Source:  Kona Grill

Normally when I see a company make a filing that involves dilution, I see it as a bad thing. Kona Grill (NASDAQ:KONA), however, may warrant an exception. The little restaurant chain with 20-something locations has filed to sell up to 2.3 million shares, which could raise over $40 million, and it appears that it plans to use the proceeds to fund rapid expansion. Fortunately for shareholders, this move may be coming at just the right time going by results from competitor BJ's Restaurants (NASDAQ:BJRI).

The BJ's turnaround
BJ's Restaurants has been struggling to find growth for several quarters now. In its last three reported quarters, BJ's Restaurants reported same-store sales slippage of 2.2%, 2.7%, and 2.9%, so it's clearly going in the wrong direction.

BJ's Restaurants has blamed just about everything for the shortfall. Capacity constraints, a promotional environment, the bad weather, macroeconomic trends, and industrywide traffic trends have all been cited as various culprits that have kept the tables and bar stools emptier than desired.

It appears that the tide is finally turning. Although last quarter saw a 2.9% decline as mentioned, this was 1.8% above the industry average. More importantly, the single month of March saw a 3.2% jump. For BJ's Restaurants' largest and most important market of California, it reported a 3.9% gain. Specifically in the Los Angeles area, BJ's Restaurants saw a 6.5% leap in same-store sales for three weeks toward the end of the quarter.

While BJ's Restaurants has been launching a number of initiatives, they will only go so far unless the market for upscale-casual dining cooperates. It appears that it will, judging by other chains.

Source:  Kona Grill

Kona Grill's turn
Kona Grill posted negative same-store sales in the first quarter of 2013. From there, they've been accelerating. The next four quarters showed gains of 2.5%, 2.6%, 3.5%, and 6.2%, respectively. After staying almost asleep for several years, Kona Grill is ready to expand the chain. It has a goal of doubling sales within five years. Kona Grill also believes that long-term potential exists for over 100 restaurants, more than quadruple the current size of the chain.

On May 16, Kona Grill filed the registration statement for the large equity raise in which it plans to sell up to 2.3 million shares. Toward the beginning of the prospectus, Kona Grill states, "We believe that the portability of our concept has been successfully demonstrated in a variety of markets across the United States." Portability seems to suggest a quick roll-out everywhere.

Growing popularity
The prospectus goes on to describe Kona Grill, pointing out that even though it has locations in 17 states, all of its restaurants are "high-performing." It plans to expand its unit count by 20% in 2014 alone to make Kona Grill "one of the fastest growing national restaurant concepts in the country."

What Kona Grill is witnessing throughout the country is a frequent fan base of regulars. Kona Grill stated, "We believe that the range of dining experiences and relaxed social atmosphere engender a sense of loyalty in our customers not found in those who frequent our competitors. Our ability to attract diners and turn them into repeat customers is a testament to the quality of our food and distinctive atmosphere that make Kona Grill a unique restaurant concept."

Kona Grill believes it has "significant opportunities to develop new units" and further increase brand awareness. In addition to the five new restaurants slated for 2014, Kona Grill already has four new leases signed for 2015. The company even believes that opportunities exist for multiple restaurants within existing markets. Perhaps it has an opportunity to add significantly more than 100 restaurants over the long term.

Source:  Kona Grill

Foolish final thoughts
It takes money to make money. The sheer size of this capital raise suggests an even more ambitious expansion plan than what Kona Grill has already revealed. The company doesn't have some massive debt burden or liquidity crisis so the vast majority of this money, if not all of it, will likely go toward expansion. How many leases is Kona Grill currently negotiating for 2015 and 2016 if it already has four of them signed? It will be interesting to learn what the company has to reveal with its next earnings report and conference call. Based on the recent reports from both BJ's Restaurants and Kona Grill, making this move now in this improved environment seems to be the right strategy.