CHINA UNITED INSURANCE SERVICE, INC. – 10-K – MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS.

The following discussion contains forward-looking statements. Forward-looking statements are identified by words and phrases such as "anticipate", "intend", "expect", and words and phrases of similar import. We caution investors that forward-looking statements are predictions based on our current expectations about future events and are not guarantees of future performance. Actual results, performance or achievements could differ materially from those expressed or implied by the forward-looking statements due to risks, uncertainties and assumptions that are difficult to predict. We encourage you to read those risk factors carefully along with the other information provided in this current report and in our other filings with the SEC before deciding to invest in our stock or to maintain or change your investment. We undertake no obligation to revise or update any forward-looking statement for any reason, except as required by law.

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You should read this Management's Discussion and Analysis in conjunction with the Consolidated Financial Statements and Related Notes.

   Overview   

China United Insurance Service, Inc. ("China United") is a Delaware corporation organized on June 4, 2010 by Mao Yi Hsiao, a Taiwanese citizen, as a listing vehicle for ZLI Holdings Limited ("CU Hong Kong") to be quoted on the Over the Counter Bulletin Board (the "OTCBB"). CU Hong Kong, a wholly owned Hong Kong-based subsidiary of China United, was founded by China United on July 12, 2010 under Hong Kong laws. On October 20, 2010, CU Hong Kong founded a wholly foreign owned enterprise, Zhengzhou Zhonglian Hengfu Business Consulting Co., Ltd. ("CU WFOE") in Henan province in the PRC.

On January 16, 2011, China United issued 20,000,000 shares of common stock, $0.00001 par value per share, to several non U.S. persons for their investment of $300,000 in cash in the Company's subsidiaries. The issuance was made pursuant to an exemption from registration contained in Regulation S under the Securities Act of 1933, as amended. The consideration was fully paid as of June 30, 2012. On January 28, 2011, the Company increased the number of authorized shares from 30,000,000 shares of common stock to 100,000,000 shares of common and 10,000,000 shares of preferred stock.

Henan Law Anhou Insurance Agency Co., Ltd. ("Henan Anhou", formerly known as Zhengzhou Anhou Insurance Agency Co., Ltd.) was incorporated in the People's Republic of China ("the PRC") on August 20, 2003. Henan Anhou provides insurance agency services in the PRC. On August 16, 2010, Ms. Zhu Shuqin contributed RMB8,000,000($1,175,440) in cash to Henan Anhou and controlled 80% of Henan Anhou shares.

Sichuan Kangzhuang Insurance Agency Co., Ltd. ("Sichuan Kangzhuang") was founded on July 10, 2006 in Sichuan province in the PRC and provides insurance agency services in the PRC. On August 23, 2010, at Sichuan Kangzhuang's general meeting of shareholders, its shareholders voted to sell their shares in Sichuan Kangzhuang to Henan Anhou for RMB532,622($83,444). On September 6, 2010, the equity transfer agreements were signed between Henan Anhou and each shareholder of Sichuan Kangzhuang.

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Jiangsu Law Insurance Broker Co., Ltd. ("Jiangsu Law") was founded on September 19, 2005 in Jiangsu Province in the PRC and provides insurance brokerage services in the PRC. On August 12, 2010, at Jiangsu Law's general meeting of shareholders, its shareholders voted to sell their shares to Henan Anhou for RMB518,000($81,153) and Henan Anhou increased Jiangsu Law's paid-in capital to RMB10,000,000($1,566,661) from RMB5,180,000($811,531) on January 18, 2011 to meet the PRC paid-in capital requirements for insurance brokerage companies. On September 28, 2010, the equity transfer agreements were signed between Henan Anhou and each shareholder of Jiangsu Law.

   Recent Acquisition of AHFL   

On August 24, 2012, the Company acquired all of the issued and outstanding shares of Action Holdings Financial Limited ("AHFL"), a limited liability company incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL becomes a 100% subsidiary of the Company.

AHFL holds 65.95% of the issued and outstanding shares of Law Enterprise Co., Ltd. ("Law Enterprise"), a company limited by shares incorporated under the laws of Taiwan on January 30, 1996. Law Enterprise holds (i) 100% Law Insurance Broker Co., Ltd. ("Law Broker"), a company limited by shares incorporated in Taiwan on October 9, 1992; (ii) 97.84% of Law Risk Management & Consultant Co., Ltd. ("Law Management"), a company limited by shares incorporated in Taiwan on December 5, 1987; and (iii) 96% of Law Insurance Agent Co., Ltd. ("Law Agent" collectively with "Law Enterprise", "Law Broker" and "Law Agent", the "Taiwan Subsidiaries", each a "Taiwan Subsidiary"), a limited liability company incorporated in Taiwan on June 3, 2000.

Law Enterprise acts as a holding company of its operating subsidiaries in Taiwan. Law Broker primarily engages in insurance brokerage and insurance agency service business across Taiwan, while Law Management and Law Agent are not in active operation. We operate our Taiwan business primarily through Law Broker.

Due to PRC legal restrictions on foreign ownership and investment in insurance agency and brokerage businesses in China, especially those on qualifications as well as capital requirement of the investors, we operate our business primarily through our Consolidated Affiliated Entities ("CAE") in China. We do not hold equity interests in our CAE. However, through the VIE Agreements with these CAE and their respective shareholders, we effectively control, and are able to derive substantially all of the economic benefits from, these CAE.

Our CAE in China are variable interest entities through which all of our insurance services are operated. It is through the VIE Agreements that we have effective control of the CAE, which allows us to consolidate the financial results of the CAE in our financial statements. If Henan Anhou and its shareholders fail to perform their obligations under the VIE Agreements, we could be limited in our ability to enforce the VIE Agreements that give us effective control. Furthermore, if we are unable to maintain effective control of our CAE, we would not be able to continue to consolidate the CAE's financial results with our financial results. During fiscal years ended June 30, 2011 and 2012, 100% of our revenues in our consolidated financial statements were derived from our CAE. For more information see "Risk Factors-Risks Related to Our Corporate Structure."

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On January 17, 2011, CU WFOE and Henan Anhou and its shareholders entered into a series of agreements known as variable interest agreements (the "VIE Agreements") pursuant to which CU WFOE has executed effective control over Henan Anhou through these contractual arrangements.

As of June 30, 2012, through our CAE, we had 13 branches and 21 offices, and 1,179 individual sub-agents in Henan, Sichuan and Jiangsu provinces.

Critical Accounting Policies

The preparation of financial statements in conformity with Generally Accepted Accounting Principles in the United States of America ("US GAAP") requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the amounts of revenues and expenses during the reporting periods. Management makes these estimates using the best information available when the estimates are made. However, actual results could differ materially from those results. While there are a number of significant accounting policies affecting the Company's financial statements; the Company believes the following critical accounting policies involve the most complex, difficult and subjective estimates and judgments The Company has not made any material changes in the methodology used in these accounting polices during the past two years.

   80        Principles of consolidation   

The accompanying consolidated financial statements include the balance sheets of China United, its wholly owned subsidiaries CU Hong Kong and CU WFOE, the variable interest entity Henan Anhou and wholly owned subsidiaries Sichuan Kangzhuang and Jiangsu Law, as of June 30, 2012 and 2011. As Henan Anhou acquired 100% of Sichuan Kangzhuang on September 6, 2010, for accounting convenience, its operating results from September 1, 2010 through June 30, 2011 and the balance sheet of Sichuan Kangzhuang as of June 30, 2011 were included in the consolidated financial statements. As Henan Anhou acquired 100% of Jiangsu Law on September 30, 2010, the operating results of Jiangsu Law from October 1, 2010 through June 30, 2011 and the balance sheet as of June 30, 2011 were included in the consolidated financial statements. All significant inter-company accounts and transactions were eliminated in consolidation.

   Accounts receivable   

The Company reviews its accounts receivable on a regular basis to determine if a bad debt allowance is necessary. Management reviews the composition of accounts receivable and analyzes the age of receivable outstanding, customer concentrations, customer credit worthiness, current economic trends and changes in customer payment patterns to evaluate the necessity of making such allowance.

   Revenue recognition   

In accordance with US GAAP, the Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance companies and insured exists, services were provided, the fees for such services are fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered to be rendered and completed, and revenue is recognized, when an insurance policy becomes effective, that is, when the signed insurance policy is in place and the premium is collected from the insured. The Company has met all the four criteria of revenue recognition when the premiums are collected by the respective insurance companies and not before, because collectability is not ensured until receipt of the premium. Any subsequent commission adjustments in connection with policy cancellations which have been de minims to date are recognized upon notification from the insurance carriers.

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The Company pays commissions to its sub-agents when an insurance product is sold by the sub-agent. The Company recognizes commission revenue on a gross basis. The commissions paid by the Company to its sub-agents are recorded as costs of services.

    Income taxes    

The Company utilizes ASC 740 "Income Taxes", which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred income taxes are recognized for the tax consequences in future years of differences between the tax bases of assets and liabilities and their financial reporting amounts at each period end based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established, when necessary, to reduce deferred tax assets to the amount expected to be realized.

When tax returns are filed, it is likely some positions taken would be sustained upon examination by the taxing authorities, while others are subject to uncertainty about the merits of the position taken or the amount of the position that would be ultimately sustained. The benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions. Tax positions that meet the more-likely-than-not recognition threshold are measured as the largest amount of tax benefit that is more than 50% likely of being realized upon settlement with the applicable taxing authority. The portion of the benefits associated with tax positions taken that exceeds the amount measured as described above is reflected as a liability for unrecognized tax benefits in the accompanying balance sheets along with any associated interest and penalties that would be payable to the taxing authorities upon examination. Interest associated with unrecognized tax benefits are classified as interest expense and penalties are classified in selling, general and administrative expenses in the statements of operations and other comprehensive income (loss).

The Company was not subjected to income tax examinations by taxing authorities during the current and past fiscal years. During the years ended June 30, 2012 and 2011, the Company did not recognize any interest or penalties.

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Impairment of Long-Lived Assets

In accordance with ASC 360, "Property, Plant and Equipment" the Company reviews the carrying values of long-lived assets whenever facts and circumstances indicate that the assets may be impaired. Recoverability of assets to be held and used is measured by a comparison of the carrying amount of an asset to future net undiscounted cash flows expected to be generated by the asset. If an asset is considered impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds the fair value. Assets to be disposed of are reported at the lower of the carrying amount or fair value, less costs of disposal.

   Goodwill   

Goodwill arose from the acquisition of Sichuan Kangzhuang. Goodwill represents the excess of the cost of an acquisition over the fair value of the net assets acquired. Goodwill is tested for impairment annually or more frequently if events or changes in circumstances indicate that it might be impaired, using the prescribed two-step process under US GAAP. The first step screens for potential impairment of goodwill to determine if the fair value of the reporting unit is less than its carrying value, while the second step measures the amount of goodwill impairment, if any, by comparing the implied fair value of goodwill to its carrying value.

                   Results of Operations for the year ended June 30,                                                                                2011 to                                                                               2012                                                                            Percentage                                              2012            2011           Change                                                $               $               % Revenues                                    3,153,776       2,740,519               15 % Cost of revenues                            2,363,581       1,897,359               25 % Gross profit                                  790,195         843,160               (6 )% General and administrative expenses         1,166,841       1,095,869                6 % Loss from operations                         (376,646 )      (252,709 )             49 % Other income (expense), net: Interest income                                 4,756          12,760              (63 )% Gain on acquisition of subsidiary                   -         267,156             (100 )%  Other, net                                       (18 )        (2,753 )            (99 )% Net income / (loss) before income taxes      (371,908 )        24,454           (1,621 )% Income tax expense                           (268,440 )       354,441             (176 )% Net loss                                     (103,468 )      (329,987 )            (69 )%     83       

Year June 30, 2012 Compared to Year Ended June 30, 2011

   Revenues   

Revenues increased 15% from $2,740,519 for the year ended June 30, 2011 to $3,153,776 for the year ended June 30, 2012. The increase in commissions and fees was contributed to the growth of our sub-agents team.

Cost of revenues and gross profit

The cost of revenues ("COR") for the year ended June 30, 2012 increased to $2,363,581, or 25%, compared with $1,897,359 for the year ended June 30, 2011. Over 90% of the COR is commissions paid to our sales agents. Therefore the COR increased as revenues grew.

The gross profit decreased to $790,195 for the year ended June 30, 2012, or 6%, compared with $843,160 for the year ended June 30, 2011. The gross margin decreased from 31% to 25% due to intensive competition. The decrease in our gross profit ratio is due to the need to pay a higher portion of commission to sub-agents. As China's economic growth slowed down, the incremental demand for insurance products decreased. As a result, we were required to pay higher commission to individual sub-agents. We believe paying higher commission will help us to keep the team stable in long term. The increase in sub-agent commissions affected our profitability.

General and administrative expenses

The general and administrative ("G&A") expenses principally comprise of salaries and benefits for our administrative staff, office rental expenses, travel expenses, depreciation and amortization, entertainment expenses, and office supply expenses for our administrative staff.

For the year ended June 30, 2012, G&A expenses were $1,166,841, and increased by $70,972 compared with the year ended June 30, 2011. The 6% increase is mainly due to the increase of China's price index and our expansion of our business.

Other income / (expenses)-net

For the year ended June 30, 2012, no material other income and expenses such as gain on acquisition of subsidiary occurred.

   Income tax   

CU WFOE, the Company's subsidiary, and the VIEs in the PRC, are governed by the Income Tax Law of the PRC concerning the private-run enterprises, which are generally subject to tax at 25% on income reported in the statutory financial statements after appropriated adjustments. Except for Jiangsu Law, according to the requirement of local tax authorities, the tax basis is deemed as 10% its total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.

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According to tax regulations by Chinese tax authorities effective January 1, 2008, commissions paid to sub-agents in excess of 5% of the commission revenue were not tax deductible. Therefore, as of June 30 2011, Henan Anhou and Sichuan Kangzhuang accrued income tax payable of $658,344 for deductible commissions occurred before June 30, 2011.

According to China State Administration of Taxation #15 Announcement in year 2012, effective from 2011 tax year, such commissions can be fully deducted. Therefore we reversed the tax payable of $283,880 that was accrued in 2011 tax year for such deductible commission and credited as income tax benefit in fiscal year 2012.

Income tax of $15,770 and nil was paid during the year ended June 30, 2012 and 2011, respectively. The balance of income tax payable as of June 30, 2012 mainly represents the income tax accrued for the un-deductible commission paid to sub-agents before tax year 2011 and is due upon written request of the local tax bureau.

The income tax benefit was $268,440 for the years ended June 30, 2012. The income tax benefit was because the reversed tax payable for the deductible commission was recorded as negative income tax expense.

Liquidity and Capital Resources

On August 24, 2012, the Company acquired all of the issued and outstanding shares of Action Holdings Financial Limited ("AHFL"), a LLC incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Pursuant to the provisions of the Acquisition Agreement and in exchange for all of the issued and outstanding shares of AHFL, the Company will pay NT$15 million($500,815) and NT$7.5 million($250,095) in cash in two installments, subject to terms and conditions therein. The Company plan to use future cash flow generated by future operation or advance from shareholders.

Off Balance Sheet Arrangements

As of June 30, 2012, the Company had no off balance sheet arrangements.