Kona Grill, Inc. Q1 2009 Earnings Call Transcript

Apr.29.09 | About: Kona Grill, (KONA)

Kona Grill, Inc. (NASDAQ:KONA)

Q1 2009 Earnings Call

April 29, 2009, 5:00 pm ET

Executives

Mark S. Robinow - Chief Financial Officer

Marcus E. Jundt - Chairman and Chief Executive Officer

Mark Bartholomay - Chief Operating Officer

Analysts

Brad Whittington - KeyBanc Capital Markets

Rob Brown - Craig-Hallum Capital

Mark Smith - Feltl & Company

Thomas Lynch – Melroad Capital

Justin Bennett - Clarke Bennett

Justin Jacobs - Melroad Capital

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the Kona Grill first quarter 2009 earnings conference call. (Operator Instructions) I would now like to turn the conference call over to Mr. Marcus Jundt, Chief Executive Officer, and Mr. Mark Robinow, Chief Financial Officer. Please go ahead, sir.

Mark Robinow

Thank you. This is Mark Robinow. By now you should all have access to our first quarter earnings release. It may also be found on our website at konagrill.com under the Investor Relations section.

Before we begin formal remarks, I need to remind everyone that part of our discussion today may include forward-looking statements. These statements are not guarantees of future performance and therefore undue reliance should not be placed upon them. We refer all of you to our recent filings with the SEC for a more detailed discussion of the risks that could impact our future operating results and financial conditions.

With that, I'd like to turn the call over to Marcus Jundt, our Chief Executive Officer.

Marcus Jundt

Thank you, Mark, and thank you all for joining us today.

We'd like to cover several items during this call. First, I will open with some brief comments about the first quarter. Mark will then discuss in detail our financial results, as well as our guidance for the second quarter. I will then wrap up the call with some final thoughts before turning the call over for Q&A. With that, let us being.

First quarter sales were $19.5 million or $200,000 above the high end of our original February 10 guidance due to higher than forecasted sales at our Richmond, Virginia restaurant.

Same store sales declined 9.6% during the first quarter, which is once again reflective of the weak economy.

Net loss for the quarter was $0.17 per share, which was at the high end of our revised guidance on April 13.

For the quarter, restaurant operating profit margin was 15.7% compared to 16.3% last year. Like most other restaurant companies, margins continue to be impacted by deleveraging effect of lower sales volumes. We continue to offset some of this margin pressure through better management of our food costs and lower costs for certain commodities. Despite the same store sales decline, our 15-unit comparable base, which represents 70% of our total operating portfolio, was able to generate restaurant operating profit margins of 17.2%, which most other restaurant companies would be happy to achieve under far more favorable conditions.

While the overall environment is likely to remain challenging for the foreseeable future, we continue to focus on those things within our control to improve the guest experience and ultimately the bottom line.

During the quarter, we completed the system-wide rollout of our Perfect Pairings lunch promotion and expanded our happy hour menu to drive guests frequency. We are also working on improved training programs to enhance service levels and are planning a large scale menu update later this spring to keep our offerings fresh and exciting.

During January, we opened a restaurant in Richmond, Virginia at West Broad Village, an upscale shore pump area. This unit has opened strong in spite of the tough economy and we hope to continue this momentum with opening of our restaurant in Woodbridge, New Jersey yesterday.

Woodbridge is our second location in the northeast and brings a total number of units to 22. The restaurant is located near the Woodbridge Hotel and Conference Center and is situated in a vibrant commercial district that is home to several national and international corporate headquarters. We look forward to serving a greater part of the New York metro area with our latest opening.

With that, I will turn the call over to our CFO, Mark Robinow.

Mark Robinow

Thanks. Marcus.

For the first quarter ended March 31st, restaurant sales increased 7.5% to $19.5 million, reflecting additional revenue from four restaurants opened since last June. In addition to the difficult economic environment, first quarter sales comparisons were negatively impacted by a full percentage point by the additional day in February last year.

Overall, same-store sales declined 9.6%, inclusive of a 4% increase in pricing year-over-year. This compares to a 2.4% decline in same-store sales in the same period in 2008.

Same store comps, excluding states severely affected by the housing and economic crisis, Arizona, Nevada, and Michigan, were down 5.8%.

Cost of sales as a percentage of restaurant sales decreased 250 basis points to 26.2% during the first quarter from 28.7% last year as we continue to experience positive results from the implementation of our automated food cost and inventory management system.

The rollout was completed during July of 2008, so we have already lapped the initial benefits of this implementation. We remain pleased with the results.

We also realized savings from lower costs of protein and produce during the quarter.

Labor expenses as a percentage of restaurant sales increased 90basis points to 34.7% during the quarter from 33.8% last year. We expect labor as a percentage of sales to flatten out as we realize the benefit of recently implemented labor staffing schedules.

Occupancy expenses as a percentage of restaurant sales increased 90 basis points to 7.8% during the quarter compared to 6.9% last year, as these costs are largely fixed.

Restaurant operating expenses increased 130 basis points as a percentage of restaurant sales as a result of higher utilities, increased repair and maintenance costs, and deleveraging of fixed operating costs.

Combining these four line items, restaurant operating profit was $3.1 million or 15.7% of restaurant sales compared to $2.9 million or 16.3% of restaurant sales last year.

General and administrative expenses were flat at $1.9 million during the quarter, but down 50 basis points as a percentage of restaurant sales.

G&A savings resulting from the January 2009 downsizing and realignment of corporate staff and reduction of other expenses were offset by over $100,000 dollars in legal fees associated with shareholder activity.

Pre-opening expenses were $500,000 in the first quarter compared to $178,000 last year. These costs related to the opening of Richmond in the first quarter and Woodbridge, which opened yesterday. Our cash costs for pre-opening expenses is approximately $400,000 per restaurant.

Depreciation expense as a percent of restaurant sales increased 20 basis points to 8.9% of restaurant sales during the first quarter from 8.7% a year ago. The increase reflects decreased leverage on the top line partially offset by a reduction of depreciation expense due to the asset impairment charge we took in the fourth quarter of 2008 for our Lincolnshire, Illinois restaurant.

Net loss for the quarter was $1.1 million or $0.17 per share on a weighted average share base of 6.5 million shares. Last year, we posted a net loss of $673,000 or $0.10 per share on a weighted average share base of 6.6 million shares.

We ended the quarter with $9.7 million in cash and investments. $6.5 million of this amount is held in student loan auction rate securities with a face value of $6.6 million. As mentioned on our last call, we have the ability to borrow against these securities and outstanding borrowings under the line of credit were $4.6 million at the end of the quarter.

During the first quarter, net cash provided by operating activities was $1.5 million. We spent $4.3 million on capital expenditures during the quarter for our new restaurant.

For our second quarter financial guidance, we are forecasting sales of $20.5 million to $21.5 million and a loss of $0.5 million to $1.0 million or $0.07 to $0.13 per diluted share based on $7.5 million weighted shares estimated for the quarter post rights offering.

Our forecast reflects continued weakness in the economy and uncertainty of when traffic trends will start to improve.

I will now turn the call back to Marcus before we go to Q&A.

Marcus Jundt

Thanks, Mark. Before we wrap up our prepared remarks, I’d like to discuss the current status of our financing.

A special committee of our Board of Directors has overseen every aspect of the financing process our company has undertaken. These independent directors have worked closely with management and the company's legal and financial advisors to recommend financing alternatives in the best interests of the company and all of its shareholders.

Based upon the committee’s recommendation and the full board’s approval, we issued $1.2 million in bridge notes during March. While our rights offering to raise up to $3.5 million in proceeds is going on and is set to close on May 22.

We continue to seek additional debt financing to support the long-term growth of Kona Grill. Our cash flow from operations is sufficient to fund current operations and the proceeds of our rights offering will allow us to complete construction of the Eden Prairie, Minnesota site.

If no affordable debt financing is available near term, we may have to delay construction of future restaurants under lease.

Most importantly, we continue to manage our company in a manner we believe will allow us to best ride out the current economic downturn, while strategically evaluating all aspects of our business to position us for long-term success.

Mark Bartholomay, our Interim Chief Operating Officer, has joined us for the Q&A portion of our call.

I would now be happy to answer any questions. I would also like to make one note that I encourage all shareholders to participate in the rights offering going forward.

Operator, would you please open the lines for questions?

Question-and-Answer Session

Operator

Thank you, gentlemen. (Operator Instructions)

We’ll go first to Brad Whittington - KeyBanc Capital Markets

Brad Whittington - KeyBanc Capital Markets

Let me start off by checking on the markets you just talked about opening, planned openings, you said one more and might have to delay future. So should we just assume that we’re going to have three instead of four here in 2009?

Marcus Jundt

I wouldn’t make that assumption. If we can get financing, we’ll build it. If we can’t, we’ll delay it.

Brad Whittington - KeyBanc Capital Markets

So still kind of one per quarter is a good time schedule for that?

Marcus Jundt

Yes.

Mark Robinow

This is Mark. I think on the current schedule of Eden Prairie, it would be very late in the third quarter.

Brad Whittington - KeyBanc Capital Markets

Okay, so don’t put in too many operating weeks after that pre-opening and the like. Okay.

Maybe I’m misunderstanding this, if you’re operating at a loss, why are you working on a diluted share count?

Marcus Jundt

Well dilution, it’s just a GAAP term. They’re really just primary shares, but for GAAP we do the dilutive calculation.

Brad Whittington - KeyBanc Capital Markets

Okay, so 7.5 is what we use going forward. And can you comment at all on how the non-comp base units are performing, if there’s certain regions that are a little weaker than others or how that’s coming along?

Marcus Jundt

Just to give you a little color on the non-comp base units, I would say that Richmond, Gilbert, Arizona, and North Phoenix, Arizona are fairly strong performers. The weakest performer of the bunch is probably West Palm Beach, Florida.

Operator

We’ll hear next from Rob Brown - Craig-Hallum Capital

Rob Brown - Craig-Hallum Capital

I missed the cash balance, the debt outstanding, and then the debt against the cash balance. Could you just go through that again, Mark.

Mark Robinow

The next cash balance when our borrowings are shaken out and everything is actually, you know, net is down to $2.5 million, but we have outstanding debt on the UBS is $4.6 million right now. Total cash and investments total $9.7 million.

Rob Brown - Craig-Hallum Capital

Looking at your implied guidance, what kind of comp does that guidance imply? In the quarter, have you seen any improvement in the market?

Marcus Jundt

We’ve seen slight improvement in April. We’re obviously not done with the month and it will probably improve slightly over March and over what the first quarter comp was, but it’s early to call a trend in this environment. We saw month-to-month fluctuations in the first quarter that were fairly substantial and our guidance really anticipates that we have similar comps right now down in the 9% range. So we are basically similar comps to the first quarter.

Rob Brown - Craig-Hallum Capital

I think you mentioned $100,000 in your G&A costs this quarter for legal fees. Does that continue on going forward or is that sort of a one quarter item?

Mark Robinow

Rob, I think we’re going to see that. We saw it in the first quarter. I think we’ll probably see a similar amount in the second quarter and then we believe that would taper off from there. It shouldn’t be ongoing for a long period of time.

Rob Brown - Craig-Hallum Capital

Do you have a sense for your CapEx in 09?

Marcus Jundt

It depends on the timing of some of these restaurants, but at this point, looking at opening all four restaurants and getting a start on Baltimore for early 2010. We’re still looking at $11 to $12 million in CapEx in calendar 09.

Operator

We’ll hear now from Mark Smith - Feltl & Company.

Mark Smith - Feltl & Company

Can you just give us more insight into were you able to squeeze out some cost savings in G&A?

Marcus Jundt

In addition to layoffs, Mark, we also restructured some positions. We actually took some corporate operations positions and put those back as restaurant operating positions. We went to vendors and reduced ongoing fees that we’ve been paying to certain vendors or eliminated certain vendors that we didn’t need. Put tighter controls on things like travel and corporately we had basically a salary freeze and no bonuses were paid to any people in the corporate office.

Mark Smith - Feltl & Company

Second, can you talk a little about the effect of Easter and the shift in Easter this year may have had.

Marcus Jundt

Easter is not a big day for us. We’re not a large lunch and brunch destination. We do have a brunch that is growing in interest, but at this point, the Easter shift is not significant for Kona Grill. The bigger item for us in the first quarter, because we’re on a calendar reporting basis, was the extra day in February last year compared to this year and that accounted for a full point of our negative same store sales.

Mark Smith - Feltl & Company

Last, just a housekeeping, can you give us again, I missed the cash from operations and the CapEx number during the quarter.

Mark Robinow

Cash from operations was $1.5 million and the CapEx was $4.3 million.

Operator

We’ll hear now from Thomas Lynch – Melroad Capital.

Thomas Lynch – Melroad Capital

Marcus, I’ve noticed on previous calls and on this call that you’ve been a little bit reticent about answering questions. So as I go forward, I’d like to give you the opportunity to show shareholders that you’re accountable and you really know how to operate this business.

So if you would personally answer in a detailed way my operating questions, I’d appreciate it. My first question is we took a universe of all of the public reporting restaurant companies and so far 15 companies have reported. In the first quarter of 2009, Kona ranked dead last in this universe with same store sales of negative 9.6%. As an example of others, Cheesecake Factory was negative 3.4%, Buffalo Wild Wings was up 6.4%. Over your last three years as CEO, you almost completely changed out the management team bringing in your own people. What explains this weak performance? What changes are you going to make? Who is personally accountable? And specifically in management, what changes will you make?

Marcus Jundt

I think there’s, for starters, a misperception on your part. I’ve been involved, I’ve financed a first restaurant. I’ve been involved with the company since day one on the Board of Directors and if you look back on a historical basis, we had a period where our same store sales outperformed our peers.

Thomas Lynch – Melroad Capital

Marcus, I’m talking about the recent period, please. Can you please address that?

Marcus Jundt

I’ll address the question in the manner in which I want to address it. If you look at our number of units we have, we also have some concentration that’s maybe different than some of the examples that you stated. So I think you’re going to see probably more volatility in our numbers until we have a larger footprint throughout the United States.

As far as management, we’ve got an excellent management team. They’ve been in the restaurant business a significant amount of time and in previous places they worked, they’ve been very successful and the company and the board is very pleased with the team that we have in place and we plan on making no changes.

Thomas Lynch – Melroad Capital

You’re 15th out of 15 and you believe it’s all due to geography.

Marcus Jundt

You’ve given me criticism in the past. You said that we had the worst performing stock and then what you forgot to tell people is that the previous year we actually had the best performing stock. I think you have a tendency to take data that fits your viewpoint and then you like to express it.

Thomas Lynch – Melroad Capital

Marcus, I could read off all 15 if you’d like to, but you’re 15 out of 15. So my question to you, is the poor performance entirely related to geography or does management have any responsibility and will there be any changes in policy.

Marcus Jundt

I think that we have made some changes. Jason Merritt resigned.

Thomas Lynch – Melroad Capital

All of this happened after Jason Merritt resigned. I’m talking about the first quarter, Marcus.

Marcus Jundt

In order to change, it takes time. We’re redoing the menu. We’re changing the décor. We’re changing the uniforms. We’re changing some of the pricing in our pairings. I don’t think there’s one aspect of the company that we’re not working on as far as cost controls, as far as what the customer is going to see and experience. I think that if you look at our units, and even some of the ones that have been hurt substantially by the negative same store sales, they’re still very profitable and as a stand alone unit, you would be very proud to own.

Thomas Lynch – Melroad Capital

What I’m looking at though is 9.6% in the last quarter and what I don’t hear is that there is any managerial accountability here or any major changes. So let me ask the question another way. Over your last three years, since you were appointed CEO, Kona’s share price has declined by 81%, making it the worst performing of these 15 restaurant chains. As an example, Cheesecake Factory is down 20%, PF Chang is down 7%, Buffalo Wild Wings is actually up 114%, and BJ’s is down 25%. Can you tell me why Kona has been the worst performing restaurant stock in this universe of 15 over the years that you’ve been CEO? Who should be held accountable for that share price performance?

Marcus Jundt

On a long-term basis, I should be, yes. I think your numbers are inaccurate. When I actually became CEO, I believe the stock was 7 or 8 and I think the stock is at 250, 240 today.

Thomas Lynch – Melroad Capital

Marcus, I’d be willing to send this to you after the call, but beginning on the date you were appointed, 7-11-06, ending 4-24-09, Kona Grill stock is down 81.3%. The other numbers I gave you were accurate for that exact period.

Marcus Jundt

Again, Mr. Lynch, you’re using an interesting data point that’s your argument. I was appointed intern CEO and the price was at a different level than the one where I was appointed to be permanent. So your numbers, yes, they’re down, but they’re not as bad as you make them out to be.

Thomas Lynch – Melroad Capital

Who is accountable for that?

Marcus Jundt

Well, you know, Mr. Lynch, the stock was the number one performing stock the first year I was CEO and.

Thomas Lynch – Melroad Capital

And for the two years you’ve been CEO, it’s been the worst performing. I’m sure the stock was the best performing stock one day last year as well, but there’s a three year period and we as shareholders want to know who’s accountable for that and what changes will be made?

Marcus Jundt

The board is.

Thomas Lynch – Melroad Capital

The board is?

Marcus Jundt

The board is responsible for who the CEO of the company is.

Thomas Lynch – Melroad Capital

Well you’re the chairman of the board, Marcus. Will you look into making a change at the CEO level.

Marcus Jundt

I will bring this issue up to the board.

Thomas Lynch – Melroad Capital

I’m asking the opinion of the chairman though.

Marcus Jundt

At this moment, I will not give opinion to that.

Thomas Lynch – Melroad Capital

Let me go to the fundraising process, Marcus. Over the last six months, the company ran two fundraisers. In the first, the company agreed to sell a million dollars in shares to your father at $1.19. In the second, the company agreed to offer your father and a couple of others very expensive over subscription rights at $1.35. My question for you as a chairman, a CEO, and as a person responsible as a fiduciary to all shareholders is quite simple. Were the processes fair and did they result in fair prices?

Marcus Jundt

We had a special committee. We had counsel, we had independent bankers, and there was a process. The process was followed, and yes I do believe that it was fair.

Thomas Lynch – Melroad Capital

The process were fair and the price was fair.

Marcus Jundt

Mr. Lynch, you were shown the exact same terms on that….

Thomas Lynch – Melroad Capital

Marcus, it’s interesting…so you’re saying that it was a fair process and a fair price.

Marcus Jundt

Yes.

Thomas Lynch – Melroad Capital

Okay. Marcus, it’s interesting that you say that we were shown the same deal, because as I look at the 8-K the company filed on March 9, the term sheet was the term sheet I and other shareholders saw, but the definitive documentation was different. The definitive documentation that your father and other insiders signed had a set of protections that weren’t offered to the other shareholders. Those include no maturity, no transferability, no anti-layering. Outsiders weren’t offered any of them. The term sheet shows that they weren’t offered any of them, but the definitive documentation that your father and others signed, they received all three. Can you explain that difference to us, please?

Marcus Jundt

You’re misstating the facts and you’re deceiving people and you’re factually incorrect. You were shown the exact same terms and to state otherwise is factually deceiving and wrong.

Thomas Lynch – Melroad Capital

Marcus, if after this phone call I send you a letter and I highlight in that letter the term sheet has described and I highlight the definitive documentation and what the terms are, would you get on a conference call tomorrow with all shareholders and explain the difference?

Marcus Jundt

I will not. I will tell you that there was a process. I will tell you that you were shown. We had good counsel and we had good advisors. You were shown the exact same terms and I’ll repeat myself. If you say that you weren’t, you’re deceiving other people on this phone call. You were shown the exact same terms that the people that participated were shown and that’s a fact.

Thomas Lynch – Melroad Capital

What I would say is I was shown the terms that were released in the March 9th 8-K, and I would ask all the shareholders on this call to look at those terms and look at the definitive documentation, because it’s clear cut that the definitive documentation is different than the terms.

Marcus Jundt

Mr. Lynch, we almost begged you to participate in that deal and you were trying to game this system, game it for your benefit and I’m finished answering your questions. If you’d like to ask anymore questions, you can call me offline.

Thomas Lynch – Melroad Capital

I would like to continue with a couple questions, Marcus. The final thing I’d like to note is that shareholders can look at exhibit A in the March 9th 8-K and exhibit B and they could see for themselves what the exact difference is.

Another question, Marcus. Did any shareholders who participated in the process complain about the fairness of the process?

Marcus Jundt

No comment.

Thomas Lynch – Melroad Capital

Is that that you don’t know or you don’t want to say?

Marcus Jundt

My answer is no comment.

Thomas Lynch – Melroad Capital

It’s my understanding that at least three shareholders complained. Do you believe I’m wrong, Marcus?

Marcus Jundt

No comment.

Thomas Lynch – Melroad Capital

Okay, Marcus. I’ll get back in the queue. Thank you.

Operator

We’ll go next to Justin Bennett - Clarke Bennett.

Justin Bennett - Clarke Bennett

Marcus, I was just curious. Who is on the independent committee?

Marcus Jundt

Mark Z., Char D., Tony Wensheski, and Kirk Patterson.

Justin Bennett - Clarke Bennett

You also mentioned that you had bankers and advisors involved? Could I have the name of the bankers and advisors?

Marcus Jundt

Greenberg T. was the legal counsel and Key Banc was the financial advisor.

Justin Bennett - Clarke Bennett

Also, I read the lawsuit that was filed on April 1st against certain members of the board. I’m not a lawyer so I don’t understand really what this means, but what are you specifically liable for in this lawsuit?

Marcus Jundt

We don’t comment on lawsuits, so I have no comment.

Operator

We’ll go back to Mark Smith - Feltl & Company.

Mark Smith - Feltl & Company

Just one clarification that we haven’t touched and that’s just on pricing, Marcus. You mentioned in one question that you’re revamping the menu and looking at the menu. Can you comment on any changes in pricing?

Mark Bartholomay

This is Mark Bartholomay, interim COO. What we did was we gave a comprehensive look at the entire pricing that we got in there. We got a zero change, some of our pricing didn’t make sense. The biggest instance I can give you is we had a 12-ounce hamburger, which was perceived as a value because of its size, but everybody else had a 8-ounce hamburger or a 7 or an 8, some had a 9, and they were a dollar below us. So in our opinion and in the eyes of the consumer, that was not a value, because they didn’t really care how big it was. So that’s the most demonstrative one down. We also had some things that were while they were priced for an average margin that was reasonable, they really frankly weren’t priced to sell from a consumer standpoint. So we’ve given up a little in a few places. We picked up a little in a few other places. We’ve re-engineered some sizes and we’ve moved around some of the size. For instances, putting asparagus with a steak instead of a green bean, because it makes more sense, which is a little more costly to attempt to adjust that perception of value in the consumer’s eyes.

Mark Smith - Feltl & Company

Other than that, there’s really zero change in pricing.

Mark Bartholomay

When you got all done with it, it’s a zero net change.

Mark Smith - Feltl & Company

Can you talk about individual units that are cash flow negative and cash flow positive and a breakdown in the system of how many maybe in those groups?

Mark Robinow

We only had one restaurant that was cash flow negative, which is Lincolnshire, Illinois.

Mark Smith - Feltl & Company

Any other changes or outlook on that restaurant. I know that there’s been signage issues in the past, but has anything changed there?

Mark Robinow

Well, number one, in a competitive marketplace, two restaurants within two miles went out of business in the last probably 8-10 weeks. So it’s not just our problem and you would hope that would help. Otherwise, we’ve got a stabilized management team in there for the first time in a long time and they’ve got all of our outside metrics on how that store is operating. Stabilized and then started to come up. So it was a long process, but it seems like we’re making progress on it.

Mark Smith - Feltl & Company

Any of those restaurants that went out, are they the ones that are directly in kind of that square at that Lincolnshire location or a little further out?

Mark Robinow

They’re up and down the road.

Operator

We’ll go back to Brad Whittington - KeyBanc Capital Markets

Brad Whittington - KeyBanc Capital Markets

Thanks. I just got a follow-up on the theoretical food cost system. I’ve seen some impressive improvements in cogs over the last quarter or so and I was wondering if we should see that kind of flatten out maybe in the third quarter?

Mark Robinow

Brad, as I said, we finished at last July, we’ve continued to make some improvements and some of our other improvements came from improvements in commodity costs. So the low hanging fruit is definitely done and I would look for food costs to stabilize. We can’t continue to make those kind of improvements for quarter after quarter. So you got to flatten it out.

Brad Whittington - KeyBanc Capital Markets

Okay, thank you.

Operator

We’ll go back to Justin Bennett with Clarke Bennett.

Justin Bennett - Clarke Bennett

Have you guys come to any conclusion on the board member for Carlson?

Marcus Jundt

The answer is that’s in the hands of the nominating committee and there’s nothing to announce.

Justin Bennett - Clarke Bennett

Okay. At some point, you have to announce something by what? June 30th?

Marcus Jundt

We do by June. That is correct.

Operator

We’ll hear next from Justin Jacobs with Melroad Capital.

Justin Jacobs - Melroad Capital

We’ll stay on the topic of the vacant board seat. Marcus, as a chairman, I’d like to understand your opinion a little bit about what you think the important qualifications are as you look at potential directors. Do you think it’s important for a candidate to have experience in a public board?

Marcus Jundt

I think that the nominating committee is going through a process. If you want to read their charter, it’s available and I have high confidence that the process will work and the board will get a good candidate.

Justin Jacobs - Melroad Capital

I’m asking your opinion though as chairman.

Marcus Jundt

I just gave you my statement, my opinion.

Justin Jacobs - Melroad Capital

Your opinion is that it doesn’t matter or what are you looking for for other folks on the board?

Marcus Jundt

I’m looking for what the charter states in the nominating committee process.

Justin Jacobs - Melroad Capital

Let’s talk a little bit different part of the board, which is the turnover that’s occurred. You’ve had two directors resign in less than three years, both of whom were on the audit committee. Why does Kona have such high turnover on the board?

Marcus Jundt

Again, that’s a deceptive way of phrasing it. One was Mark Bartholomay, who joined the company. So that’s natural. The other one was Ken Carlson, who said if we pursued a lease with his bank, that he’d have to resign. Another one was Frank Bennett and he did not want to serve on a public board anymore.

Justin Jacobs - Melroad Capital

That’s actually three. I wasn’t including in Bartholomay, because he joined the management team. I think I would take Frank Bennett’s resignation a little bit differently, considering the 8-K that you filed. I’ll read part of his part of his resignation, one of which he said he respectfully disagreed with four governance process the fiduciary election. What was the disagreement about?

Marcus Jundt

You’ll have to ask Mr. Bennett.

Justin Jacobs - Melroad Capital

What was the process that made you CEO?

Marcus Jundt

I’ve known Mr. Bennett for a long time.

Justin Jacobs - Melroad Capital

Let me repeat the question. What was the board governance process that resulted in you becoming CEO?

Marcus Jundt

No Comment.

Justin Jacobs - Melroad Capital

You can’t comment on how you became CEO of the company?

Marcus Jundt

I won’t comment at this time.

Justin Jacobs - Melroad Capital

Was a search [ ] attained during that search?

Marcus Jundt

No comment.

Justin Jacobs - Melroad Capital

How many candidates were interviewed by the board?

Marcus Jundt

No comment.

Justin Jacobs - Melroad Capital

So you can’t give any comment to the shareholders of your company as to how you became CEO of the company?

Marcus Jundt

These issues were addressed three years ago.

Justin Jacobs - Melroad Capital

I’m asking the question now.

Marcus Jundt

I stated no comment.

Justin Jacobs - Melroad Capital

Operator

Gentlemen

Eric Welsh – Key Banc

I have no question.

Operator

Gentlemen, I’ll turn the conference back to you.

Marcus Jundt

Thank you for attending our conference call. If you have any further questions, do feel free to call us at our corporate headquarters. We’re all here. Thank you very much.

Operator

That does conclude our teleconference.

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