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

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", "CUIS" or the "Company") 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 People's Republic of China ("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 US persons for $300,000 in cash invested 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 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 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 to Henan Anhou for RMB532,622 ($78,318). On September 6, 2010, the equity transfer agreements were signed between Henan Anhou and each shareholder of Sichuan Kangzhuang.

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 ($75,475) and Henan Anhou increased Jiangsu Law's paid-in capital to RMB10,000,000 ($1,355,000) from RMB5,180,000 ($625,113) 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.

   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 ("LLC") incorporated under the laws of British Virgin Islands on April 30, 2012, together with its subsidiaries in Taiwan. Subsequent to the acquisition, AHFL became a 100% owned 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 LLC incorporated in Taiwan on June 3, 2000.

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Law Enterprise is 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 active. 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 and capital requirements 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 variable interest entities ("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 VIE 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 nine months ended March 31, 2013 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 March 31, 2013, through our CAE, we had two insurance agencies and one brokerage and 74 service outlets with 831 full-time sales professionals, 37 part-time sales professionals and 67 administrative staff in Henan, Sichuan and Jiangsu provinces in China. In addition, through Law Insurance Broker Co., Ltd., we had 22 sales and service outlets (including the headquarters) and 1,395 full-time sales professionals, 428 part-time sales professionals and 152 administrative staff in Taiwan.

   Critical Accounting Policies   

The preparation of financial statements in conformity with Accounting Principles generally accepted 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 they are made. However, actual results could differ materially from those estimates. 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.

Principles of consolidation

The accompanying consolidated financial statements include the accounts of China United and its subsidiaries. The results of operations of AHFL and subsidiaries are included since August 31, 2012 the date of acquisition for accounting convenience. All significant intercompany transactions and balances 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. No allowance was deemed necessary as of March 31, 2013 and June 30, 2012 (audited).

    Revenue recognition    

The Company's revenue is from insurance agency and brokerage services. The Company, through its subsidiaries, sells insurance products to customers, and obtains commissions from the respective insurance companies according to the terms of each insurance company service agreement. The Company recognizes revenue when the following have occurred: persuasive evidence of an agreement between the insurance company and insured exists, services were provided, the fee for such services is fixed or determinable and collectability of the fee is reasonably assured. Insurance agency services are considered complete, and revenue is recognized, when an insurance policy becomes effective. The customers are entitled to a 10-day cancellation period from the date of the issuance of the policies, in which the customers can cancel the contract without any fees. The Company is notified of such cancellations by the insurance carriers.

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 revenue.

   25        Income taxes    

The Company utilizes ASC Topic 740 "Income Taxes", which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of events that were 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). As of March 31, 2013 and June 30, 2012 (audited), the Company did not have any uncertain tax positions.

The Company was not subjected to income tax examinations by taxing authorities during the current and past fiscal years. During the nine months ended March 31, 2013 and 2012, the Company did not recognize any interest or penalties.

Impairment of Long-Lived Assets

In accordance with ASC Topic 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 ("FV"). Assets to be disposed of are reported at the lower of the carrying amount or FV, less costs of disposal.

   Goodwill   

Goodwill arose from the acquisition of Sichuan Kangzhuang. Goodwill is the excess of the cost of an acquisition over the FV 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 FV 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 FV of goodwill to its carrying value.

    26            Results of Operations for the Three Months Ended March 31, 2013 and 2012                                                                                          2012 to                                                                                         2013                                                                                      Percentage                                                       2013             2012            Change  Revenues                                          $ 11,945,506$    699,169            1,609 % Cost of revenue                                      7,957,959          508,363            1,465 %  Gross profit                                         3,987,547          190,806            1,990 %  Operating expenses: General and administrative                           2,686,193          269,233              898 %  Income (loss) from operations                        1,301,354          (78,427 )         (1,759 )%  Other income (expenses): Interest income                                         25,186            1,181            2,033 % Other - net                                            142,093              267           53,118 % Total other income (expenses)                          167,279            1,448           11,452 %  Income (loss) before income taxes                    1,468,633          (76,979 )         (2,008 )% Income tax expense                                     302,594           72,279              319 %  Net income (loss)                                    1,166,039         (149,258 )           (881 )% Net income attributable to the non-controlling interests                                             (474,234 )              - Net income (loss) attributable to parent's shareholders                                           691,805         (149,258 )           (563 )%  Other comprehensive items Foreign currency translation gain (loss) attributable to parent's shareholders                  (24,258 )          1,791           (1,454 )% Foreign currency translation gain (loss) attributable to non-controlling interest                40,797                -  Comprehensive income (loss) attributable to parent's shareholders                             $    667,547$   (147,467 )           (553 )%  Comprehensive income (loss) attributable to non-controlling interest                          $   (433,437 )              -              194 %  Weighted average shares outstanding: Basic and diluted                                   29,100,503       20,100,503  Income (loss) per share: Basic and diluted                                 $       0.02$      (0.01 )     27       

Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012

Our results of operations for the three months ended March 31, 2013 contains the results for three months ended March 31, 2013 of AHFL. The majority of AHFL's result is generated by Law Broker, its subsidiary in Taiwan. Acquisition of AHFL enables us to expand our business to Taiwan.

   Revenues   

Revenues increased by $11,246,337, or 1,609%, from $699,169 for the three months ended March 31, 2012 to $11,945,506 for the three months ended March 31, 2013. The increase in revenues was mainly attributable to our new operations in Taiwan after August 24, 2012 that occurred as a result of our acquisition of AHFL.

As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach the untapped market in Taiwan and increased our sub agent numbers from 1,098 as of June 30, 2012 to 2,691 as of March 31, 2013.

Cost of revenue and gross profit

The cost of revenue for the three months ended March 31, 2013 increased by $7,449,596 or 1,465%, to $7,957,959 compared to $508,363 for the three months ended March 31, 2012. Over 90% of the cost of revenue is commissions paid to our sales agents. Therefore the cost of revenue increased as our sales increased.

The gross profit for the three months ended March 31, 2013 increased by $3,796,741, or 1,990%, to $3,987,547 compared to $190,806 for the three months ended March 31, 2012. The gross profit ratio increased to 33% for the three months ended March 31, 2013 from 27% for the three months ended March 31, 2012. The increase in profitability was mainly due to the higher margins of Law Broker.

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 three months ended March 31, 2013, G&A expenses were $2,686,193, and increased by $2,416,960, or 898%, compared with $269,233for the three months ended March 31, 2012. The growth of expenses is due to the overall growth of our business and the acquisition of AHFL. For the three months ended March 31, 2013, the Company accrued $200,000 for expenses related to the acquisition.

   Other income   

Other income for the three months ended March 31, 2013 was mainly rental income of sub-leased spare offices and garage.

   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% of total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.

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 2012, Henan Anhou and Sichuan Kangzhuang accrued income tax payable of $400,229 for deductible commissions incurred before June 30, 2012.

   28       

According to China State Administration of Taxation #15 Announcement in 2012, effective from 2011, such commissions can be fully deducted. Also, such tax payable over three years can be revised. Therefore, during the nine months ended March 31, 2013, we reversed the tax payable of $58,358 accrued in 2012 for such deductible commissions and credited as income tax benefit.

The Company's subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% of income reported in the statutory financial statements after appropriate adjustments.

The balance of income tax payable as of March 31, 2013 mainly is the income tax accrued for the un-deductible commission paid to sub-agents before 2011 and is due upon written request of the local tax bureau.

        Results of Operations for the Nine Months Ended March 31, 2013 and 2012                                                                                          2012 to                                                                                         2013                                                                                      Percentage                                                       2013             2012            Change  Revenues                                          $ 27,951,585$  2,396,066            1,067 % Cost of revenue                                     18,055,254        1,692,384              967 %  Gross profit                                         9,896,331          703,682            1,306 %  Operating expenses: General and administrative                           7,212,718          904,827              697 %  Income (loss) from operations                        2,683,613         (201,145 )         (1,434 )%  Other income (expenses): Interest income                                         61,330            3,570            1,618 % Bargain gain on purchase of subsidiaries             5,280,042                - Other - net                                            307,655              614           50,007 % Total other income (expenses)                        5,649,027            4,184          134,915 %  Income (loss) before income taxes                    8,332,640         (196,961 )         (4,331 )% Income tax expense                                     458,064          261,334               75 %  Net income (loss)                                    7,874,576         (458,295 )         (1,818 )% Net income attributable to the non-controlling interests                                           (1,006,447 )              - Net income (loss) attributable to parent's shareholders                                         6,868,129         (458,295 )         (1,599 )%  Other comprehensive items Foreign currency translation gain (loss) attributable to parent's shareholders                   45,007           13,702              228 % Foreign currency translation gain (loss) attributable to non-controlling interest                19,882                -  Comprehensive income (loss ) attributable to parent's shareholders                             $  6,913,136$   (444,593 )         (1,655 )%  Comprehensive income (loss ) attributable to non-controlling interest                          $   (986,565 )              -              122 %  Weighted average shares outstanding: Basic and diluted                                   27,093,204       20,100,503  Income (loss) per share: Basic and diluted                                 $       0.26$      (0.02 )     29       

Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012

   Revenues   

Revenues increased by $25,555,519, or 1,067% from $2,396,066 for the nine months ended March 31, 2012 to $27,951,585 for the nine months ended March 31, 2013. The increase in revenues was mainly attributable to our new operations in Taiwan after August 24, 2012 that occurred as a result of our acquisition of AHFL.

As a distributor of insurance products, we derive our revenue primarily from commissions and fees paid by insurance companies, typically calculated as a percentage of premiums paid by our customers to the insurance companies. We generate revenue primarily through our sales force, which consists of individual sales agents in our distribution and service network. The acquisition of AHFL enabled us to reach untapped market in Taiwan and increased our sub agent numbers from 1,098 as of June 30, 2012 to 2,691 as of March 31, 2013.

Cost of revenues and gross profit

The cost of revenues for the nine months ended March 31, 2013 increased $16,362,870, or 967% to $18,055,254, compared to $1,692,384 for the nine months ended March 31, 2012. Over 90% of the cost of revenues is commissions paid to our sales agents. Therefore the cost of services increased as the sales increased.

The gross profit for the nine months ended March 31, 2013 increased by $9,192,649 or 1,306%, to $9,896,331 compared to $703,682 for the nine months ended March 31, 2012. The gross profit ratio increased from 29% for the nine months ended March 31, 2012 to 35% for the nine months ended March 31, 2013. The increase in profitability was mainly due to the higher margins of Law Broker.

General and administrative expenses

The 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 nine months ended March 31, 2013, G&A expenses were $7,212,718, an increase of $6,307,891 or 697% compared to the nine months ended March 31, 2012. The growth of expenses is due to the overall growth of our business and the acquisition of AHFL. For the nine months ended March 31, 2013, the Company accrued $200,000 for expenses related to the acquisition.

   30        Other income   

Other income for the nine months ended March 31, 2013 was mainly the bargain gain on acquiring AHFL and rental income of sub-leased spare offices and garage. We believe the gain on acquisition resulted from the sellers' strategic intent to enter the PRC market, which has a higher growth rate than Taiwan, and to become shareholders of an OTCBB traded company.

   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% of total revenue, instead of net income. The tax rate of Jiangsu Law is also 25%.

According to Chinese tax regulations 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 2012, Henan Anhou and Sichuan Kangzhuang accrued income tax payable of $400,229 for deductible commissions incurred before June 30, 2012.

According to China State Administration of Taxation #15 Announcement in 2012, effective from 2011, such commissions can be fully deducted. Also, such tax payable over three years can be revised. Therefore, during the nine months ended March 31, 2013, we reversed the tax payable of $171,510 accrued in 2012 for such deductible commissions and credited as income tax benefit.

The Company's subsidiaries in Taiwan are governed by the Income Tax Law of Taiwan, and are generally subject to tax at 17% of income reported in the statutory financial statements after appropriate adjustments.

The balance of income tax payable as of March 31, 2013 mainly is the income tax accrued for the un-deductible commission paid to sub-agents before 2011 and is due upon written request of the local tax bureau.

Liquidity and Capital Resources

Prior to June 30, 2012, the Company's gross margin couldn't cover its operating expenses and recorded an accumulated deficit of $1,918,972. As a result, the Company needed to partially finance its operations through capital contribution and borrowings from related parties.

As a result of the acquisition of AHFL, our cash and equivalents increased by $9,211,606. As of March 31, 2013, the Company had cash and equivalents of $10,469,817.

Net cash provided by operating activities during the nine months ended March 31, 2013 was $82,354. The net cash used in operating activities during the nine months ended March 31, 2012 was $200,044. The increase was mainly contributed by our Taiwan business.

Net cash provided by investing activities was $9,336,457 during the nine months ended March 31, 2013. This was the combined effect of cash acquired in acquisition of AHFL and purchase of marketable securities. The net cash used in investing activities was $15,946 for the nine months ended March 31, 2012.

For the nine months ended March 31, 2013, net cash used in financing activities was $256,327 and net cash provided by financing activities was $192,798 in the nine months ended March 31, 2012. During the nine months ended March 31, 2013, the $256,327 net cash used in financing activities was used to repay related parties to reduce the balance of borrowings.

On a going forward basis, the Company's primary requirements for cash over the next 12 months consist of:

· providing insurance agency services to its existing clients in its existing

   branches;    · developing new clients;     31       

· promoting sales activities;

· opening more branches in China; and

· expanding business scale in China, through mergers & acquisitions.

    Due to related parties   

The related parties listed below loaned money to the Company for working capital. Due to related parties consisted of the following as of March 31, 2013 and June 30, 2012 (audited):

March 31, 2013June 30, 2012

Due to Mr. Mao (Principal Shareholder of the Company) $ 270,949 $ 1,871 Due to Ms. Zhu (Shareholder of Henan Anhou)

                           147,430             441,272 Due to Mr. Zhu (Legal Representative of Jiangsu Law)                    2,208               2,189 Total                                                        $        420,587$       445,332

During the nine months and three months ended March 31, 2013 and 2012, Mr. Mao paid $270,949 and $37,496 in expenses on behalf of the Company, for the professional services fees related to the acquisition of AHFL. During the nine months and three months ended March 31, 2013 and 2012, Henan Anhou repaid $293,842 and $619,256 to Ms. Zhu. The amounts are interest-free, unsecured and repayable on demand.

Off Balance Sheet Arrangements

As of March 31, 2013, the Company had no off balance sheet arrangements.