce Senior Vice President Institutional Sales (612) Mark Hagen (612) Mark W. Moeller (612) Dennis E. Nielsen, CFA (612) Richard A. Ryan (612) Jack M. Zipoy (612) TRADING: (866) Joseph G. Fredericks Manager, Equity Trading (612) William W. Koop (612) Thomas Walters (612) Elliott Randolph Institutional Sales Trading (612) Deborah L. Zieman Institutional Sales Trading (612) Luke J. Weimerskirch Institutional Sales Trading (612) Paul M. Manley Ryan Quade (612) Jo Pihl (612) SOUTH SIXTHSTREET SUITE 4200 MINNEAPOLIS, MINNESOTA (612) (866) MEMBER SIPC & NASD