EUPA International (EUPI) 10QSB 2006 Q2 Quarterly report (small business)

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended June 30, 2006
Commission file number 000-26539

EUPA International Corporation

(Exact name of small business issuer as specified in its charter)

Nevada	88-0409450
(State or other jurisdiction of incorporation or organization)	(IRS Employer Identification Number)
89 N. San Gabriel Boulevard, Pasadena, California (Address of principal executive offices)	91107 (Zip Code)

626-793-2688
(Issuer’s telephone number, including area code)

     Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days Yesþ      Noo.

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yeso      Noþ

     20,900,024 shares of common stock, par value $0.001, were outstanding as of August 8, 2006.

EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES

INDEX

	Page
Part I — Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Balance Sheets		3
Condensed Consolidated Statements of Operations		4
Condensed Consolidated Statements of Cash Flows		5
Condensed Consolidated Statements of Changes in Stockholders’ Equity		6
Notes to Condensed Consolidated Financial Statements		7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3. Controls and Procedures		15
Part II — Other Information		15
Item 1. Legal Proceedings		15
Item 6. Exhibits and Other Reports on Form 8-K		15
Signature		16
Certifications
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

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EUPA INTERNATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED BALANCE SHEETS

ASSETS

	June 30, 2006
	(Unaudited)			December 31, 2005
Current Assets
Cash and cash equivalents	$	552,515		$	793,442
Investment		100,000			100,000
Accounts receivable, related parties, net		122,984			230,572
Other receivable, related parties		2,512			5,229
Prepaid expenses		0			407
Total Current Assets		778,011			1,129,650
Fixed Assets
Property, furniture and equipment (net)		769,392			778,691
Total Fixed Assets		769,392			778,691
Other Assets
Intangible assets, net		277,401			274,521
Deposits		8,370			8,370
Total Other Assets		285,771			282,891
Total Assets	$	1,833,174		$	2,191,232
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current Liabilities
Accounts payable and accrued expenses	$	181,121		$	99,282
Other payable, related parties		38,818			44,476
Total Current Liabilities		219,939			143,758
Deposits payable		4,100			4,100
Total Liabilities		224,039			147,858
Stockholders’ Equity
Common stock, $.001 par value, 25,000,000 shares authorized, 20,900,000 issued and outstanding		20,900			20,900
Additional paid in capital		1,984,203			1,973,203
Retained earnings (deficit)		(395,968	)		49,271
Total Stockholders’ Equity		1,609,135			2,043,374
Total Liabilities and Stockholders’ Equity	$	1,833,174		$	2,191,232

See Accompanying Notes and Accountants’ Report

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EUPA INTERNATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF OPERATIONS

	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2006			2005			2006			2005
Fee income	$	145,562		$	219,763		$	422,808		$	474,058
Total revenue		145,562			219,763			422,808			474,058
Cost of revenue		142,708			213,934			414,635			463,877
Gross profit		2,854			5,829			8,173			10,181
General and administrative expenses		341,730			26,108			488,367			72,611
Income (loss) from operations		(338,876	)		(20,279	)		(480,194	)		(62,430	)
Other (income) expense
Interest income		(708	)		(754	)		(4,641	)		(1,414	)
Rental income		(15,838	)		(16,051	)		(32,340	)		(29,638	)
Miscellaneous		284			0			426			532
Total other (income) expense		(16,262	)		(16,805	)		(36,555	)		(30,520	)
Income (loss) before income taxes		(322,614	)		(3,474	)		(443,639	)		(31,910	)
Provision for income taxes		0			0			1,600			1,600
Net Income (loss)		($322,614	)		($3,474	)		($445,239	)		($33,510	)
Net loss per share (basic and diluted)
Basic		($0.015	)		($0.000	)		($0.021	)		($0.002	)
Diluted		($0.015	)		($0.000	)		($0.021	)		($0.002	)
Weighted average number of shares (See note 7)
Basic		20,900,024			20,900,024			20,900,024			20,900,024
Diluted		20,900,024			20,900,024			20,900,024			20,900,024

See Accompanying Notes and Accountants’ Report

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EUPA INTERNATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CASH FLOWS

	Six Months Ended
	June 30,			June 30,
	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income (loss)		($445,239	)		($33,510	)
Adjustments to reconcile net income (loss) to net cash used in operating activities:
Depreciation and amortization		17,358			35,072
Stock options issued for services		11,000			11,000
Translation adjustment		0			532
Decrease (Increase) in receivables		107,588			43,674
Decrease (Increase) in other receivables		2,717			25,720
Decrease (Increase) in prepaid expenses		407			2,800
(Decrease) Increase in accounts payable and accrued expenses		81,839			28,374
(Decrease) Increase in other payable		(5,658	)		53,698
Total Adjustments		215,251			200,870
Net cash provided by (used in) operations		(229,988	)		167,360
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of fixed assets		0			(5,472	)
Increase in intangible assets		(10,939	)		(13,335	)
Net cash used in investing activities		(10,939	)		(18,807	)
Net change in cash and cash equivalents		(240,927	)		148,553
Cash and cash equivalents at beginning of period		793,442			828,091
Cash and cash equivalents at end of period	$	552,515		$	976,644
Supplemental cash flows disclosures:
Income tax payments	$	1,600		$	1,600
Non cash investing and financing activities:
Stock issued for services	$	11,000		$	11,000

See Accompanying Notes and Accountants’ Report

5

EUPA INTERNATIONAL CORPORATION AND SUBSIDIARY

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

	June 30, 2006
	(Unaudited)			December 31, 2005
Common stock, number of shares outstanding
Balance at beginning of period		20,900,024			20,900,024
Balance at end of period		20,900,024			20,900,024
Common stock, par value $.001 (thousands of shares)
Balance at beginning of period	$	20,900		$	20,900
Balance at end of period		20,900			20,900
Additional paid in capital
Balance at beginning of period		1,973,203			1,951,203
Issuance of stock options for service		11,000			22,000
Balance at end of period		1,984,203			1,973,203
Cumulative foreign-exchange translation adjustment
Balance at beginning of year		0			(532	)
Foreign currency translation		0			532
Balance at end of period		0			0
Retained earnings
Balance at beginning of period		49,271			242,876
Foreign currency translation		0			(532	)
Net income (loss)		(445,239	)		(193,073	)
Balance at end of period		(395,968	)		49,271
Total Stockholders’ Equity at end of period	$	1,609,135		$	2,043,374

See Accompanying Notes and Accountants’ Report

6

EUPA INTERNATIONAL CORPORATION AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2006

Note 1 — Accounting Policies

Unaudited Interim Financial Information

     We have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) for interim financial reporting. As used herein, “EUPA,” the “Company,” “we,” “our,” and similar terms include EUPA International Corporation and its wholly-owned subsidiaries, unless the context indicates otherwise. These consolidated financial statements are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation of the consolidated balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not necessarily indicative of the results that may be expected for the year ending December 31, 2006. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in our Annual Report on Form 10-KSB for the year ended December 31, 2005.

Basis of Consolidation

     The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary. Intercompany balances and transactions have been eliminated upon consolidation.

Revenue Recognition

     We recognize revenue from three major sources, sales and customer support services, patent fiduciary and administration services and research and development services. Each of these services is provided on an on-going contractual basis. We recognize revenues from these services at the end of each calendar quarter for services performed during that calendar quarter.

Cash Equivalents and Short-Term Investments

     For purposes of the statements of financial positions and cash flows, cash equivalents include all highly liquid debt instruments with original maturities of three months or less which are not securing any corporate obligations. Highly liquid debt instruments with original maturities of three months or more are classified as short-term investments.

Fixed Assets

     Property and equipment are stated at cost less accumulated depreciation. Expenditures for major additions and improvements are capitalized and minor replacements, maintenance and repairs are charged to expense as incurred. Whenever an asset is retired or disposed of, its cost and accumulated depreciation or amortization is removed from the respective accounts and the resulting gain or loss is credited or charged to income.

     Depreciation is computed using the straight-line and declining-balance methods over the following estimated useful lives:

Buildings and improvements		15 to 60 years
Automobiles		4 to 6 years
Machinery and equipment		5 to 12 years
Furniture and Fixtures	7 years

Intangible Assets

     We only capitalize legal fees and filing fees associated with registering internally developed patents and trademarks in accordance with the provisions of Accounting Principles Board (“APB”) Opinion No. 17, “Intangible Assets.”

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     Effective July 2002, we adopted Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets.” The adoption of SFAS No. 142 required an initial impairment assessment involving a comparison of the fair value of trademarks, patents and other intangible assets to current carrying value.

     Trademarks and other intangible assets determined to have indefinite useful lives are not amortized. Trademarks and other intangible assets determined to have definite lives are amortized over their useful lives or the life of the trademark and other intangible asset, whichever is less. We test all trademarks and other intangible assets for impairment annually, or more frequently if events or circumstances indicate that an asset might be impaired.

Estimates

     The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the consolidated financial statements and accompanying notes. Estimates are used for, but not limited to, depreciable lives, receivables valuation, accrued expenses, recoverability of intangible assets and income taxes. Actual results could differ materially from those estimates.

Concentration of Credit Risk

     There is concentration of credit risk in our cash equivalents and trade accounts receivable. Our cash equivalents are concentrated in select financial institutions and, at times, cash balances exceed the FDIC insured levels. Our trade accounts receivable are concentrated with related parties in Asia.

Stock Based Compensation

     We have historically measured compensation from issuing stock options under the accounting prescribed by APB Opinion No. 25, “Accounting for Stock Issued to Employees” which is an intrinsic value method. Accounting pronouncement SFAS No. 123(R), “Share-based Payment,” replaces SFAS No. 123 and supersedes APB Opinion No. 25. SFAS No. 123(R) establishes financial accounting and reporting standards for transactions in which an entity exchanges its equity instruments for goods or services. SFAS No. 123(R) focuses primarily on accounting for transactions in which an entity obtains employee services in share-based payment transactions. SFAS 123(R) requires a public entity to measure the cost of employee services received in an exchange for an award of equity instruments based on the grant-date fair value of the award. That cost will be recognized over the period during which an employee is required to provide service in exchange for the award (the vesting period). As a small business issuer we are required to adopt SFAS No. 123(R) effective as of the beginning of the first interim or annual reporting period that begins after December 15, 2005. SFAS No. 123(R) applies to all awards granted after the required effective date and to awards modified, repurchased, or cancelled after that date. The adoption of SFAS No. 123R will not have any effect on our net income.

Impairment of Long-Lived Assets

     We evaluate long-lived assets, in accordance with SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be recoverable. If the estimated future cash flows, undiscounted and without interest charges, from the use of an asset are less than the carrying value, a write-down would be recorded to reduce the related asset to its estimated fair value. There have been no such impairments to date.

Earnings Per Share

     We use SFAS No. 128 “Earnings Per Share” for calculating the basic and diluted earnings (loss) per share. Basic earnings (loss) per share are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding. Diluted earnings per share are computed similar to basic earnings per share except that the denominator is increased to include common stock equivalents as if the potential shares of common stock had been issued.

Income Taxes

     Income taxes have been provided based upon the tax laws and rates in the countries in which operations are conducted and income is earned. The income tax rates imposed by the taxing authorities vary. Taxable income may vary from pre-tax income for financial accounting purposes. There is no expected relationship between the provision for income taxes and income before income taxes

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because the countries have different taxation rules, which vary not only to nominal rates but also in terms of available deductions, credits and other benefits. Deferred tax assets and liabilities are recognized for the anticipated future tax effects of temporary differences between the financial statement basis and the tax basis of our assets and liabilities using the applicable tax rates in effect at year end as prescribed by SFAS No. 109, “Accounting for Income Taxes.”

Reclassification

     Certain amounts have been reclassified in prior years to be consistent with the classification as of June 30, 2006.

Note 2 — Property and Equipment

     A summary is as follows:

	June 30, 2006
	Unaudited			December 31, 2005
Building and improvements	$	659,688		$	659,688
Land		400,000			400,000
Machinery and equipment		218,537			218,537
Automobiles		108,067			108,067
Furniture and fixtures		64,759			64,759
		1,451,051			1,451,051
Less accumulated depreciation		(681,659	)		(672,360	)
	$	769,392		$	778,691

Note 3—Intangible Assets

     A summary is as follows:

	June 30, 2006
	Unaudited			December 31, 2005
Patents and Trademark costs	$	539,235		$	528,295
Less accumulated amortization		(261,834	)		(253,774	)
	$	277,401		$	274,521

     Intangible assets consist of capitalized costs, such as legal fees and application fees, for patents and trademarks in accordance with APB Opinion No. 17. In accordance with SFAS No. 142 these costs are amortized over the legal life assigned to the patent or trademark, generally 17 years. They are also reviewed annually under SFAS No. 144 for impairment. We determine that an impairment of the intangible asset has taken place if the item is no longer being used in production by its customers and management believes that there is no future use of the patent or trademark. The net unamortized balance is written off as a cost of sales and charged back to our customers.

Note 4 — Compensated Absences

     All full time regular covered employees are eligible for vacation with pay according to the following schedule: After one (1) full year of continuous full time employment five (5) days of vacation, after two (2) full years of continuous full time employment eight (8) days of vacation, after three full years of continuous full time employment twelve (12) days of vacation, after four full years of continuous full time employment sixteen (16) days of vacation, and after five full years of continuous full time employment twenty (20) days of vacation leave. The date of employment on a full time permanent basis will be considered the anniversary date for vacation purposes. When a regular full time employee has completed fifty-two (52) weeks of continuous employment he/she will be considered as having earned the aforementioned vacation benefits. At the end of each year and at termination, employees are paid for any accumulated annual vacation leave. As of June 30, 2006 vacation liability exists in the amount of $39,843.

Note 5 — Concentration — Related Party Transactions

     We had three customers during the six months ended June 30, 2006. Fees charged to these customers, all related parties, were approximately $422,808. Included in accounts receivable is $122,984 from these customers as of June 30, 2006.

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Note 6 — Common Stock

     We recognize compensation expenses for non-employee stock-based compensation in accordance with SFAS No. 123R. In December 2001, we issued a non-employee stock option to purchase 1,000,000 shares of our common stock at an exercise price of $0.001 per share, vesting over a five year period. This stock option was granted to a related party in exchange for the on-going provision of consultant services and was valued using the book value approach. At the time of grant, the book value approach best estimated the value of the services to be provided. At the date of grant, the per unit weighted-average fair value of unit options granted was $0.11. During the six months ended June 30, 2006 we recognized consulting expenses of $11,000 under the non-employee stock option.

Note 7 — Earnings Per Share

     We calculate basic and diluted earnings (loss) per share in accordance with SFAS No. 128, “Earnings Per Share.” Basic earnings (loss) per share are computed by dividing net income (loss) attributable to common stockholders by the weighted average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share are computed similar to basic earnings (loss) per share except that the denominator is increased to include common stock equivalents as if the potential shares of common stock had been issued. Stock options are stock equivalents and are assumed to be issued and outstanding during the period. Diluted earnings (loss) per share adjust for any changes in income and the repurchase of common shares that would have occurred from the assumed issuance, unless such effect is anti-dilutive.

Note 8 — Line of Credit

     On May 29, 2006, we entered into a line of credit (the “Loan”) in the principal amount of $3,000,000 pursuant to a business loan agreement (the “Loan Agreement”) with ChinaTrust Bank (U.S.A.) (“ChinaTrust”), which is secured by all of our assets. We have also executed (i) a promissory note (the “Promissory Note”) evidencing the Loan, (ii) a security agreement (the “Security Agreement”) granting ChinaTrust a security interest in the Company’s inventory, chattel paper, accounts, equipment and general intangibles, and (iii) three deeds of trust (the “Deeds of Trust”) granting to ChinaTrust security interests in our real property, to secure our obligations under the Loan. The Promissory Note has a one-year term maturing on May 28, 2007. The Promissory Note bears interest at a variable rate based on the 6 month LIBOR plus a margin of 1.25%. The interest rate may not be adjusted more than once in each 6 month period. The initial interest rate is 6.39%. We intend to use amounts borrowed under the Loan to finance the repurchase of shares of our common stock and pay related fees and expenses in the reverse stock split (Note 9). Tsann Kuen Enterprise Co., Ltd., a corporation organized and existing in the Republic of China (“TKE”), owner of approximately 69.1% of the Company’s capital stock, will guarantee all draws made on the Loan.

Note 9 – Stock Split

     On June 1, 2006, we filed a Schedule 13E-3 Transaction Statement with the SEC regarding a “going private” transaction. Our board of directors (the “Board”), on the recommendation of its special Executive Committee, has authorized effectuating a reverse stock split of our common stock by amending our Articles of Incorporation to reduce the authorized number of shares of our common stock and reverse splitting the common stock to decrease the outstanding shares to below the new number of authorized shares (the “Split”). In the Split, we estimate that the authorized number of shares will be reduced from 25,000,000 to approximately 2,500 shares of common stock. The Split will be consummated at an estimated ratio of approximately one to 9,999. Our Board will determine the final ratio immediately before consummating the Split. Stockholders who own fewer shares of common stock than the amount of the Split ratio on the effective date of the Split will no longer be stockholders of our company. Stockholders holding more shares than the Split ratio on the effective date of the Split will remain stockholders of our company after the Split, but will only be entitled to receive payment for any fractional shares that would otherwise result from the Split. The shares we purchase will be cancelled and retired. The Split is designed to reduce the number of stockholders of record of the company to fewer than 500 so that we will be eligible to terminate the registration of our common stock under the federal securities laws. After the registration of our common stock is terminated, we will then no longer be required to file periodic reports and other information with the SEC. Stockholders who receive cash in lieu of fractional shares will be entitled to dissenters’ rights for the “fair value” of their fractional share under Nevada law.

Item 2.Management’s Discussion and Analysis of Financial Condition and Results of Operations

     The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) should be read in conjunction with the December 31, 2005 consolidated financial statements and notes thereto

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along with the MD&A included in EUPA’s 2005 Annual Report on Form 10-KSB for the period ended December 31, 2005 and the Quarterly Report on Form 10-QSB for the period ended March 31, 2006, the Form 8-K dated May 29, 2006, and the Schedule 13E-3 dated May 29, 2006, filed separately with the SEC. The discussion of results, causes and trends should not be construed to imply any conclusion that such results or trends will necessarily continue in the future.

     The information contained in this MD&A, other than historical information, contains “forward looking statements” within the meaning of The Private Securities Litigation Reform Act of 1995 that are based on management’s current expectations and assumptions. This MD&A should be read in conjunction with the sections entitled “Additional Factors That May Affect Future Results” and “Forward-Looking Statements.”

Overview

     EUPA, through its wholly-owned subsidiary, Tsann Kuen U.S.A., an Illinois corporation (“TK USA”) provides sales and customer support, product design, research and development, and patent administration services to TKE. TKE is a major designer, manufacturer and marketer of small home and kitchen appliances, motor-driven products, vacuum cleaners and other consumer electronic products for brand name distributors worldwide.

     Our business has been structured around developing and promoting TKE’s products in the United States (“U.S.”). Our activities have included acting as the information center for TKE and its products, conducting market research, designing products and enhancements, performing research and development of products, cultivating and supporting relationships with brand name distributors and other customers and increasing U.S. sales. We also provide sales and customer support services to TKE’s subsidiaries, Tsann Kuen China (Shanghai) Enterprises Ltd. (“TKS”), Tsann Kuen (Zhangzhou) Enterprise Co. Ltd. (“TKL”) and Tsann Kuen (China) Enterprise Co., Ltd. (“TKC”), each of which are corporations organized and existing in the People’s Republic of China.

     Our revenues are derived from charging TKE, TKS, TKL and TKC fees for specific services we provide to them based on our fully-burdened costs incurred in providing these services plus a percentage mark-up. Our fully-burdened costs associated with research and development services include all costs we incur related to the provision of these service including, without limitation, salaries and other personnel expenses, including employee benefits; operating and overhead expenses such as rent, depreciation of equipment, administrative services, office supplies and expense and telephone; travel, including lodging and meals; client servicing, including entertainment. Our fully-burdened costs associated with fiduciary and patent administration services only include amortization of the legal costs and registration filing fees of internally-developed patents. All our costs associated with research and development services are charged to cost of revenues. All our costs associated with fiduciary and patent administration services are also charged to cost of revenues. Our costs are allocated among TKE, TKS, TKL and TKC on a reasonable cost allocation basis.

     We have not been able to grow our business as originally planned and do not believe we will be able to do so, based on changes in the economy and market that have occurred since we adopted our business model. TKE is expected to reduce its use of our services and to restructure its business and operations, which is expected to cause us to curtail or discontinue our operations. Based on our size, financial resources, human capital, inability to grow our business, cost of remaining a public company, small number and percentage of shares that are held by the public, absence of sustained interest from public investors and securities research analysts, and inability to access the capital markets, we do not believe that the costs and burdens of maintaining our status as a public company are justified. As a result, we have filed a Schedule 13E-3 Transaction Statement with the SEC indicating our intention to effect a “going private” transaction. After we terminate the registration of our common stock under the federal securities laws and are no longer subject to the reporting and proxy requirements of the federal securities laws, we understand that TKE intends to effect a merger with us. As a private company, we could effect a merger with TKE under Nevada law, without incurring the costs associated with the proxy rules and other public reporting and disclosure obligations of the federal securities laws.

     During the six month period ended June 30, 2006, fees charged to the related parties were approximately $422,808. These fees are included in accounts receivable. We carry relatively large accounts receivable, as the customer payment period is long, approximately 90 days. We invoice each of the related parties on a quarterly basis for services provided during the preceding calendar quarter and payments are due 90 days after receipt of the invoice.

     Patents and other intangible assets determined to have indefinite useful lives are not amortized. Patents and other intangible assets determined to have definite lives are amortized over their useful lives or the life of the intangible asset, whichever is less. We test all patents and other intangible assets for impairment annually, or more frequently if events or circumstances indicate that an asset might be impaired.

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Results of Operations

Six Months Ended June 30, 2006 Compared with Six Months Ended June 30, 2005

	June 30, 2006			June 30, 2005
Total Revenues	$	422,808		$	474,058
Cost of Revenues		414,635			463,877
Selling, General and Administrative Expense		488,367			72,611
Income (Loss) from Operations	$	(480,194	)	$	(62,430	)

Revenue from Fee Income

     During the six months ended June 30, 2006, revenue from fee income was $422,808 down from $474,058 in the second quarter of 2005. The decrease in fee income is a result of decreased sales of TKS, TKL and TKC in North America in the first six months ended June, 30, 2006.

Cost of Revenues

     Cost of revenues was $414,635 for the six months ended June 30, 2006 compared with $463,877 in the second quarter of 2005. The decrease in cost of revenues is directly related to the underlying changes in our revenues as outlined above.

General and Administrative Expenses

     General and administrative expenses were $488,367 for the six months ended June 30, 2006 compared with $72,611 in the second quarter of 2005. These expenses included accounting fees, wages and salaries and legal and other professional service expenses. The increase in general and administrative expenses was primarily due to the increase in accounting and, legal, and other professional fees related to the restatement of our financial statements in our annual report on Form 10-KSB for the year ended 2004 and in our quarterly reports on Form 10-QSB for 2005 and for accounting, legal and business advisory services related to the “going private” transaction.

Loss from Operations

     The loss from operations was $(480,194) and $(62,430) for the six months ended June 30, 2006 and 2005, respectively, which was due to the increase in the amount of general and administrative expenses for the six months ended June 30, 2006 as described above.

Non-Operating income

     Non-operating income for the six months ended June 30, 2006 was $36,555 compared with $30,520 in the second quarter of 2005. Included in non-operating income was $4,641 of interest income, $32,340 of rental income, for the six months ended June 30, 2006. During the six months ended June 30, 2005, there was $1,414 of interest income, $29,638 of rental income.

Net Loss

     For the six months ended June 30, 2006 we realized a net loss of $(445,239) compared to a net loss of $(33,510) for the six months ended June 30, 2005. The increase in net loss was primarily due to the increase in our general and administrative expenses as described above.

Liquidity and Capital Resources

     Our primary source of liquidity as of June 30, 2006 is our cash on hand. Net cash used in operations for the six months ended June 30, 2006 was $(229,988), as compared to net cash provided by operations of $167,360 during the same period in 2005. The increase in net cash used in operating activities was a result of the increase in net loss. Our cash and cash equivalents were $552,515 and $793,442 as of June 30, 2006 and December 31, 2005, respectively. Our current assets totaled $778,011 and $1,129,650 on June 30, 2006 and December 31, 2005, respectively. Our current liabilities were $219,939 and $143,758 on June 30, 2006 and December 31, 2005, respectively. Working capital was $558,072 and $985,892 as of June 30, 2006 and December 31, 2005, respectively.

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     Net cash used in investing activities totaled $(10,939) for the six months ended June 30, 2006, compared with $(18,807) for the six months ended June 30, 2005. The net cash change was $(240,927) and $148,553 for the second quarter of 2006 and 2005, respectively.

     We estimate that the total amount of funds necessary to make cash payments to stockholders in connection with the Split and for related expenses is approximately $975,000. We intend to use our available cash and liquid assets and the proceeds of the Loan to make cash payments to stockholders and to pay related fees and expenses.

Cash Flow

     Our cash needs are currently met by our cash on hand, primarily because of the long lag time for payment of our accounts receivable. We believe we will be able to continue to meet our anticipated working capital requirements through a combination of cash on hand and revenues from service fees as our accounts receivable are paid. From time to time, primarily because of our accounts receivable lag time, our daily operations are supported by advances from TKE. These advances are offset from our fee revenues. We believe that our current financial resources are sufficient to finance our operations for at least the next twelve months. Our actual working capital needs will depend upon numerous factors, including our operating results, competition, and the availability of monies from TKE, none of which can be predicted with certainty.

Off-Balance Sheet Arrangements

     We have not entered into any off-balance sheet financing arrangements and have not established any special purpose entities. We have not guaranteed any debt or commitments of other entities or entered into any options on non-financial assets.

Additional Factors That May Affect Future Results

     The following risk factors and other information included in this report should be carefully considered. The risks and uncertainties described below are not the only ones we face. Additional risks and uncertainties not presently known to us or which we currently deem immaterial also may impair our business operations. If any of the following risks occur, our business, financial condition, operating results, and cash flows could be materially adversely affected.

Risks Relating to Resignation of Tsan-Kun Wu

     On March 11, 2005, Tsan-Kun Wu resigned from his positions as our President, Chief Executive Officer and Chairman of the Board of Directors, amidst two criminal proceedings involving alleged securities law violations and fraud in Taiwan. Mr. Wu is also the founder and was the Chairman of TKE until his resignation in June 2006. In one proceeding, Mr. Wu was convicted, on December 31, 2004, of manipulating the stock price of Sunfar Computer Co., Ltd. and sentenced to prison for 11/2 years. Mr. Wu’s prison sentence was suspended pending the outcome of a final appeal. In the second on-going proceeding, on November 11, 2004, Mr. Wu was indicted on charges of publicly offering shares of common stock of EUPA without first obtaining the necessary governmental approvals and securities fraud. We believe that the resolution of these legal proceedings, and resulting negative publicity, may negatively impact our business. We do not expect the impact of Mr. Wu’s indictment to significantly impact EUPA’s business.

Negative Publicity May Adversely Affect Our Business

     As a result of the criminal proceedings against Mr. Wu, TKE and EUPA could become the subject of negative publicity. This negative publicity could bring regulatory scrutiny upon EUPA. Continuing negative publicity for TKE, as well as for EUPA, could have a material adverse effect on our results of operations and liquidity and the market price of our publicly traded securities.

TKE Controls Our Business

     TKE owns more than 50% of our outstanding capital stock. As a result, TKE is able to control our business and affairs and our board of directors. The interests of TKE may not necessarily be consistent with the interests of our other shareholders.

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We Are Dependent On TKE for Our Sales and Other Revenues and Capital Requirements

     As TKE is our sole customer, any changes in its business, financial condition or liquidity could have a material impact on our ability to operate our business. The market segments in which TKE competes are intensely competitive, and TKE has many competitors in the manufacturing and retail services industries. Many of TKE’s current and potential competitors have longer operating histories, larger customer bases, greater brand recognition, and significantly greater financial, marketing, and other resources than TKE. They may be able to secure comparable merchandise from vendors on more favorable terms and may be able to adopt more aggressive pricing policies. Competitors in the manufacturing industry may be able to devote more resources to new product introductions, features and enhancements, and research and development than we or TKE do. Competitors in the retail industry also may be able to devote more resources to sales and marketing than we or TKE do.

Many of Our Employees Also Perform Services for TKE Which Could Result In Their Attention Being Diverted From Our Business

     Our success will depend, to some degree, on the efforts of our employees. Many of our officers and employees are also employed by TKE. As a result, their full time, attention and energies are not directed exclusively to our business. If the attention of our officers is diverted from our business, we may not be able to realize our full potential.

The Loss of Key Senior Management Personnel Could Negatively Affect Our Business

     We depend on the continued services and performance of our senior management and other key personnel. The loss of any of our executive officers or other key employees could harm our business.

If We Do Not Develop and Introduce New TKE Products, Our Ability to Grow Will Be Limited

     We believe that our future success will depend in part upon our ability to continue to develop innovative designs in the products manufactured by TKE and to develop and market new products. We may not be successful in introducing or supplying any new products or product innovations to TKE’s which will satisfy customer needs or achieve market acceptance. The failure to develop products and introduce them successfully and in a timely manner could harm our ability to grow our business.

A Slowdown in the Retail Industry Will Likely Have an Adverse Effect on Our Results

     TKE products are ultimately sold to consumers through major retail channels, primarily mass merchandisers, department stores, specialty stores and mail order catalogs. Changes in general economic conditions will cause reductions in demand among consumers and retailers. As a result, our business and financial results will fluctuate with the financial condition of retail customers and the retail industry.

Compliance with Governmental Regulations Could Increase Our Operating Costs and Interfere with Our Business Efforts

     Most federal, state and local authorities require certification by Underwriters Laboratory, Inc., an independent, not-for-profit corporation engaged in the testing of products for compliance with certain public safety standards, or other safety regulation certification prior to marketing electrical appliances. Foreign jurisdictions also have regulatory authorities overseeing the safety of consumer products. TKE products, or additional electrical appliances which we may develop, may not meet the specifications required by these authorities. A determination that our products are not in compliance with these rules and regulations could result in the imposition of fines or awards of damages to private litigants.

We May Experience Significant Fluctuations in Our Operating Results and Rate of Growth

     Due to our limited operating history, our evolving business model, and the unpredictability of TKE’s business, we may not be able to accurately forecast our rate of growth. We base our current and future expense levels and our investment plans on estimates of future net sales and rate of growth. Our expenses and investments are to a large extent fixed. We may not be able to adjust our spending quickly enough if our or TKE’s net sales fall short of our expectations.

     Our revenue and operating profit growth depends on the continued growth of demand for the products offered by TKE, and our business is affected by general economic and business conditions throughout the world. A softening of demand, whether caused by changes in consumer preferences or a weakening of the U.S. or global economies, may result in decreased revenue or growth. Terrorist attacks and armed hostilities create economic and consumer uncertainty that could adversely affect our revenue or growth.

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Such events could create delays in, and increase the cost of, product shipments, which may decrease demand. Revenue may not be sustainable and may decrease in the future.

     Our sales and operating results will also fluctuate for many other reasons, including our ability to retain and increase sales to existing customers, attract new customers, and satisfy our customers’ demands; the introduction by our competitors of products, services, or improvements; and seasonal fluctuations in the retail industry.

We May Be Subject to Product Liability Claims if People or Property Are Harmed by the Products We Sell

     Some of the products we sell may expose us to product liability claims relating to personal injury, death, or property damage caused by such products, and may require us to take actions such as product recalls. Although we maintain liability insurance, we cannot be certain that our coverage will be adequate for liabilities actually incurred or that insurance will continue to be available to us on economically reasonable terms, or at all.

Forward-Looking Statements

     This quarterly report on Form 10-QSB includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. All statements other than statements of historical fact, made in this quarterly report on Form 10-QSB are forward-looking. We use words such as “anticipates,” “believes,” “expects,” “future,” “intends,” and similar expressions to identify forward-looking statements. Forward-looking statements reflect management’s current expectations and are inherently uncertain.

     Actual results could differ materially for a variety of reasons, including, among others, the rate of growth of the economy in general, customer spending patterns, changes in customer demand for TKE’s products, effectiveness of marketing programs, our success in designing and developing products, our research and development costs, the length of development and product acceptance cycles, world events, the amount that we invest in new business opportunities and the timing of those investments, competition, the degree to which we enter into commercial agreements and strategic transactions and maintain and develop commercial relationships, foreign exchange risks, seasonality, international growth and expansion and changes in laws and regulations. These risks and uncertainties, as well as other risks and uncertainties that could cause our actual results to differ significantly from management’s expectations, are described in greater detail in “Additional Factors That May Affect Future Results,” which, along with the previous discussion, describes some, but not all, of the factors that could cause actual results to differ significantly from management’s expectations.

Item 3.Controls and Procedures

     Under the direction of our Chief Executive Officer and Chief Financial Officer, we evaluated our disclosure controls and procedures and internal control over financial reporting and concluded that (i) our disclosure controls and procedures were effective as of June 30, 2006, and (ii) no change in internal control over financial reporting occurred during the quarter ended June 30, 2006, that has materially affected, or is reasonably likely to materially affect, such internal control over financial reporting.

Part II — Other Information

Item 1.Legal Proceedings

     None.

Item 6.Exhibits and Reports On Form 8-K

(a) Exhibits.

31.1	Certification of the Chief Executive Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
31.2	Certification of the Chief Financial Officer Pursuant to Rule 13a-14(a) under the Securities Exchange Act of 1934.
32.1	Certification of the Chief Executive Officer Pursuant to 18 U.S.C. Section 1350.
32.2	Certification of the Chief Financial Officer Pursuant to 18 U.S.C. Section 1350.

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(b) Reports on Form 8-K.

     We have filed the following reports on Form 8-K for the six month period ended June 30, 2006 and thereafter through August 14, 2006:

     Form 8-K dated May 29, 2006, announcing that we have entered into a line of credit in the principal amount of $3,000,000 pursuant to a business loan agreement with ChinaTrust Bank (U.S.A.) secured by all of our assets.

     Form 8-K dated June 1, 2006, announcing that we filed a Schedule 13E-3 Transaction Statement with the SEC regarding a “going private” transaction.

SIGNATURES

     In accordance with the requirements of the Securities Exchange Act of 1934, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

EUPA INTERNATIONAL CORPORATION

(Registrant)

Date: August 14, 2006	/s/ Yuan-Chung Tsai
	Yuan-Chung Tsai
	President and Chief Executive Officer
Date: August 14, 2006	/s/ Kung-Chieh Huang
	Kung-Chieh Huang
	Chief Financial Officer

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