Santaro Interactive Entertainment Co - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Santaro Interactive Entertainment Co	Financial_Report.xls
EX-31.2 - CERTIFICATION OF CFO - Santaro Interactive Entertainment Co	ex31-2.htm
EX-32.1 - CERTIFICATION OF CEO - Santaro Interactive Entertainment Co	ex32-1.htm
EX-31.1 - CERTIFICATION OF CEO - Santaro Interactive Entertainment Co	ex31-1.htm
EX-32.2 - CERTIFICATION OF CFO - Santaro Interactive Entertainment Co	ex32-2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

	For the quarter ended June 30, 2011

	OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission file number 333-165751

SANTARO INTERACTIVE ENTERTAINMENT COMPANY

(Exact name of registrant as specified in its charter)

Nevada

(State or other jurisdiction of incorporation or organization)

901C, 9th Floor, Building 4, Courtyard 1

Shangdi East Road, Haidian District, Beijing 100025

(Address of principal executive offices, including zip code.)

15911041464

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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. YES x NO o

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES x NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o	Accelerated filer o

Non-accelerated filer o	Smaller reporting company x

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

Yes o No x

As of August 10, 2011, there are 68,500,000 shares of common stock outstanding.

All references in this Report on Form 10-Q to the terms “we,” “our,” “us,” the “Company,” “Santaro,” and the “Registrant” refer to Santaro Interactive Entertainment Company unless the context indicates another meaning.

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The unaudited interim financial statements included herein have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). The financial statements and notes are presented as permitted on Form 10-Q and do not contain information included in the Company’s annual statements and notes. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to make the information presented not misleading. It is suggested that these financial statements be read in conjunction with the December 31, 2010 audited financial statements and the accompanying notes thereto. While management believes the procedures followed in preparing these financial statements are reasonable, the accuracy of the amounts are in some respects dependent upon the facts that will exist, and procedures that will be accomplished by the Company later in the year. These unaudited financial statements reflect all adjustments, including normal recurring adjustments, which, in the opinion of management, are necessary to present fairly the operations and cash flows for the periods presented.

Santaro Interactive Entertainment Company

(A Development Stage Company)

Consolidated Balance Sheets

	June 30, 2011			December 31, 2010
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	2,080,339		$	320,087
Prepaid expense		11,805			47,703
Other receivables		32,345			152,659

Total current assets		2,124,489			520,449

Property and equipment, net		187,944			201,379
Intangibles		—			6,004

Total Assets	$	2,312,433		$	727,832

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Other payables and accrued expenses	$	334,058		$	160,087
Due to related parties		6,455,111			5,165,582

Total current liabilities		6,789,169			5,325,669

STOCKHOLDERS’ DEFICIT

Common stock ($0.001 par value; authorized –75,000,000 shares; issued and outstanding –68,500,000 shares and 67,500,000 shares at June 30, 2011 and December 31, 2010, respectively)		68,500			67,500
Additional Paid-In Capital		3,202,726			1,203,726
Deficit accumulated during the development stage		(7,516,439	)		(5,755,855	)
Accumulated other comprehensive loss		(231,523	)		(113,208	)

Total Stockholders’ Deficit		(4,476,736	)		(4,597,837	)

Total liabilities and Stockholders’ deficit	$	2,312,433		$	727,832

See notes to the consolidated financial statements.

Santaro Interactive Entertainment Company

(A Development Stage Company)

Consolidated Statements of Operations and Comprehensive Loss

													August 9, 2006 (inception of Beijing Sntaro) through June 30, 2011

	Three months ended June 30						Six months ended June 30
	2011			2010			2011			2010
	(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)			(Unaudited)
Operating expenses
Research and development expenses	$	601,086		$	426,315		$	1,117,318		$	811,630		$	5,050,538
Sales and marketing expenses		28,291			11,615			46,363			13,616			211,859
General and administrative expenses		269,225			69,590			596,903			184,347			2,387,286

Loss from operations		(898,602	)		(507,520	)		(1,760,584	)		(1,009,593	)		(7,649,683	)

Non-operating expenses		—			36,578			—			36,578			439,575

Loss before income tax benefit and noncontrolling interest		(898,602	)		(544,098	)		(1,760,584	)		(1,046,171	)		(8,089,258	)

Deferred tax benefit		—			(126,880	)		—			(252,398	)		—

Net loss before noncontrolling interest		(898,602	)		(417,218	)		(1,760,584	)		(793,773	)		(8,089,258	)

Less: Net loss attributable to the Noncontrolling interests		—			(92,019	)		—			(170,507	)		(572,819	)

Net loss attributable to the Company		(898,602	)		(325,199	)		(1,760,584	)		(623,266	)		(7,516,439	)

Other comprehensive income
Net loss		(898,602	)		(417,218	)		(1,760,584	)		(793,773	)		(8,089,258	)
Foreign currency translation adjustment		(88,728	)		(9,612	)		(118,315	)		(10,179	)		(231,523	)
Comprehensive loss		(987,330	)		(426,830	)		(1,878,899	)		(803,952	)		(8,320,781	)
Less: Comprehensive loss attributable to the non-controlling interest		—			(92,740	)		—			(171,228	)		(572,818	)

Comprehensive loss attributable to the Company	$	(987,330	)	$	(334,090	)	$	(1,878,899	)	$	(632,724	)	$	(7,747,963	)

Loss per share:

Basic and diluted		(0.013	)		(0.006	)		(0.026	)		(0.011	)

Weighted average number of common shares outstanding – basic and diluted		67,532,967			55,670,000			67,516,575			55,670,000

See notes to the consolidated financial statements

Santaro Interactive Entertainment Company

(A Development Stage Company)

Consolidated Statements of Changes in Stockholders’ Deficit

	Common Stock				Additional Paid-In Capital			Deficit accumulated during development stage			Accumulated other comprehensive income (loss)			Total deficit of the Company’s stockholders			Noncontrolling interest			Total deficit
	Share		$0.001 Par Value		Additional Paid-In Capital			Deficit accumulated during development stage			Accumulated other comprehensive income (loss)			Total deficit of the Company’s stockholders			Noncontrolling interest			Total deficit
Balance at August 9, 2006		55,670,000	$	55,670	$	(55,670	)	$	—		$	—		$	—		$	—		$	—
Net (loss)						—			(21,583	)		—			(21,583	)		—			(21,583	)
Foreign currency exchange translation adjustment, net of nil income taxes						—			—			884			884			—			884
Inject paid-in capital						139,580			—			—			139,580			—			139,580
Balance at December 31, 2006		55,670,000		55,670		83,910			(21,583	)		884			118,881			—			118,881
Net (loss)						—			(483,001	)		—			(483,001	)		—			(483,001	)
Foreign currency exchange translation adjustment, net of nil income taxes						—			—			10,100			10,100			—			10,100
Inject paid-in capital						492,141			—			—			492,141			—			492,141
Balance at December 31, 2007		55,670,000		55,670		576,051			(504,584	)		10,984			138,121			—			138,121
Net (loss)						—			(805,983	)		—			(805,983	)		—			(805,983	)
Foreign currency exchange translation adjustment, net of nil income taxes						—			—			6,693			6,693			—			6,693
Inject paid-in capital						739,775			—			—			739,775			—			739,775
Balance at December 31, 2008		55,670,000		55,670		1,315,826			(1,310,567	)		17,677			78,606			—			78,606
Net (loss)						—			(1,937,574	)		—			(1,937,574	)		(333,044	)		(2,270,618	)
Foreign currency exchange translation adjustment, net of nil income taxes						—			—			(22	)		(22	)		—			(22	)
Inject paid-in capital						—			—			—			—			437,771			437,771
Balance at December 31, 2009		55,670,000		55,670		1,315,826			(3,248,141	)		17,655			(1,858,990	)		104,727			(1,754,263	)
Net (loss)						—			(2,507,714	)		—			(2,507,714	)		(239,775	)		(2,747,489	)
Foreign currency exchange translation adjustment, net of nil income taxes						—			—			(130,863	)		(130,863	)		—			(130,863	)
Effect of reverse acquisition		11,830,000		11,830		(112,100	)		—			—			(100,270	)		135,048			34,778
Balance as of Dec 31, 2010		67,500,000		67,500		1,203,726			(5,755,855	)		(113,208	)		(4,597,837	)		—			(4,597,837	)
Net (loss)						—			(1,760,584	)		—			(1,760,584	)		—			(1,760,584	)
Foreign currency exchange translation adjustment, net of nil income taxes						—			—			(118,315	)		(118,315	)		—			(118,315	)
Common stock issued for cash June 27, 2011		1,000,000		1,000		1,999,000			—			—			2,000,000			—			2,000,000
Balance as of June 30, 2011		68,500,000		68,500		3,202,726			(7,516,439	)		(231,523	)		(4,476,736	)		—			(4,476,736	)

Santaro Interactive Entertainment Company

(A Development Stage Company)

Consolidated Statements of Cash Flows

									August, 2006 (inception of Beijing Sntaro) through June 30, 2011
	Six months ended June 30
	2011				2010
	(Unaudited)				(Unaudited)				(Unaudited)

Cash flows from operating activities:
Net loss		$	(1,760,584	)		$	(793,773	)		$	(8,089,258	)
Adjustments to reconcile net loss before noncontrolling interests to net cash used by operating activities:
Stock returned to Company			—				36,578				—
Depreciation			41,144				42,844				258,760
Amortization of intangible assets			6,004				—				6,310
Deferred tax asset			—				(252,398	)			—
Changes in operating assets and liabilities:
Prepaid expense			36,980				(1,004	)			(8,396	)
Other receivable			139,237				2,174				(1,306	)
Other payables and accrued expenses			168,580				5,020				314,508
Due to related parties			—			—					28,243
Net cash used in operating activities			(1,368,639	)			(960,559	)			(7,491,139	)

Cash flows from investing activities:
Purchase of intangible assets			—				—				(6,310	)
Purchase of property and equipment			(23,294	)			(8,070	)			(429,453	)
Net cash used in investing activities			(23,294	)			(8,070	)			(435,763	)

Cash flows from financing activities:
Proceeds from investors			2,000,000				—				3,406,274
Capital contributed by noncontrolling interest owner			—				—				428,290
Loan from a related party			1,146,410				1,002,233				6,078,102
Net cash provided by financing activities			3,146,410				1,002,233				9,912,666
Effect of exchange rate changes on cash and cash equivalents			5,775				183				94,575
Net increase in cash and cash equivalents			1,760,252				33,787				2,080,339
Cash and cash equivalents at the beginning of period			320,087				12,722				—
Cash and cash equivalents at the end of period		$	2,080,339			$	46,509			$	2,080,339
Supplemental disclosure for cash flow information
Interest paid		$	—			$	—			$	—
Income taxes paid		$	—			$	—			$	—

See notes to the consolidated financial statements

Santaro Interactive Entertainment Company

(A Development Stage Company)

Notes to Consolidated Financial Statements (unaudited)

1. ORGANIZATION AND DISCRIPTION OF BUSINESS

Santaro Interactive Entertainment Company (“the Company”) was incorporated on December 30, 2009 in the State of Nevada. The Company’s accounting and reporting policies conform to accounting principles generally accepted in the United States of America (U.S GAAP), and the Company’s fiscal year end is December 31.

On October 12, 2010, the Company entered into a Share Exchange Agreement (the “Exchange Agreement”), with Santaro Holdings, Ltd., a limited liability company organized under the laws of British Virgin Islands, (“SHL”), and the shareholders of SHL (collectively the “SHL Shareholders”). Pursuant to the terms of the Exchange Agreement, the SHL Shareholders transferred to the Company 100% of the outstanding shares of SHL in exchange for the newly issued 55,670,000 restricted shares of the common stock of the Company. SHL is a holding company which has a 100% ownership interest in Santaro Investments, Ltd., a Hong Kong company which in turn has a 100% ownership interest in Ningbo Sntaro Network Technology Co., Ltd, a Wholly Foreign Owned Enterprise (“WFOE”) established in the People’s Republic of China. Through control of the WFOE, the Company controls Beijing Sntaro Technology Co., Ltd, a company organized under the laws of the People’s Republic of China and engaged in the development and operation of online games. As a result of the transactions described above, the Company became the record and beneficial owner of 100% of the share capital of SHL and therefore owns 100% of the share capital of its subsidiaries and Variable Interest Entities indirectly.

Santaro Holdings, Ltd. (“SHL”) is a limited liability company organized under the laws of British Virgin Islands incorporated on December 2, 2009.100 shares with par value $1.00 were issued and outstanding, although no capital was paid in as of December 30, 2010.

As a holding company, SHL has one wholly owned subsidiary, Santaro Investments, Ltd. (“Santaro HK”), a Hong Kong corporation set up by SHL on January 27, 2010. On July 13, 2010, Santaro HK set up a wholly owned subsidiary, Ningbo Sntaro Network Technology Co., Ltd. (“Ningbo Sntaro”), a Wholly Foreign Owned Enterprise (WFOE) organized under the laws of the People’s Republic of China (“PRC”). Ningbo Sntaro exercises control through a series of agreements over Beijing Sntaro Technology Co., Ltd. (“Beijing Sntaro”), an operating company organized under the laws of the PRC, and principally engaged in the development and operation of online games. Beijing Sntaro has 100% ownership interest in Beijing Sntaro Freeland Network Co., Ltd. (the “FL Network”), a company organized under the laws of the PRC. The beneficial controlling stockholders of the Company own all the outstanding shares of Beijing Santaro. In addition, SHL is the indirect parent of Ningbo Sntaro and controls this entity through its ownership of Santaro HK.

PRC regulations prohibit direct foreign ownership of business entities providing internet content, or ICP, services in the PRC such as the business of providing online games. In September 2010, a series of contractual arrangements were entered between Ningbo Sntaro and Beijing Sntaro and its individual owners. Pursuit to the agreements, Ningbo Sntaro provides exclusive technical consulting and management services to Beijing Sntaro. A summary of the major terms of the agreements is as follows:

(1)	Ningbo Sntaro has the sole discretion to determine the amount of the fees it will receive and it intends to transfer substantially all of the economic benefits of Beijing Sntaro to Ningbo Sntaro;

(2)	The equity owners irrevocably granted the Ningbo Sntaro the right to make all operating and business decisions for Beijing Sntaro on behalf of the equity owners;

(3)	All equity owned by the three equity owners were pledged to Ningbo Sntaro as a collateral against the service fee payable to Ningbo Sntaro;

(4)	The equity owners may not dispose of or enter into any other agreements involving the common shares without prior agreement by Ningbo Sntaro;

(5)	Ningbo Sntaro bears Beijing Sntaro’s operating risk.

Because the above arrangement, which assigned all of Beijing Sntaro’s equity owners’ rights and obligations to Ningbo Sntaro resulting in the equity owners lacking the ability to make decisions that have a significant effect on Beijing Sntaro’s operations and Ningbo Sntaro’s ability to extract the profits from the operation of Beijing Sntaro, and assume the Beijing Sntaro’s residual benefits. Because the Ningbo Sntaro and its indirect parent are the sole interest holders of Beijing Sntaro, the Company consolidates Beijing Sntaro from its inception consistent with the provisions of FASB Accounting Standards Codification (“ASC”) 810-10.

Beijing Sntaro was organized under the laws of People’s Republic of China (the “PRC”) on August 9, 2006 with paid-in capital of $139,580, which was 80% owned by Mr. Zhilian Chen, Beijing Sntaro’s chairman; the other 20% of the equity was held by Mr. Wenjie Lu. Beijing Sntaro is engaged in the development and operation of online games, investment in online games project. At present, Beijing Sntaro has been in development stage and does not conduct any substantive sale of its online games.

Beijing Sntaro completed a series of changes in ownership which were necessary to comply with its development. In April, 2007, pursuant to a Board of Directors’ resolution, Beijing Sntaro changed its equity ownership as follows; Mr. Zhilian Chen, Mr. Xiaobo Li and Mr. Wenjie Lu became the owners of Beijing Sntaro, with the percentage of ownership of 60%, 20%, and 20% respectively, and paid-in capital of $379,033, $126,344, and $126,344, respectively.

In May 2008, Beijing Sntaro entered into its second change of equity ownership. According to the equity agreement in May 2008, Mr. Zhilian Chen, Mr. Xiaobo Li, Mr. Xianhua Shen and Miss Yingnv Sun became the owners of Beijing Sntaro, with the percentage of ownership of 60%, 20%, 10%, and 10%, respectively, and paid in capital of $822,897, $274,299, $137, 150, and $137,150, respectively.

On March 9, 2009, Beijing Sntaro established FL Network, a subsidiary that is engaged in the business of online games development and operation, mainly focuses on technology research, FL Network is 70% owned by Beijing Sntaro, and 30% owned by Beijing East Free Land Media & Film Co., Ltd (the “FL Media”).

In April 2010, Beijing Sntaro entered into its third change of equity ownership. According to an amended equity agreement in December 2009, Mr. Xiaobo Li transferred his ownership in Beijing Sntaro to Mr. Zhilian Chen, another owner of Beijing Sntaro, and increased Mr. Chen’s percentage of ownership to 80%, with paid-in of capital $1,097,196. Mr. Xianhua Shen’s and Ms. Yingnv Sun’s equity remained unchanged, with their percentage of ownership at 10%, and 10%, respectively, and paid-in capital of $137, 150, and $137,150, respectively.

On June 20, 2010, the FL Network, the subsidiary of Beijing Sntaro, also completed a change in its ownership. Ms. Yu Bai was transferred 2.5% ownership by Beijing Sntaro and 2.5% shares by FL Media for free. And Ms. Yu Bai became a new owner of FL Network, with the percentage of ownership of 5%, Beijing Sntaro and FL Media changed their ownership percentage from 70% and 30% to 67.5% and 27.5%, respectively.

On October 12, 2010, within the Exchange Agreement described above, the Company used 8,400,000 shares out of the newly issued 55,670,000 shares to exchange the 32.5% noncontrolling interests in FL Network from FL Media and Ms. Yu Bai and gave the interests to Beijing Sntaro, who had 67.5% ownership interest in FL Network. As of December 31, 2010, Beijing Sntaro has 100% ownership interest in the FL Network.

The Company is principally engaged in the development and operation of online games, and has a core product development team that is responsible for developing new games. San Guo Online and UU Rowing are the two Massive Multiplayer Online Role Playing Game (“MMORPG”) games that will be launched when finished.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation and basis of presentation

The consolidated financial statements include the financial statements of the Company and its subsidiaries. All significant inter-company transactions and balances have been eliminated in consolidation.

The consolidated interim financial information as of June 30, 2011 and for the three and six-month periods ended June 30, 2011 and 2010 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have not been included, The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, previously filed with the SEC.

In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of June 30, 2011, its consolidated results of operations and cash flows for the three and six-month periods ended June 30, 2011 and 2010, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.

Use of Estimates

The preparation of consolidated financial statements in conformity with the U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the fair value determination of financial and equity instruments, the realization of deferred tax assets and; the recoverability of intangible assets and property and equipment; and accruals for income tax uncertainties and other contingencies. The current economic environment has increased the degree of uncertainty inherent in those estimates and assumptions.

Foreign Currency Translation and transaction

The Company’s functional currency is United States Dollar (“US$”) while its main subsidiaries maintain their books and accounting records in People’s Republic of China (the “PRC”) currency “Renminbi” (“RMB”). The Company’s financial statements are translated into the reporting currency US$. Assets and liabilities of the Company are translated at the prevailing exchange rate at each reporting period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from translation of these financial statements are reflected as accumulated other comprehensive loss in the stockholders’ deficit.

Translation adjustments resulting from this process are included in accumulated other comprehensive loss in the consolidated statement of operations and comprehensive loss and amounted to $231,523 as of June 30, 2011, and $113,208 as of December 31, 2010. The balance sheet amounts with the exception of equity at June 30, 2011 were translated at 6.4640 RMB to $1.00 USD as compared to 6.6118 RMB at December 31, 2010. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the six months ended June 30, 2011 and 2010 were 6.5582 RMB and 6.8347 RMB, respectively.

Statement of Cash Flows

In accordance with FASB guidance, “Statement of Cash Flows,” cash flows from the Company’s operations is calculated based upon the functional currency. As a result, amounts related to assets and liabilities reported on the statement of cash flows may not necessarily agree with changes in the corresponding balances on the balance sheet.

Fair Value of Measurements

Effective January 1, 2008, the Company adopted ASC 820-Fair Value Measurements and Disclosure or ASC 820 for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements, establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.

ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:

Level 1:	Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.

Level 2:	Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.

Level 3:	Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

Cash and cash equivalents and accounts due from and to related parties, are carried at cost on the balance sheets and the carrying amount approximates their fair value because of the short-term nature of these financial instruments.

Cash and Cash Equivalents

Cash and cash equivalents include cash on hand, deposits in banks with maturities of three months or less, and all highly liquid investments which are unrestricted as to withdrawal or use, and which have original maturities of three months or less at the time of purchase.

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:


Computer equipment		5 years
Leasehold improvements		5 years
Furniture and fixtures		5 years

The Company recognizes website and internally used software development costs in accordance with Statement of Position (“SOP”) No. 98-1, “Accounting for the Costs of Computer Software Developed or Obtained for Internal Use” (ASC Topic 350). As such, the Company expenses all costs that are incurred in connection with the planning and implementation phases of development and costs that are associated with repair or maintenance of the existing websites and software. Costs incurred in the development phase are capitalized and amortized over the estimated product life. Since the inception of Beijing Sntaro, the amount of costs qualifying for capitalization has been insignificant and as a result all website and internally used software development costs have been expensed as incurred.

Advertising expenses

Advertising costs are expensed when incurred and included in sales and marketing expenses and nil were recognized for the three and six months ended June 30, 2011 and 2010, respectively.

Research and development expenses

Costs incurred for the development of online game products prior to the establishment of technological feasibility and costs incurred for maintenance after the online game products are available for marketing are expensed when incurred and are included in research and product development expenses.

Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date.

A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.

ASC 740-10-25 clarifies the accounting for uncertain tax positions and requires that an entity recognizes in the consolidated financial statements the impact of a tax position, if that position is more likely than not of being sustained upon examination, based on the technical merits of the position. Recognized income tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or measurement are reflected in the period in which the change in judgment occurs. The Company has elected to classify interest and penalties related to unrecognized tax benefits, if and when required, as a component of income tax expense in the consolidated statements of income.

Recent issued accounting pronouncements

In May 2011, the FASB issued ASU No. 2011-04, “’ Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs”, which is not expected to have a material impact on the consolidated financial statements upon adoption.

In June 2011, the FASB issued ASU No. 2011-05, “Presentation of Comprehensive Income”. Under the amendments in this ASU, an entity has two options for presenting its total comprehensive income: to present total comprehensive income and its components along with the components of net income in a single continuous statement, or in two separate but consecutive statements. The amendments in this ASU are required to be applied retrospectively and are effective for fiscal years, and interim periods within those years, beginning after December 15, 2011, with early adoption permitted. The Company intends to conform to the new presentation required in this ASU beginning with its Form 10-Q for the three months ended March 31, 2012.

3. EARNINGS PER SHARE

The FASB’s accounting standard for earnings per share requires presentation of basic and diluted earnings per share in conjunction with the disclosure of the methodology used in computing such earnings per share. Basic earnings per share excludes dilution and is computed by dividing income available to common stockholders by the weighted average common shares outstanding during the period. Diluted earnings per share takes into account the potential dilution that could occur if securities or other contracts to issue common stock were exercised and converted into common stock.

The following is a reconciliation of the basic and diluted earnings per share computations for the three months ended June 30, 2011 and 2010:

	2011		2010

Net loss for basic and diluted earnings per share	$	(898,602)	$	(325,199)

Weighted average shares used in basic and diluted computation		67,532,967		55,670,000
Earnings per share:
Basic and diluted	$	(0.013)	$	(0.006)

The following is a reconciliation of the basic and diluted earnings per share computations for the six months ended June 30, 2011 and 2010:

	2011		2010

Net loss for basic and diluted earnings per share	$	(1,760,584)	$	(623,266)

Weighted average shares used in basic and diluted computation		67,516,575		55,670,000
Earnings per share:
Basic and diluted	$	(0.026)	$	(0.011)

For the three and six months ended June 30, 2011, 500,000 warrants with an average exercise price of $5.00 were not included in the diluted earnings per share calculation because of the anti-dilutive effect.

4. GOING CONCERN AND LIQUIDITY

The accompanying financial statements are presented on a going concern basis. The Company is in a development stage and has not generated any revenue during the period from its inception to June 30, 2011. The Company has an accumulated deficit of $7,516,439. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The Company had not generated any revenue and no other liquid assets. During the quarter ended June 30, 2011, the Company obtained a funding of $2,000,000 from newly issued 1,000,000 common shares. However, there can be no assurance that the Company will be able to obtain debt or equity financing on terms acceptable to it, or if at all. The management plans to fund continuing operations through new financing from related parties and equity financing arrangements. On April 29, 2011, the Company entered into an agreement with Mr. Zhilian Chen and CixiYide, whereby, as a contribution to the Capital of Beijing Sntaro, Mr. Zhilian Chen and CixiYide surrendered all right to collect or otherwise enforce repayment of a debt in principal amount of US $4,460,366, which was occurred during the period from its inception to October 18, 2010. The capital registration and certification will be completed in near future.

5. OTHER RECEIVABLES

Other receivables of $32,345 and $152,659 as of June 30, 2011 and December 31, 2010 consisted of cash advances given to certain employees for use during business operations and are recognized as General and Administration expenses when expensed. It also includes certain rental deposit.

6. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:


	June 30, 2011			December 31, 2010
	(Unaudited)
Computer equipment	$	330,572		$	306,849
Furniture and fixtures		62,859			54,678
Leasehold improvement		69,096			67,551
		462,527			429,078
Less: Accumulated depreciation		(274,583	)		(227,699	)

Property and equipment, net	$	187,944		$	201,379

Depreciation expenses for the three months ended June 30, 2011 and 2010 were $20,904 and $21,320 respectively. Depreciation expenses for the six months ended June 30, 2011 and 2010 were $41,144 and $42,844 respectively.

7. OTHER PAYABLES AND ACCRUED EXPENSES

Other Payable of $334,058 as of June 30, 2011 consisted of the interest-free loan of $232,054 from Ningbo Jufeng Textile Co., Ltd, a third party of the Company. The loan is unsecured and interest free, payable on demand, and was outstanding.

8. INCOME TAX EXPENSES

The Company and its subsidiaries file income tax returns separately.

The United States of America

Santaro Interactive Entertainment Company is incorporated in the State of Nevada in the U.S., and is subject to a gradual U.S. federal corporate income tax of 15% to 35%. The State of Nevada does not impose any corporate state income tax.

British Virgin Islands

Santaro holdings Ltd (the “SHL”) was incorporated in the British Virgin Islands on December 2, 2009 (“SHL”). Under the current laws of the British Virgin Islands, SHL is not subject to tax on income or capital gains. In addition, upon payments of dividends by SHL, no British Virgin Islands withholding tax is imposed.

Hong Kong

Santaro Investments, Ltd., was incorporated in Hong Kong on January 27, 2010. Santaro HK did not earn any income that was derived in Hong Kong for the year ended December 31, 2010 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

PRC

Ningbo Sntaro, Beijing Sntaro and FL Network were all organized under the laws of the People’s Republic of China (“PRC”) which are subject to Enterprise Income Tax (“EIT”) on the taxable income as reported in their respective statutory financial statements adjusted in accordance with the Enterprise Income Tax Law. Pursuant to the PRC Income Tax Laws, the Company and subsidiary are subject to EIT at a statutory rate of 25%.

Deferred Tax Assets

In assessing the realization of deferred tax assets, the Company considers projected future taxable income and tax planning strategies in making its assessment, as of June 30, 2011, and December 31, 2010, for PRC income tax purposes. As of June 30, 2011, Beijing Sntaro had a gross tax loss carry-forward of $4,742,154 which would expire in future years. Management determines it is more likely than not that all deferred tax asset could not be recognized, so full allowance was provided as of June 30, 2011.

As of June 30, 2011, for PRC income tax purposes, FL Network had $2,917,586 gross loss carry-forwards which would expire in future years. Management determines it is more likely than not that all deferred tax asset could not be recognized, so full allowance was provided as of June 30, 2011.

9. EMPLOYEE BENEFITS

The full-time employees of the Company and its subsidiary that are incorporated in the PRC are entitled to staff welfare benefits, including medical care, unemployment insurance and pension benefits. The Company is required to accrue for these benefits based on percentages of 10%, 1% and 12% of the local employees’ average salaries in accordance with the relevant regulations, and to conduct contributions to the state-sponsored medical plans, unemployment insurance and pension benefits. For the three months ended June 30, 2011 and 2010, total amounts expensed for such employee benefits amounted to $49,561 and $31,266, respectively. For the six months ended June 30, 2011 and 2010, total amounts expensed for such employee benefits amounted to $94,109 and $60,763, respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees.

10. RELATED PARTY TRANSACTIONS AND BALANCES

The Company is in a development stage and has no revenue to date during the period from its inception to June 30, 2011. CixiYide Auto Company (the “CixiYide”), a company 97% owned by the Company’s director and 80% ultimate shareholder Mr. Zhilian Chen, provides continuous financial support for Beijing Sntaro and Ningbo Sntaro’s business and operation. By the end of 2010, CixiYide has provided a loan of $4,846,184. During the six months ended June 30 2011, CixiYide made an additional loan of $1,146,410 to the Company. The total amount due to CixiYide is $5,992,594 as of June 30, 2011.

The loans from CixiYide are of no fixed terms, interest free and due on demand. On April 29, 2011, the Company entered into an agreement (the “Agreement”) with Mr. Zhilian, Chen and CixiYide, whereby, as a contribution to the Capital of Beijing Sntaro, Mr. Zhilian Chen and CixiYide surrendered all right to collect or otherwise enforce repayment of a debt in the principal amount of US $4,460,366, which was occurred during the period from its inception to October 18, 2010.

Santaro HK signed a loan agreement with Mr. Zhilian Chen on August 2, 2010 for $310,000 for the payment of Ningbo Sntaro’s registered Paid-In-Capital in accordance with Chinese legal requirements. Santaro HK received this loan in September 2010.

In the year ended December 31, 2007, Mr. Zhilian Chen provided $18,047 loan to the Beijing Sntaro, and total amount of that remained outstanding as of June 30, 2011.

As of June 30, 2011, the total balance of loans from CixiYide and Mr. Zhilian Chen was $6,455,111 due to exchange fluctuation. The loans are unsecured and interest free, payable on demand, and were outstanding.

11. LEASE COMMITMENTS

The Company has entered into operating lease arrangements mainly relating to its office premises and computer equipment which will all end in 2011. Future minimum lease payments for non-cancelable operating leases as of June 30, 2011 are $48,615.

Total rental expenses are US$128,971 and US$116,507 for the six months ended June 30, 2011 and 2010, respectively; and US$69,739 and US$71,668 for the three months ended June 30, 2011 and 2010, respectively.

12. SALE OF COMMON STOCK AND WARRANTS

On June 27, 2011, the Company entered into Subscription Agreements with certain institutional investors (collectively, the “Buyers”) to sell an aggregate of one million shares of its common stock, and warrants to purchase a total of five hundred thousand shares of its common stock (the “Warrants”) to the Buyers for gross proceeds of $2,000,000, before deducting fees and expenses. The Warrants mature in three years and have a strike price of $5.00 per share. The warrants were evaluated for liability treatment and were determined to be equity warrants.

13. SUBSEQUENT EVENT

Management has considered all events occurring through the date the financial statements have been issued, and has determined that there are no such events that are material to the financial statements, or all such material events have been fully disclosed.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is an overview of the important factors that management focuses on in evaluating our business; financial condition and operating performance should be read in conjunction with the financial statements included in this Current Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth in the Company’s reports filed with the SEC on Form 10-K, 10-Q and 8-K as well as in this Current Report on Form 10-Q. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.

Results of Operations

Because the Company is in the development stage, our operations have been limited to developing our products. As a result, the Company realized no revenue during the period from inception (August 9, 2006) through June 30, 2011. The Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC such as changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.

The following table sets forth a summary, for the periods indicated, our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period.

Table One:	Six Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
Operating expenses
Research and development expenses	$	1,117,318		$	811,630
Sales and marketing expenses		46,363			13,616
General and administrative expenses		596,903			184,347

Loss from operations		(1,760,584	)		(1,009,593	)

Non-operating expenses		—			36,578

Loss before income tax expense and non-controlling interest		(1,760,584	)		(1,046,171	)

Deferred tax benefit		—			(252,398	)

Net loss	$	(1,760,584	)	$	(793,773	)

Table Two:	Three Months Ended June 30,
	2011			2010
	(Unaudited)			(Unaudited)
Operating expenses
Research and development expenses	$	601,086		$	426,315
Sales and marketing expenses		28,291			11,615
General and administrative expenses		269,225			69,590

Loss from operations		(898,602	)		(507,520	)

Non-operating expenses		-			36,578

Loss before income tax expense and non-controlling interest		(898,602	)		(544,098	)

Deferred tax benefit		-			(126,880	)

Net loss	$	(898,602	)	$	(417,218	)

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

Research and Development (R&D) expenses

R&D expenses primarily consist of R&D salary, depreciation, and office and communication fees which occurred for R&D activities. For the six months ended June 30, 2011, R&D expense was $1,117,318, representing an increase of $305,688 or 37.66%, compared with $811,630 for the corresponding period in 2010 which was due to the salary expenses incurred in the six months of 2011 increased US$316,244 compared with same period of 2010. Since the Online game 3Guo Online is in testing stage, the Company hired more technical staff for the R&D. Others variance includes expenses for business entertainment, business travelling, etc. presenting a slight decrease, accumulated about US$10,556.

Sales and marketing expenses

Selling expenses mainly represent advertising costs and fees. For the six months ended June 30, 2011, selling expense was $46,363, representing an increase of $32,747 or 240.50% compared with $13,616 for the corresponding period in 2010. It was mainly due to increase of water &electricity fee and investor relations fee with the amount of $11,883 and $18,806. As mentioned in the analysis on R&D expenses, more related expenses occurred since it is getting closer to release of the game of 3Guo Online. Others variance includes sundry promotion fee, etc.

General and administrative expenses

General and administrative expenses consist primarily of compensation for personnel, business travelling expense, rental and office expense related to ordinary administration and fees for professional services. For the six months ended June 30, 2011, total general and administrative expenses was $596,903, representing an increase of $412,556, or approximately 223.79% as compared to $184,347 for the corresponding period in 2010 which due to the salary expense increased US$238,920, professional service fee increased US$125,801 and rental fee increased US$12,763 compared with same periods of 2010, respectively. As for the increase of salary, as mentioned in R&D expenses and Selling expenses, the Company hired more high level staff for the coming release of the game and Ningbo Company’s Beijing branch’s operation. The Company became listed Company in October 2010, related professional fee increased significantly during the second quarter of 2011. Other variance includes expenses occurred for social insurance for supporting department, communication fee, and power etc.

Deferred tax benefit

For the six months ended June 30, 2011, the deferred tax benefit decreased by $252,398 to $0 compared with $252,398 for the corresponding period in 2010. The change in deferred tax benefit was due to the full allowance of the management’s recognition of relevant deferred tax assets at the end of June 30, 2011 since it is more likely than not that all of the deferred tax assets will not be realized.

Net loss before noncontrolling interest

For the six months ended June 30, 2011, the net loss before noncontrolling interest increased to $1,760,584 compared with $793,773 for the corresponding period in 2010. The increase in net loss before noncontrolling interest was primarily due to increases in R&D expense, sales and marketing expenses, general and administrative expense.

Three Months Ended June 30, 2011 Compared to Three Months Ended June 30, 2010

Research and Development (R&D) expenses

R&D expenses primarily consist of R&D salary, depreciation, and office and communication fees which occurred for R&D activities. For the three months ended June 30, 2011, R&D expense was $601,086, representing an increase of $174,771 or 41.00%, compared with $426,315 for the corresponding period in 2010 which was due to the salary expenses incurred in the second three months of 2011 increased US$163,060 and Office expenses increased US$17,297. Since the Online game 3Guo Online is in testing stage, the Company hired more technical staff for the R&D. Others variance includes expenses for business entertainment, business travelling, etc. presenting a slight decrease, accumulated about US$5,586.

Sales and marketing expenses

Selling expenses mainly represent advertising costs and fees. For the three months ended June 30, 2011, selling expense was $28,291, representing an increase of $16,676 or 143.57% compared with $11,615 for the corresponding period in 2010. It was mainly due to increase of consultant service fee with the amount $18,806. As mentioned in the analysis on R&D expenses, more related expenses occurred since it is getting closer to release of the game of 3Guo Online. Others variance includes decrease of promotion fee with the amount of US$2,130.

General and administrative expenses

General and administrative expenses consist primarily of compensation for personnel, business travelling expense, rental and office expense related to ordinary administration and fees for professional services. For the three months ended June 30, 2011, total general and administrative expenses was $269,225, representing an increase of $199,635, or approximately 286.87% as compared to $69,590 for the corresponding period in 2010 which due to the salary expense increased US$159,373, professional service fee increased US$29,015 compared with same periods of 2010 respectively. As for the increase of salary, as mentioned in R&D expenses and Selling expenses, the Company hired more high level staff for the coming release of the game. The Company became listed Company in October 2010, related professional fee increased significantly during the second quarter of 2011. Other variance includes expenses occurred for social insurance for supporting department, communication fee, and power etc.

Deferred tax benefit

For the three months ended June 30, 2011, the deferred tax benefit decreased by $126,880 to $0 compared with $126,880 for the corresponding period in 2010. The change in deferred tax benefit was due to the full allowance of

the management’s recognition of relevant deferred tax assets at the end of June 30, 2011 since it is more likely than not that all of the deferred tax assets will not be realized.

Net loss before noncontrolling interest

For the three months ended June 30, 2011, the net loss before noncontrolling interest increased to $898,602 compared with $417,218 for the corresponding period in 2010. The increase in net loss before noncontrolling interest was primarily due to increases in R&D expense, sales and marketing expenses, general and administrative expense.

Liquidity and Capital Resources

We anticipate that the existing cash and cash equivalents on hand, together with the net cash flows supported by owners and related parties will be sufficient to meet our working capital requirements for our on-going projects and to sustain the business operations for the next twelve months.

Since we initiated our business operations, we have been funded primarily by related parties. CixiYide Auto Company (the “CixiYide”) provided loan of $5,992,594 for the business’s initial operations. Mr. Zhilian Chen is the major owner of CixiYide.

Going concern and Liquidity

The accompanying financial statements are presented on a going concern basis. The Company is in a development stage and has not generated any revenue during the period from its inception to June 30, 2011. The Company has an accumulated deficit of $7,516,439. This condition raises substantial doubt about the Company’s ability to continue as a going concern. The Company had not generated any revenue and no other liquid assets. During the quarter ended June 30, 2011, the Company obtained a funding of $2,000,000 from newly issued 1,000,000 common shares. However, there can be no assurance that the Company will be able to obtain debt or equity financing on terms acceptable to it, or if at all. The management plans to fund continuing operations through new financing from related parties and equity financing arrangements. On April 29, 2011, the Company entered into an agreement with Mr. Zhilian Chen and CixiYide, whereby, as a contribution to the Capital of Beijing Sntaro, Mr. Zhilian Chen and CixiYide surrendered all right to collect or otherwise enforce repayment of a debt in principal amount of US $4,460,366, which was occurred during the period from its inception to October 18, 2010. The Company will complete the transaction in near future.

Cash Flows

Six Months Ended June 30, 2011 Compared to Six Months Ended June 30, 2010

	Six Months Ended June 30,
	2011				2010
	(Unaudited)				(Unaudited)
Net cash used in operating activities		$	(1,368,639	)		$	(960,559	)
Net cash used in investing activities			(23,294	)			(8,070	)
Net cash provided by financing actives			3,146,410				1,002,233
Effect of foreign currency exchange rate changes on cash and cash equivalents			5,775				183
Net increase in cash and cash equivalents		$	1,760,252			$	33,787

Net cash used in operating activates: The Company had no revenue from its inception in 2006 to June 30, 2011. Our net cash used in operating activities increased $408,080 in the six months ended June 30, 2011 compared to that in the six months ended June 30, 2010. Most operating cash flow is the result of cash-paid expenditure during operation. The increase of net cash used in operating activities was due to increasing salary expense and rent

expense. Since the Company will complete its R&D of 3Guo Online, the Company hired more high level staff for the preparation of R&D and operating.

Net cash used in investing activities: Our net cash used in investing activities increased $15,224 in the six months ended June 30, 2011 compared to that in the six months ended June 30, 2010. The increase in net cash used in investing activities was the result of an increase in the purchasing of new equipment and facilities during the six months ended June 30, 2011.

Net cash provided by financing activities: Our cash provided by financing activities significantly increased from $1,002,233 for the six months ended June 30, 2010 to $3,146,410 for the six months ended June 30, 2011, representing an increase of 213.94%. This is a result of that the current financed capital could not support current operation and product development, CixiYide Auto Company, 97% controlled by the Company’s controlling shareholder, continuously provides financial support. The Company also received proceeds of US$2 million upon the issuance of 1 million common stocks in June 2011.

Working capital

Working capital deficit is $(4,664,680) as of June 30, 2011 compared with $(4,805,220) as of December 31, 2010. The significant change in working capital is due to the development stage of the Company’s games. Because the Company’s games are not yet producing any revenue, the Company obtained loans to support daily operations. The Company obtained a loan in the amount of $4,846,184 at December 31, 2010 from CixiYide Company. As of June 30, 2011, the Company accumulatively obtained loans in the amount of $5,992,594 from CixiYide Company. The Company also received proceeds of US$2 million upon the issuance of 1 million common stocks in June 2011.

Off-Balance Sheet Arrangements

The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

In July 2006, the Ministry of Industry and Information Technology of the PRC, or MIIT, issued the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business, or the MIIT Circular. The MIIT Circular reiterated the regulations on foreign investment in telecommunications businesses, which require foreign investors to set up foreign-invested enterprises and obtain a business operating license for Internet content provision to conduct any value-added telecommunications business in China. Under the MIIT Circular, a domestic company that holds an Internet content provision license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance, including providing resources, sites or facilities, to foreign investors that conduct value-added telecommunications business illegally in China. Furthermore, the relevant trademarks and domain names that are used in the value-added telecommunications business must be owned by the local Internet content provision license holder. Due to a lack of interpretative materials from the regulator, it is unclear what impact the MIIT Circular will have on us or the other Chinese Internet companies that have adopted the same or similar corporate and contractual structures as ours.

On September 28, 2009, the General Administration of Press and Publications, or the GAPP, the National Copyright Administration (hereinafter referred to as “NCA”), and National Office of Combating Pornography and Illegal Publications (hereinafter referred to as “NOCPIP”) jointly published the “Stipulations on ‘Three Provisions’ ” of the State Council and the Relevant Interpretations of the State Commission Office for Public Sector Reform and the Further Strengthening of the Administration of Pre-examination and Approval of Online games and the Examination and Approval of Imported Online games (Xin Chu Lian [2009] No. 13), or Circular 13. Circular 13 restates the general principle espoused in recently promulgated regulations that foreign investment is not permitted in online game operating businesses in China. According to the Article IV of Circular 13, foreign investors are prohibited from participating in online game operating businesses via wholly owned, equity joint venture or cooperative joint venture investments in China, and from controlling and participating in such businesses directly or indirectly through contractual or technical support arrangements. In the event of a violation of these provisions, GAPP shall, in conjunction with the relevant government authorities of the PRC, investigate and handle the same in accordance with the law. In serious cases, the relevant licenses and registrations shall be revoked. However, due to the lack of a detailed interpretation of Circular 13, it is not yet clear how it will be implemented. Moreover, Circular 13 was issued solely by GAPP, NCA and NOCPIP, instead of being jointly issued by the publication administration authorities and other government authorities which are in charge of the related business operations, like the Ministry of Commerce, or the MOFCOM, and the MIIT, and the scope, implementation and enforcement of Circular 13 from the views of the above mentioned other authorities remain uncertain.

In the opinion of Han Kun Law Offices, our PRC legal counsel, subject to the interpretation and implementation of the MIIT Circular and Circular 13, the ownership structure of Ningbo Santaro and Beijing Santaro and our contractual arrangements with Beijing Santaro and its shareholders comply with all existing PRC laws, rules and regulations. However, in the opinion of our PRC legal counsel, there are substantial uncertainties regarding the interpretation and application of current or future PRC laws and regulations and there may be changes and other developments in the PRC laws and regulations or their interpretations. Accordingly, we cannot assure you that Chinese government authorities will ultimately take a view that is consistent with the opinion of our PRC legal counsel.

If the past or current ownership structures, contractual arrangements and businesses of our company Beijing Santaro is found to be in violation of any existing or future PRC laws or regulations, including the MIIT Circular and Circular 13, the relevant supervisory authorities would have broad discretion in dealing with such violations, including but not limited to: revoking our business and operating licenses; levying fines; confiscating our income or the income of Beijing Santaro; shutting down our servers or blocking our website; imposing conditions or requirements with which we may not be able to comply; requiring us to restructure the relevant ownership structure, operations or contractual arrangements; restricting or prohibiting our use of the proceeds from our public offering to finance our business and operations in China; and taking other regulatory or enforcement actions that could be harmful to our business.

Any of these events could materially and adversely affect our business, financial condition and results of operations.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as of the end of the period covered by this report. Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, particularly during the period when this report was being prepared.

There was no significant changes in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter ended June 30, 2011 that has materially affected, or is reasonably likely to materially affect our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

Currently we are not involved in any pending litigation or legal proceeding.

ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.

None.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS

(Removed and Reserved).

ITEM 5. OTHER INFORMATION

None.

ITEM 6. EXHIBITS

The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:

Exhibit No.	Description

3.1	Articles of Incorporation (1)

3.2	Bylaws (1)

31.1	Section 302 Certification of Chief Executive Officer*

31.2	Section 302 Certification of Chief Financial Officer *

32.1	Section 906 Certification of Chief Executive Officer *

32.2	Section 906 Certification of Chief Financial Officer *

101.INS	XBRL Instance Document

101.SCH	XBRL Taxonomy Extension Schema Document

101.CAL	XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF	XBRL Taxonomy Extension Definition Linkbase Document

101.LAB	XBRL Taxonomy Extension Label Linkbase Document

101.PRE	XBRL Taxonomy Extension Presentation Linkbase Document

*filed herewith

(1) Incorporated by reference to the Form S-1 registration statement filed on March 29, 2010.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

August 16, 2011

By: SANTARO INTERACTIVE ENTERTAINMENT COMPANY

By: /s/ Zhilian Chen
Zhilian Chen, President

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