##### 



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-QSB
 þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended June 30, 2005
 o
    
    TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the transition period from ___to ___
 Commission File Number 000-26698
 DATAWAVE SYSTEMS INC.
  Delaware
(State or other Jurisdiction of
incorporation or organization)
    
    98-0186455
(IRS Employer Identification No.)
 Wayne Interchange Plaza One  145 Route 46 West,
3 rd Floor  Wayne, NJ 07470
 (973) 774-5000
  (none)
 Common Shares
 þ o
  o þ




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##### 



DATAWAVE SYSTEMS INC.
 FORM 10-QSB
 TABLE OF CONTENTS
  
 PART I FINANCIAL INFORMATIONItem 1 Financial Statements
    
    
    1Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3 Controls and Procedures
    
    
    17PART II OTHER INFORMATIONItem 6 Exhibits
    
    
    18




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- iii -




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##### 



PART I FINANCIAL INFORMATION
 
 Item 1 Financial Statements.
 DATAWAVE SYSTEMS INC.
 CONSOLIDATED BALANCE SHEETS
As at June 30, 2005 and March 31, 2005
(Expressed in United States dollars, except share amounts)
(Unaudited)
 June 30
    
    
    March 312005
    
    
    2005AssetsCurrentCash and cash equivalents
    
    $
    1,950,142
    
    
    $
    4,560,512Accounts receivable and other (Note 3 (a))
    
    
    7,543,684
    
    
    
    7,366,712Inventories (Note 3 (b))
    
    
    5,471,446
    
    
    
    4,155,614Prepaid expenses and deposits
    
    
    412,078
    
    
    
    336,800Total current assets
    
    
    15,377,350
    
    
    
    16,419,638Machinery and equipment, net (Note 3 (c))
    
    
    2,487,365
    
    
    
    2,453,571Equity investment (Note 3(e))
    
    
    73,635
    
    
    
    39,387Goodwill
    
    
    1,849,408
    
    
    
    1,857,985Intangible assets, net
    
    
    1,029,581
    
    
    
    1,079,843Other assets
    
    
    211,209
    
    
    
    225,575Total assets
    
    $
    21,028,548
    
    
    $
    22,075,999LiabilitiesCurrentAccounts payable and accrued liabilities (Note 3 (d))
    
    $
    13,283,161
    
    
    $
    14,547,422Deferred revenue
    
    
    948,915
    
    
    
    839,303Other current liabilities
    
    
    109,570
    
    
    
    109,346Total current liabilities
    
    
    14,341,646
    
    
    
    15,496,071Deferred income taxes
    
    
    305,468
    
    
    
    309,509Deferred inducement
    
    
    337,947
    
    
    
    342,184Convertible promissory note
    
    
    600,000
    
    
    
    600,000Other liabilities
    
    
    40,461
    
    
    
    61,668Total liabilities
    
    
    15,625,522
    
    
    
    16,809,432Shareholders equityCommon sharesAuthorized, 100,000,000 common shares, $0.001 par value
Issued, 46,826,834 shares issued and outstanding at
June 30, 2005 and March 31, 2005
    
    
    46,827
    
    
    
    46,827Additional paid-in capital
    
    
    17,920,408
    
    
    
    17,920,408Accumulated other comprehensive income
    
    
    463,636
    
    
    
    465,048Accumulated deficit
    
    
    (13,027,845
    )
    
    
    (13,165,716
    )Total shareholders equity
    
    
    5,403,026
    
    
    
    5,266,567Total liabilities and shareholders equity
    
    $
    21,028,548
    
    
    $
    22,075,999
  - 1 -




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##### 



DATAWAVE SYSTEMS INC.
 CONSOLIDATED STATEMENTS OF OPERATIONS
Three month period ended June 30, 2005 and 2004
(Expressed in United States dollars, except share amounts)
(Unaudited)
 Three months ended June 30,2005
    
    
    2004RevenueSales
    
    $
    5,053,588
    
    
    $
    2,764,207Net agency sales (Note 5)
    
    
    1,898,818
    
    
    
    1,771,402Total revenue
    
    
    6,952,406
    
    
    
    4,535,609Cost of revenues (exclusive of depreciation and amortization)
    
    
    4,559,363
    
    
    
    2,647,0542,393,043
    
    
    
    1,888,555Operating costs and expensesGeneral and administrative
    
    
    948,268
    
    
    
    758,788Selling and marketing
    
    
    581,548
    
    
    
    426,990Product development
    
    
    396,573
    
    
    
    290,255Depreciation and amortization
    
    
    369,187
    
    
    
    249,610Merger costs
    
    
    
    
    
    
    73,142Total operating costs and expenses
    
    
    2,295,576
    
    
    
    1,798,785Operating income
    
    
    97,467
    
    
    
    89,770Other income (expense)
    
    
    34,864
    
    
    
    (560
    )Loss on foreign exchange
    
    
    (3
    )
    
    
    (3,427
    )Income before income taxes
    
    
    132,328
    
    
    
    85,783Income taxes
    
    
    (28,705
    )
    
    
    Equity income (loss) from investee
    
    
    34,248
    
    
    
    (3,555
    )Net income
    
    $
    137,871
    
    
    $
    82,228Net income per share basic
    
    $
    0.00
    
    
    $
    0.00 diluted
    
    $
    0.00
    
    
    $
    0.00Weighted-average number of common shares basic
    
    
    46,826,834
    
    
    
    43,889,334 diluted
    
    
    56,023,391
    
    
    
    43,889,334
  - 2 -




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##### 



DATAWAVE SYSTEMS INC.
 CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
As at June 30, 2005 and March 31, 2005
(Expressed in United States dollars, except share amounts)
(Unaudited)
 AccumulatedNumber of
    
    
    
    
    
    Additional
    
    Other
    
    
    
    
    
    TotalCommon
    
    Common
    
    Paid-in
    
    Comprehensive
    
    Accumulated
    
    ShareholdersShares
    
    Shares
    
    Capital
    
    Income
    
    Deficit
    
    EquityBalance, April 1, 2004
    
    
    43,889,334
    
    
    $
    15,006,743
    
    
    $
    2,725,492
    
    
    $
    277,966
    
    
    $
    (13,829,163
    )
    
    $
    4,181,038Issuance of shares
    
    
    2,937,500
    
    
    
    235,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    235,000Reclassification to
additional paid-in
capital on emigration
    
    
    
    
    
    
    (15,194,916
    )
    
    
    15,194,916
    
    
    
    
    
    
    
    
    
    
    
    Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    663,447
    
    
    
    663,447Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    187,082
    
    
    
    
    
    
    
    187,082Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    850,529Balance, March 31, 2005
    
    
    46,826,834
    
    
    
    46,827
    
    
    
    17,920,408
    
    
    
    465,048
    
    
    
    (13,165,716
    )
    
    
    5,266,567Net income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    137,871
    
    
    
    137,871Foreign currency
translation adjustment
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,412
    )
    
    
    
    
    
    
    (1,412
    )Comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    136,459Balance, June 30, 2005
    
    
    46,826,834
    
    
    $
    46,827
    
    
    $
    17,920,408
    
    
    $
    463,636
    
    
    $
    (13,027,845
    )
    
    $
    5,403,026
  - 3 -




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##### 



DATAWAVE SYSTEMS INC.
 CONSOLIDATED STATEMENTS OF CASH FLOWS
Three month period ended June 30, 2005 and 2004
(Expressed in United States dollars, except share amounts)
(Unaudited)
 Three months ended June 30,2005
    
    
    2004Operating activitiesNet income
    
    $
    137,871
    
    
    $
    82,228Adjustments to reconcile net income to net cash
provided by operating activities:Depreciation and amortization
    
    
    369,187
    
    
    
    249,610Equity (income) loss from investee
    
    
    (34,248
    )
    
    
    3,555Amortization of lease inducement
    
    
    7,546
    
    
    
    Net change in non-cash operating assets and liabilitiesAccounts receivable and other
    
    
    (176,972
    )
    
    
    (315,719
    )Inventories
    
    
    (1,315,832
    )
    
    
    (1,077,411
    )Prepaid expenses and deposits
    
    
    (75,278
    )
    
    
    112,445Accounts payable and accrued liabilities
    
    
    (1,264,262
    )
    
    
    2,542,430Deferred revenue
    
    
    109,612
    
    
    
    93,188Net cash (used in) provided by operating activities
    
    
    (2,242,376
    )
    
    
    1,690,326Investing activityPurchase of machinery and equipment
    
    
    (346,766
    )
    
    
    (202,470
    )Net cash used in investing activity
    
    
    (346,766
    )
    
    
    (202,470
    )Financing activityRepayment of capital lease obligations
    
    
    (21,228
    )
    
    
    (15,651
    )Net cash used in financing activity
    
    
    (21,228
    )
    
    
    (15,651
    )(Decrease) increase in cash
    
    
    (2,610,370
    )
    
    
    1,472,205Cash and cash equivalents, beginning of period
    
    
    4,560,512
    
    
    
    852,406Cash and cash equivalents, end of period
    
    $
    1,950,142
    
    
    $
    2,324,611
  - 4 -




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DATAWAVE SYSTEMS INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Three month period ended June 30, 2005 and 2004
(Expressed in United States dollars, except share amounts)
(Unaudited)
 1.
    
    DESCRIPTION OF BUSINESSDataWave Systems Inc. (the Company or DataWave) sells and distributes prepaid products
using proprietary systems for activating products at the point-of-sale. DataWave designs,
develops, produces, owns and manages a proprietary, intelligent, automated, direct
merchandising network (the DataWave System). The DataWave System is comprised of
point-of-sale-activation (POSA) terminals, free-standing smart machines (DTMs), and
cash registers or web-based applications. All of these devices are connected to proprietary
server and database systems through wireless, land line wide area networks or host-to-host
connectivity, and are capable of dispensing multiple prepaid products and services. In
addition, DataWave sells prepaid calling cards and point-of-sale activated prepaid cellular
personal identification numbers (PINs) on a wholesale basis to certain retail operators
and other customers.2.
    
    SIGNIFICANT ACCOUNTING POLICIES
 (a)
    
    Basis of presentationThese unaudited consolidated financial statements have been prepared in accordance
with accounting principles generally accepted in the United States and pursuant to
the rules and regulations of the United States Securities and Exchange Commission
for the presentation of interim financial information. Accordingly, certain
information and footnote disclosures normally included in financial statements
prepared in accordance with United States generally accepted accounting principles
have been condensed, or omitted, pursuant to such rules and regulations. These
financial statements do not include all disclosures required for annual financial
statements and should be read in conjunction with the Companys audited consolidated
financial statements and notes thereto included as part of the Companys 2005 Annual
Report on Form 10-KSB. All amounts herein are expressed in United States dollars
unless otherwise noted.In the opinion of management, all adjustments (including reclassifications and
normal recurring adjustments) necessary to present fairly the financial position,
results of operations and cash flows at June 30, 2005 and for all periods presented,
have been made. Interim results are not necessarily indicative of results for a full
year.(b)
    
    Use of estimatesThe preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amount of assets and liabilities and disclosures of contingent
assets and liabilities at the date of the financial statements and reported amounts
of revenues and expenses during the reporting period. Estimates are used for, but
not limited to, accounting for doubtful accounts, assessing the recoverability of
machinery and equipment, intangibles and goodwill, amortization, valuation allowance
for deferred income tax assets, accruals for cost of time in excess of amounts
billed by service providers, income taxes and contingencies. Actual results could
differ from those estimates.(c)
    
    Stock-based compensationIn accordance with SFAS No. 148, Accounting for Stock-Based Compensation-Transition
and Disclosurethe Company provides pro-forma information regarding net income and
net income per share for stock-based awards granted or modified after December 31,
1994 as if the awards to employees had been accounted for under the fair value
method prescribed by SFAS No. 123, Accounting for Stock Based Compensation.
 - 5 -




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DATAWAVE SYSTEMS INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Three month period ended June 30, 2005 and 2004
(Expressed in United States dollars, except share amounts)
(Unaudited)
 2.
    
    SIGNIFICANT ACCOUNTING POLICIES
 (c)
    
    Stock-based compensation (continued)The pro-forma compensation expense of employee share options for the three month
periods ended June 30, 2005 and 2004 was determined to be nominal.
 3.
    
    BALANCE SHEET DETAILS
 (a)
    
    Accounts receivable and other
 June 30,
    
    
    March 31,2005
    
    
    2005Trade accounts receivable  POSA
    
    $
    5,366,945
    
    
    $
    4,499,592Trade accounts receivable  prepaid long distance
    
    
    2,183,908
    
    
    
    2,638,597Less allowance for doubtful accounts
    
    
    (96,072
    )
    
    
    (96,360
    )Other receivables
    
    
    88,903
    
    
    
    324,883$
    7,543,684
    
    
    $
    7,366,712
 (b)
    
    Inventories
 June 30,
    
    
    March 31,2005
    
    
    2005PINs and cellular time
    
    $
    4,939,557
    
    
    $
    3,274,233Cards and long-distance phone time
    
    
    344,014
    
    
    
    646,139Part and supplies
    
    
    187,875
    
    
    
    235,242$
    5,471,446
    
    
    $
    4,155,614
 (c)
    
    Machinery and equipment
 June 30, 2005AccumulatedCost
    
    Depreciation
    
    Net Book ValueVending equipment
    
    $
    3,806,887
    
    
    $
    3,356,912
    
    
    $
    449,975POSA equipment
    
    
    2,203,153
    
    
    
    1,351,694
    
    
    
    851,459Computer equipment
and software
    
    
    1,943,847
    
    
    
    1,152,330
    
    
    
    791,517Other
    
    
    549,842
    
    
    
    155,428
    
    
    
    394,414$
    8,503,729
    
    
    $
    6,016,364
    
    
    $
    2,487,365
 March 31, 2005AccumulatedCost
    
    Depreciation
    
    Net Book ValueVending equipment
    
    $
    3,796,883
    
    
    $
    3,336,090
    
    
    $
    460,793POSA equipment
    
    
    1,969,809
    
    
    
    1,207,702
    
    
    
    762,107Computer equipment
and software
    
    
    1,921,569
    
    
    
    1,102,811
    
    
    
    818,758Other
    
    
    553,887
    
    
    
    141,974
    
    
    
    411,913$
    8,242,148
    
    
    $
    5,788,577
    
    
    $
    2,453,571
 - 6 -




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DATAWAVE SYSTEMS INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Three month period ended June 30, 2005 and 2004
(Expressed in United States dollars, except share amounts)
(Unaudited)
 3.
    
    BALANCE SHEET DETAILS (Continued)
 (d)
    
    Accounts payable and accrued liabilities
 June 30,
    
    March 31,2005
    
    2005Trade accounts payable  PINs and cellular
time
    
    $
    7,824,034
    
    
    $
    8,663,602Trade accounts payable  prepaid long distance
    
    
    2,380,083
    
    
    
    3,209,064Trade accounts payable  other
    
    
    655,953
    
    
    
    500,659Accrued compensation and benefits
    
    
    3,768
    
    
    
    56,620Co-op and rebate accruals
    
    
    431,970
    
    
    
    312,993Other
    
    
    1,987,353
    
    
    
    1,804,484$
    13,283,161
    
    
    $
    14,547,422
 (e)
    
    Equity Investment
 The Company has an equity investment in Nextwave Card Corp (NCC). For the period ended
June 30, 2005, DataWave recorded equity investment income of $34,248 (2004  $3,555 loss).At June 30, 2005, DataWaves cumulative share of equity investment income was $73,635 (March
31, 2005  $39,387).
 4.
    
    COMMON SHARES
 (a)
    
    Net income per shareThe following table sets out the computation of basic and diluted net income per
common share. Basic income per share is calculated by dividing net income by the
weighted average number of common shares outstanding during the period. Diluted
income per share is calculated by dividing net income by the sum of the weighted
average number of common shares outstanding and all additional common shares that
would have been outstanding if potentially dilutive common shares had been issued
during the period. The treasury stock method is used to calculate the dilutive
effect of options and warrants.
 Three months ended June 30,2005
    
    
    2004Numerator:Net income
    
    $
    137,871
    
    
    $
    82,228Denominator:Weighted average common shares outstanding
    
    
    46,826,834
    
    
    
    43,889,334Effect of dilutive securitiesStock Options
    
    
    1,696,557
    
    
    
    Convertible promissory note
    
    
    7,500,000
    
    
    
    Diluted weighted average common shares outstanding
    
    
    56,023,391
    
    
    
    43,889,334Basic and diluted net income per share
    
    $
    0.00
    
    
    $
    0.00
 - 7 -




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DATAWAVE SYSTEMS INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Three month period ended June 30, 2005 and 2004
(Expressed in United States dollars, except share amounts)
(Unaudited)
 4.
    
    COMMON SHARES (Continued)
 (a)
    
    Net income per share (Continued)
 For the three month period ended June 30, 2005, securities not included in the
diluted net income per share computation were 572,500 options (June 30, 2004 -
872,500).
 5.
    
    BUSINESS SEGMENT INFORMATION AND CONCENTRATION OF SALES
 (a)
    
    Segmented informationDataWave manufactures and operates prepaid calling card merchandising machines and
re-sells long distance telephone time through prepaid and other calling cards
distributed through its machines, at retail locations and on a wholesale basis to
third parties. DataWave considers its business to consist of one reportable
operating segment, therefore these consolidated financial statements have not been
segmented.DataWaves revenues are primarily generated from the resale of prepaid long distance
and cellular telephone time, principally from the sale of prepaid calling cards and
point-of-sale activated PINs. Sales of prepaid calling cards and point-of-sale
activated PINs under third party brands where DataWave is not the primary obligor of
the related phone service and has no significant continuing obligation with respect
to operation of the card subsequent to sale are recognized at the date of sale on a
net basis.DataWave has total revenues of sales, net agency sales, and costs of revenues
(exclusive of depreciation and amortization) analyzed by product, as follows:
 - 8 -




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DATAWAVE SYSTEMS INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Three month period ended June 30, 2005 and 2004
(Expressed in United States dollars, except share amounts)
(Unaudited)
 5.
    
    BUSINESS SEGMENT INFORMATION AND CONCENTRATION OF SALES (Continued)
 (a)
    
    Segmented information (Continued)
 Prepaid
    
    
    
    
    
    PrepaidLong
    
    Prepaid
    
    Internet
    
    Fees andDistance
    
    Cellular
    
    Products
    
    Service
    
    Other
    
    TotalThree months ended June 30, 2005Canada
    
    $
    3,353,591
    
    
    $
    
    
    
    $
    3,554
    
    
    $
    553,672
    
    
    $
    
    
    
    $
    3,910,817U.S.
    
    
    1,051,364
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84,171
    
    
    
    1,135,535Mexico
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,236
    
    
    
    7,236Sales
    
    
    4,404,955
    
    
    
    
    
    
    
    3,554
    
    
    
    553,672
    
    
    
    91,407
    
    
    
    5,053,588Canada
    
    
    
    
    
    
    31,078,093
    
    
    
    56,336
    
    
    
    
    
    
    
    
    
    
    
    31,134,429U.S.
    
    
    2,197,249
    
    
    
    370,380
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,567,629Mexico
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross proceeds
received on agency
sales
    
    
    2,197,249
    
    
    
    31,448,473
    
    
    
    56,336
    
    
    
    
    
    
    
    
    
    
    
    33,702,058Less payments to
suppliers
    
    
    (886,993
    )
    
    
    (30,862,707
    )
    
    
    (53,540
    )
    
    
    
    
    
    
    
    
    
    
    (31,803,240
    )Net agency sales
    
    
    1,310,256
    
    
    
    585,766
    
    
    
    2,796
    
    
    
    
    
    
    
    
    
    
    
    1,898,818Canada
    
    
    3,353,591
    
    
    
    577,706
    
    
    
    6,350
    
    
    
    553,672
    
    
    
    
    
    
    
    4,491,319U.S.
    
    
    2,361,620
    
    
    
    8,060
    
    
    
    
    
    
    
    
    
    
    
    84,171
    
    
    
    2,453,851Mexico
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    7,236
    
    
    
    7,236Total revenue
    
    
    5,715,211
    
    
    
    585,766
    
    
    
    6,350
    
    
    
    553,672
    
    
    
    91,407
    
    
    
    6,952,406Cost of revenues
    
    
    4,457,382
    
    
    
    
    
    
    
    2,916
    
    
    
    99,065
    
    
    
    
    
    
    
    4,559,363Margin
    
    $
    1,257,829
    
    
    $
    585,766
    
    
    $
    3,434
    
    
    $
    454,607
    
    
    $
    91,407
    
    
    $
    2,393,043
 - 9 -




---



##### 



DATAWAVE SYSTEMS INC.
 NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
Three month period ended June 30, 2005 and 2004
(Expressed in United States dollars, except share amounts)
(Unaudited)
 5.
    
    BUSINESS SEGMENT INFORMATION AND CONCENTRATION OF SALES (Continued)
 (a)
    
    Segmented information (Continued)
 Prepaid
    
    
    
    
    
    PrepaidLong
    
    Prepaid
    
    Internet
    
    Fees andDistance
    
    Cellular
    
    Products
    
    Service
    
    Other
    
    TotalThree months ended June 30, 2004Canada
    
    $
    1,794,590
    
    
    $
    
    
    
    $
    
    
    
    $
    470,378
    
    
    $
    
    
    
    $
    2,264,968U.S.
    
    
    433,760
    
    
    
    
    
    
    
    
    
    
    
    12,302
    
    
    
    34,186
    
    
    
    480,248Mexico
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,991
    
    
    
    18,991Sales
    
    
    2,228,350
    
    
    
    
    
    
    
    
    
    
    
    482,680
    
    
    
    53,177
    
    
    
    2,764,207Canada
    
    
    
    
    
    
    18,601,896
    
    
    
    43,551
    
    
    
    
    
    
    
    
    
    
    
    18,645,447U.S.
    
    
    1,447,314
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,447,314Mexico
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Gross proceeds
received on agency
sales
    
    
    1,447,314
    
    
    
    18,601,896
    
    
    
    43,551
    
    
    
    
    
    
    
    
    
    
    
    20,092,761Less payments to
suppliers
    
    
    (61,251
    )
    
    
    (18,218,542
    )
    
    
    (41,566
    )
    
    
    
    
    
    
    
    
    
    
    (18,321,359
    )Net agency sales
    
    
    1,386,063
    
    
    
    383,354
    
    
    
    1,985
    
    
    
    
    
    
    
    
    
    
    
    1,771,402Canada
    
    
    1,794,590
    
    
    
    383,354
    
    
    
    1,985
    
    
    
    470,378
    
    
    
    
    
    
    
    2,650,307U.S.
    
    
    1,819,823
    
    
    
    
    
    
    
    
    
    
    
    12,302
    
    
    
    34,186
    
    
    
    1,866,311Mexico
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    18,991
    
    
    
    18,991Total revenue
    
    
    3,614,413
    
    
    
    383,354
    
    
    
    1,985
    
    
    
    482,680
    
    
    
    53,177
    
    
    
    4,535,609Cost of revenues
    
    
    2,583,078
    
    
    
    
    
    
    
    
    
    
    
    63,976
    
    
    
    
    
    
    
    2,647,054Margin
    
    $
    1,031,335
    
    
    $
    383,354
    
    
    $
    1,985
    
    
    $
    418,704
    
    
    $
    53,177
    
    
    $
    1,888,555
 (b)
    
    Concentration of sales and economic dependenceThe Company is dependent on a small number of customers for revenues from
point-of-sale activation products and future results depend significantly on these
strategic relationships.For the period ended June 30, 2005, the top ten customers accounted for 61% of
revenues (sales and net agency sales) (2004  52%). The Company actively seeks to
expand its customer base for point-of-sale activation products to mitigate this
risk.
 - 10 -




---



##### 



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 You should read the following discussion and analysis in conjunction with our consolidated
financial statements and related notes included elsewhere in this Report. Except for historical
information, the following discussion contains forward-looking statements within the meaning of the
Private Securities Litigation Reform Act of 1995. See Note Regarding Forward Looking Statements
above.
 Overview
  Managements Summary
     - 11 -




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##### 



Selected Financial Operating Data for the Three Month Periods Ended June 30, 2005 and 2004
 Three months Ended June, 302005
    
    
    2004
    
    
    2005
    
    
    2004$000
    
    
    $000
    
    
    Percentage of RevenueRevenueSales
    
    $
    5,053
    
    
    $
    2,764
    
    
    
    72.7
    %
    
    
    60.9
    %Net agency sales
    
    
    1,899
    
    
    
    1,771
    
    
    
    27.3
    %
    
    
    39.1
    %Total revenue
    
    
    6,952
    
    
    
    4,536
    
    
    
    100.0
    %
    
    
    100.0
    %Cost of revenues (exclusive
of depreciation and
amortization)
    
    
    4,559
    
    
    
    2,647
    
    
    
    65.6
    %
    
    
    58.4
    %Gross margin
    
    
    2,393
    
    
    
    1,889
    
    
    
    34.4
    %
    
    
    41.6
    %Operating costs and expensesGeneral and administrative
    
    
    948
    
    
    
    759
    
    
    
    13.6
    %
    
    
    16.7
    %Selling and marketing
    
    
    582
    
    
    
    427
    
    
    
    8.4
    %
    
    
    9.4
    %Product development
    
    
    397
    
    
    
    290
    
    
    
    5.7
    %
    
    
    6.4
    %Merger costs
    
    
    
    
    
    
    73
    
    
    
    0.0
    %
    
    
    1.6
    %Depreciation and amortization
    
    
    369
    
    
    
    250
    
    
    
    5.3
    %
    
    
    5.5
    %Total operating costs and expenses
    
    
    2,296
    
    
    
    1,799
    
    
    
    33.0
    %
    
    
    39.7
    %Operating income
    
    
    97
    
    
    
    90
    
    
    
    1.4
    %
    
    
    2.0
    %Other income (loss)
    
    
    35
    
    
    
    (1
    )
    
    
    0.5
    %
    
    
    0.0
    %Foreign exchange (loss)
    
    
    
    
    
    
    (3
    )
    
    
    0.0
    %
    
    
    (0.1
    )%Income before income taxes
    
    
    132
    
    
    
    86
    
    
    
    1.9
    %
    
    
    1.9
    %Income taxes
    
    
    (28
    )
    
    
    
    
    
    
    (0.4
    )%
    
    
    0.0
    %Equity gain (loss) from investee
    
    
    34
    
    
    
    (4
    )
    
    
    0.5
    %
    
    
    (0.1
    )%Net income
    
    $
    138
    
    
    $
    82
    
    
    
    2.0
    %
    
    
    1.8
    %
 Revenues
    - 12 -




---



##### 



As at June
    
    As at March30, 2005
    
    31, 2005CanadaPOSA terminals (owned)
    
    
    4,016
    
    
    
    3,858POSA terminals (serviced or host to host)
    
    
    501
    
    
    
    501United StatesDTMs
    
    
    917
    
    
    
    913Traditional machine units
    
    
    7
    
    
    
    7Over-the counter units (terminals)
    
    
    
    
    
    
    POSA terminals (owned)
    
    
    56
    
    
    
    27POSA terminals (serviced or host to host)
    
    
    159
    
    
    
    159MexicoPOSA terminals (serviced or host to host)
    
    
    200
    
    
    
    200Total
    
    
    5,856
    
    
    
    5,665
     Cost of Revenue (exclusive of depreciation and amortization)
    - 13 -




---



##### 



General and Administrative Expenses
  
    
    salaries increased by $76,000 as a result of hiring additional staff in operations
and finance, including legal counsel;
    
    accounting, audit and consulting fees increased by $68,000; and
    
    investor relations fees increased by $22,000, as a result of obtaining the services
of an investor relations firm.
 Selling and Marketing Expense
  Product Development
   Depreciation and Amortization
    - 14 -




---



##### 



Liquidity and Capital Resources
    
    
    net income for the period was $138,000:
    
    accounts payable and accrued liabilities decreased by $1,264,000, including a
decrease of $840,000 for wireless products (PINs and cellular airtime) as a result of
taking early payment discounts as discussed above, and a decrease of $829,000 for
prepaid long distance products, offset by an increase in other accounts payable and
accrued liabilities of $405,000. All wireless accounts payable balances were paid by

the end of July 2005;
    
    accounts receivable increased by $177,000, and prepaid expenses and deposits
increased by $75,000;
    
    inventories increased by $1,316,000, primarily for prepaid cellular PINs products.
Inventories of prepaid cellular PINs at June 30, 2005 were $4,940,000; cellular PIN
inventory is maintained at approximately ten days sales (ten days sales (gross proceeds
of sales) for the same period last year) and the increase is the result of increased
sales activity;
    
    depreciation, amortization and other operating expense for the period was $342,000; and
    
    deferred revenue increased by $109,000, mainly due to an increase in non-activated PINs.
   Future Capital Needs and Resources
   - 15 -




---



##### 



Trend Information
     Off-Balance Sheet Arrangements
  - 16 -




---



##### 



Item 3 Controls and Procedures.
  Evaluation of disclosure controls and procedures
  No significant changes in internal controls
  - 17 -




---



##### 



PART II OTHER INFORMATION
 
 Item 6 Exhibits
  ExhibitNumber
    
    
    
    
    
    Description3.1
    
    
    (1
    )
    
    State of Delaware Certificate of Domestication of DataWave Systems Inc.3.2
    
    
    (1
    )
    
    State of Delaware Certificate of Incorporation of DataWave Systems Inc.3.3
    
    
    (1
    )
    
    Bylaws of DataWave Systems Inc.31.1
    
    
    **
    
    
    Certification pursuant to Section 302 of the Sarbanes  Oxley Act of 2002 of Joshua
Emanuel31.2
    
    
    **
    
    
    Certification pursuant to Section 302 of the Sarbanes  Oxley Act of 2002 of John Gunn32.1
    
    
    **
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
Of The Sarbanes-Oxley Act Of 2002 of Josh Emanuel32.2
    
    
    **
    
    
    Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906
Of The Sarbanes-Oxley Act Of 2002 of John Gunn
 
 **
    
    Filed herewith(1)
    
    Previously filed as an exhibit to, and incorporated herein by reference from, the Companys
8K report filed on March 1, 2004. - 18 -




---



##### 



SIGNATURES
  DataWave Systems Inc.(Registrant)By
    
    /s/ Joshua EmanuelChairman and Chief Executive OfficerDate
    
    August 12, 2005By
    
    /s/ John GunnGeneral Manager, Chief Financial OfficerDate
    
    August 12, 2005
 - 19 -