Santaro Interactive Entertainment Co - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Santaro Interactive Entertainment Co	Financial_Report.xls
EX-32.1 - EXHIBIT 32.1 - Santaro Interactive Entertainment Co	v343586_ex32-1.htm
EX-31.2 - EXHIBIT 31.2 - Santaro Interactive Entertainment Co	v343586_ex31-2.htm
EX-31.1 - EXHIBIT 31.1 - Santaro Interactive Entertainment Co	v343586_ex31-1.htm

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended March 31, 2013.

¨ Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the transition period from ___________to ___________.

Commission File Number 333-165751

SANTARO INTERACTIVE ENTERTAINMENT COMPANY

(Exact name of registrant as specified in its charter)

Nevada		27-1571493

(State or Other Jurisdiction of		(I.R.S. Employer
Incorporation or Organization)		Identification No.)

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

Shangdi East Road, Haidian District

Beijing, People’s Republic of China, 100025

(Address of Principal Executive Offices including zip code)

(8610) 82167111

(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 Exchange Act 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 þ No ¨

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 þ No ¨

Indicate by check mark if the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company

Large Accelerated Filer ¨

Accelerated Filer ¨

Non-Accelerated Filer ¨

(Do not check if a smaller reporting company)

Smaller reporting company þ

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act). Yes ¨ No þ

As of May 6, 2013, 69,875,000 shares of the issuer’s common stock, par value $0.001, were outstanding.

Table of Contents

		Page

PART I FINANCIAL INFORMATION

ITEM 1	FINANCIAL STATEMENTS	2

ITEM 2	MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS	20

ITEM 3	QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK	27

ITEM 4.	CONTROLS AND PROCEDURES	27

PART II OTHER INFORMATION

ITEM 1	LEGAL PROCEEDINGS	27

ITEM 1A.	RISK FACTORS	27

ITEM 2	UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS	27

ITEM 3	DEFAULTS UPON SENIOR SECURITIES	27

ITEM 4	MINE SAFETY DISCLOSURES	27

ITEM 5	OTHER INFORMATION	27

ITEM 6	EXHIBITS	27

PART I

FINANCIAL INFORMATION

ITEM 1

FINANCIAL STATEMENTS

Santaro Interactive Entertainment Company

(A Development Stage Company)

Consolidated Balance Sheets

	March 31, 2013			December 31,2012
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	16,418		$	49,504
Prepaid expenses		163,203			4,751
Other receivables		77,293			10,592

Total current assets		256,914			64,847

Property and equipment, net		507,015			556,884
Long term investment		644			644
Intangibles, net		29,194			31,575

Total Assets	$	793,767		$	653,950

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Advance from Customers	$	62,569		$	79,861
Taxes payable		3,606			737
Deferred revenue		20,402			17,461
Other payables and accrued expenses		611,890			467,976
Due to related parties		5,403,068			4,426,400

Total current liabilities		6,101,535			4,992,435
Commitments and contingencies
STOCKHOLDERS’ DEFICIT
Common stock ($0.001 par value; authorized –100,000,000 shares; issued and outstanding –69,875,000 shares at March 31, 2013 and December 31, 2012, respectively)		69,875			69,875
Additional paid-in capital		10,578,169			10,578,169
Deficit accumulated during the development stage		(15,574,455	)		(14,628,454	)
Accumulated other comprehensive loss		(381,357	)		(358,075	)

Total stockholders’ deficit		(5,307,768	)		(4,338,485	)

Total Liabilities and Stockholders’ Deficit	$	793,767		$	653,950

See notes to the consolidated financial statements

*The assets of the variable interest entities (the “VIEs”) can be used to settle obligations of the consolidated entities. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets (Note 3).

Santaro Interactive Entertainment Company

(A Development Stage Company)

Consolidated Statements of Operations and Comprehensive Loss

	Three months ended March 31,
	2013			2012			August 9, 2006 (inception of Beijing Sntaro) through March 31, 2013
	(Unaudited)			(Unaudited)			(Unaudited)
Revenue	$	78,776		$	-		$	106,347
Cost of revenue		437,928			-			1,130,987
Gross loss		(359,152	)		-			(1,024,640	)

Operating expenses
Research and development expenses		151,513			698,064			9,208,167
Sales and marketing expenses		140,544			9,625			689,465
General and administrative expenses		295,551			419,857			4,808,104
Total operating expenses		587,608			1,127,546			14,705,736

Loss from operations		(946,760	)		(1,127,546	)		(15,730,376	)

Gain on deconsolidation of subsidiary		-			-			(15,823	)
Non-operating (income) expenses		(759	)		(3,441	)		432,721

Loss before non-controlling interest		(946,001	)		(1,124,105	)		(16,147,274	)

Less: loss attributable to the non-controlling interests		-			-			(572,819	)

Net loss attributable to the Company		(946,001	)		(1,124,105	)		(15,574,455	)

Other comprehensive loss
Net loss		(946,001	)		(1,124,105	)		(16,147,274	)
Foreign currency translation adjustment		(23,282	)		5,301			(381,357	)
Comprehensive loss		(969,283	)		(1,118,804	)		(16,528,631	)
Less: Comprehensive loss attributable to the non-controlling interest		-			-			(572,819	)

Comprehensive loss attributable to the Company	$	(969,283	)	$	(1,118,804	)	$	(15,955,812	)

Loss per share:

Basic and diluted	$	(0.014	)	$	(0.016	)

Weighted average number of common shares outstanding – basic and diluted		69,875,000			69,875,000

See notes to the consolidated financial statements

Santaro Interactive Entertainment Company

(A Development Stage Company)

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

	Common Stock				Additional			Deficit accumulated			Accumulated other			Total deficit of
			$0.001 Par		Paid-In			during development			comprehensive			the Company’s			Non-controlling
	Share		Value		Capital			stage			income (loss)			stockholders			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 December 31, 2010		67,500,000		67,500		1,203,726			(5,755,855	)		(113,208	)		(4,597,837	)		-			(4,597,837	)
Net (loss)						-			(3,774,468	)		-			(3,774,468	)		-			(3,774,468	)
Foreign currency exchange translation adjustment, net of nil income taxes						-			-			(247,528	)		(247,528	)		-			(247,528	)
Common stock issued for cash June 27,2011		1,000,000		1,000		1,999,000			-			-			2,000,000			-			2,000,000
Common stock issued for cash August 29, 2011		1,375,000		1,375		2,748,625			-			-			2,750,000			-			2,750,000
Capital contribution						4,626,818									4,626,818						4,626,818
Balance as of December 31, 2011		69,875,000		69,875		10,578,169			(9,530,323	)		(360,736	)		756,985			-			756,985
Net (loss)						-			(5,098,131	)		-			(5,098,131	)		-			(5,098,131	)
Foreign currency exchange translation adjustment, net of nil income taxes						-			-			2,661			2,661			-			2,661
Balance as of December 31, 2012		69,875,000		69,875		10,578,169			(14,628,454	)		(358,075	)		(4,338,485	)		-			(4,338,485	)
Net (loss)						-			(946,001	)		-			(946,001	)		-			(946,001	)
Foreign currency exchange translation adjustment, net of nil income taxes						-			-			(23,282	)		(23,282	)		-			(23,282	)
Balance as of March 31, 2013 (unaudited)		69,875,000	$	69,875	$	10,578,169		$	(15,574,455	)	$	(381,357	)	$	(5,307,768	)	$	-		$	(5,307,768	)

See notes to the consolidated financial statements

Santaro Interactive Entertainment Company

(A Development Stage Company)

Consolidated Statements of Cash Flows

							August 9, 2006
							(inception of
							Beijing Sntaro)
	Three months ended March 31,						through March
	2013			2012			31, 2013
	(Unaudited)			(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(946,001	)	$	(1,124,105	)	$	(16,147,274	)
Adjustments to reconcile net loss before non-controlling interests to net cash used by operating activities:
Non-operating income		(794	)		-			(794	)
Depreciation		63,899			47,336			592,258
Amortization of intangible assets		2,552			2,374			20,140
Gain on deconsolidation of subsidiary		-			-			(15,823	)
Changes in operating assets and liabilities:
Prepaid expense		(158,320	)		110,063			(153,251	)
Other receivable		(66,598	)		37,312			(155,090	)
Advance from customers		(17,719	)		-			62,095
Tax payable		2,863			-			3,600
Deferred revenue		2,844			-			20,294
Other payables and accrued expenses		136,837			(151,614	)		592,057
Due to a related party		28,238			(7,437	)		109,675
Net cash used in operating activities		(952,199	)		(1,086,071	)		(15,072,113	)

Cash flows from investing activities:
Net cash received from disposal of fixed assets		1,082			-			1,082
Purchase of property and equipment		(6,523	)		(66,944	)		(994,042	)
Intangibles		-			(7,120	)		(48,346	)
Cash effect on deconsolidation of subsidiary		-			-			15,823
Net cash used in investing activities		(5,441	)		(74,064	)		(1,025,483	)

Cash flows from financing activities:
Proceeds from sale of stock		-			-			6,156,274
Paid-in capital injection		-			-			4,626,818
Capital contributed by non-controlling interest owner		-			-			428,290
Loan from a related party		924,306			-			9,608 ,712
Repayment of related parties loan		-			-			(4,786,811	)
Net cash provided by financing activities		924,306			-			16,033,283
Effect of exchange rate changes on cash and cash equivalents		248			13,053			80,731
Net (decrease) increase in cash and cash equivalents		(33,086	)		(1,147,082	)		16,418
Cash and cash equivalents at the beginning of period		49,504			2,028,612			-
Cash and cash equivalents at the end of period	$	16,418		$	881,530		$	16,418
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 Unaudited Financial Statements

1. ORGANIZATION AND DESCRIPTION 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.

The accompanying consolidated financial statements include the accounts of the following entities, and all significant intercompany transactions and balances have been eliminated in consolidation for all periods presented:

Consolidated entity name:	Percentage of ownership
Santaro Holdings, Ltd (“SHL”)	100	%
Santaro Investments, Ltd. (“Santaro HK”)	100	%
Ningbo Sntaro Network Technology Co., Ltd. (“Ningbo Sntaro”)	100	%
Beijing Sntaro Technology Co., Ltd. (“Beijing Sntaro”)	Variable Interest Entity
Beijing Sntaro Freeland Network Co., Ltd. (“FL Network”) (only through December 31,2012)	100% subsidiary of Beijing Sntaro

FL Network was a 100% subsidiary of Beijing Sntaro until December 31, 2012, when we ceased to have the power to direct its activities following a change of ownership. As a result of such change, FL Network ceased to be our subsidiary starting December 31, 2012.

The Financial Accounting Standards Board’s (“FASB”) accounting standards address whether certain types of entities, referred to as variable interest entities (“VIEs”), should be consolidated in a company’s consolidated financial statements. In accordance with the provisions of the FASB accounting standards, the Company has determined that Beijing Sntaro is a VIE and that the Company is the primary beneficiary and has a controlling financial interest. Accordingly, the consolidated financial statements of Beijing Sntaro are consolidated into the financial statements of the Company.

2. GOING CONCERN AND LIQUIDITY

The accompanying financial statements are presented on a going concern basis. The Company is in a development stage and only generated an insignificant amount of revenue during the period from its inception (August 9, 2006) to March 31, 2013. The Company has recurring net losses and negative cash flows from operations and has been dependent on debt and equity financing from related and non-related entities. The Company has an accumulated deficit of $15,574,455 as of March 31, 2013. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. During the year ended December 31, 2011, the Company obtained funding in the aggregate $4,750,000 from the issuance of 2,375,000 shares of our common stock, and warrants to purchase a total of 1,187,500 shares of our common stock. On December 5, 2011, Mr. Zhilian Chen converted parts of the loan provided by CixiYide, a related party (Note 14), to Beijing Sntaro, i.e., $4,626,818 (RMB 29,260,000), into the registered capital of Beijing Sntaro by the way of subscribing for the increased capital of Beijing Sntaro and then let Beijing Sntaro to pay back the increased capital to CixiYide. There can be no assurance that the Company will be able to obtain additional debt or equity financing on terms acceptable to it, or if at all. Management plans to fund continuing operations through new financing from related parties and equity financing arrangements.

3. VARIABLE INTEREST ENTITIES (VIES)

Regulations of the People’s Republic of China (“PRC”) 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. Pursuant 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 a decisive right 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 of Beijing Sntaro irrevocably granted 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 of Beijing Sntaro shall be pledged to Ningbo Sntaro as a collateral against the service fee payable to Ningbo Sntaro; and
(4)	The equity owners of Beijing Sntaro may not dispose of or enter into any other agreements involving all and any of the equity interest of Beijing Sntaro without prior agreement by Ningbo Sntaro.

Pursuant to the above arrangements, all of the equity owners' rights and obligations of Beijing Sntaro were assigned to Ningbo Sntaro, which resulted in the equity owners of Beijing Sntaro lacking the ability to make decisions that have a significant effect on Beijing Sntaro's operations and enabled Ningbo Sntaro to extract the profits from the operation of Beijing Sntaro, and assume Beijing Sntaro's residual benefits. Because 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.

In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effective control over the VIEs, and its ability to conduct its business may be materially and adversely affected.

The assets of the variable interest entities (the “VIEs”) can be used to settle obligations of the consolidated entities. Conversely, liabilities recognized as a result of consolidating these VIEs do not represent additional claims on the Company’s general assets.

Most of our operations are conducted through our affiliated companies which the Company controls through contractual agreements in the form of VIEs. Current regulations in China permit our PRC subsidiaries to pay dividends to us only out of its accumulated distributable profits, if any, determined in accordance with their articles of association and PRC accounting standards and regulations. The ability of these Chinese affiliates to make dividends and other payments to us may be restricted by factors that include changes in applicable foreign exchange and other laws and regulations.

A.	Under PRC law, our subsidiary may only pay dividends after 10% of its after-tax profits have been set aside as reserve funds, unless such reserves have reached at least 50% of its registered capital. Such cash reserve may not be distributed as cash dividends.

The PRC Income Tax Law also imposes a 10% withholding income tax on dividends generated on or after January 1, 2008 and distributed by a resident enterprise to its foreign investors, if such foreign investors are considered as non-resident enterprise without any establishment or place within China or if the received dividends have no connection with such foreign investors’ establishment or place within China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

As of March 31, 2013, there were no such retained earnings available for distribution.

The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated financial statements as follows:

	March 31, 2013		December 31, 2012
	(Unaudited)
Total assets	$	176,435	$	123,052

Total liabilities	$	2,744,853	$	2,682,517

	Three months ended March 31,
	2013		2012
	(Unaudited)		(Unaudited)
Revenues	$	78,776	$	-

Net loss	$	141,365	$	39,897

All of our current revenue is generated in PRC currency Renminbi (“RMB”). Any future restrictions on currency exchanges may limit our ability to use net revenues generated in RMB to make dividends or other payments in U.S. dollars or fund possible business activities outside China.

Foreign currency exchange regulation in China is primarily governed by the following rules:

·	Foreign Exchange Administration Rules (1996), as amended in August 2008, or the Exchange Rules;
·	Administration Rules of the Settlement, Sale and Payment of Foreign Exchange (1996), or the Administration Rules.

Under the Administration Rules, RMB is freely convertible for current account items, including the distribution of dividends, interest payments, trade and service related foreign exchange transactions, but not for capital account items, such as direct investments, loans, repatriation of investments and investments in securities outside of China, unless the prior approval of the State Administration of Foreign Exchange (“SAFE”) is obtained and prior registration with the SAFE is made. Foreign-invested enterprises like ours that need foreign exchange for the distribution of profits to their shareholders may affect payment from their foreign exchange accounts or purchase and pay foreign exchange rates at the designated foreign exchange banks to their foreign shareholders by producing board resolutions for such profit distribution. Based on their needs, foreign-invested enterprises are permitted to open foreign exchange settlement accounts for current account receipts and payments of foreign exchange along with specialized accounts for capital account receipts and payments of foreign exchange at certain designated foreign exchange banks.

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiaries and have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”) regarding interim financial reporting. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012 filed with the SEC. All intercompany accounts and transactions have been eliminated.

In the opinion of management, the accompanying consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements for the fiscal year ended December 31, 2012, and include all adjustments necessary for fair presentation of the results of the interim periods presented. The operating results for the interim periods presented are not necessarily indicative of the results expected for the full year. The Company considers events or transactions that occur after the balance sheet date but before the financial statements are issued to provide additional evidence relative to certain estimates or to identify matters that require additional disclosure. The Company is considered to be in the development stage as defined in Accounting Standards Codification (ASC) 915 “Development Stage Entities”. The Company is devoting substantially all of its efforts on the development and operation of online games.

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 maintains its books and accounting records in RMB, which is determined as the functional currency. The Company’s financial statements are translated into the reporting currency, the United States Dollar (“USD”). 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 income (loss) in 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 $381,357 as of March 31, 2013, and $358,075 as of December 31, 2012. The balance sheet amounts with the exception of equity at March 31, 2013 were translated at 6.2816 RMB to $1.00 USD as compared to 6.3161 RMB at December 31, 2012. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the three months ended March 31, 2013 and 2012 were 6.2858 RMB and 6.3201 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

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 and establishes a framework for measuring fair value and expands disclosure about such fair value measurements.

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.

There were no transfers between level 1, level 2 or level 3 measurements for the three months ended March 31, 2013.

As of March 31, 2013, none of the Company’s nonfinancial assets or liabilities was measured at fair value on a nonrecurring basis.

Cash and cash equivalents, accounts due from and to related parties, other payables and accrued expenses 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.

The Company maintains cash deposits in financial institutions or state-owned banks within the PRC that are not covered by insurance. Non-performance by these institutions could expose the Company to losses. To date, the Company has not experienced any losses in such accounts.

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		3-5 years
Leasehold improvements		3 years
Furniture and fixtures		3-5 years

Expenditures for maintenance and repairs are expensed as incurred. Gain or loss on the disposal of property and equipment is the difference between the net sales proceeds and the carrying amount of the relevant assets and is recognized in the consolidated statements of operations and comprehensive income.

Revenue recognition

The Company currently provides online game services in the PRC and recognizes revenue in accordance to the criteria of ASC subtopic 985 (“ASC 985”), Revenue Recognition when persuasive evidence of an arrangement exists, the service has been rendered, the sales price is fixed or determinable, and collectability is reasonably assured. Online game revenues include our MMOG operations and Co-operation Web-based game revenues.

MMOG operations

The Company operates Massive Multiplayer Online Role-Playing Games (“MMORPG”) under a free-to-play model. The online game revenue derives from the sale of in-game virtual items and revenue was recognized pursuant to the item-based revenue model.

Under the item-based model, players are able to play the basic features of the game for free. We generate revenues when players purchase virtual items that enhance their playing experience, such as weapons, clothing, accessories and pets. The item-based revenue model allows us to introduce new virtual items or change the features or properties of virtual items to enhance game player interaction and create a better game community.

The Company sells prepaid cards, in both virtual and physical forms, to third party distributors who in turn sell the prepaid cards to end customers. The prepaid cards provide customers with a pre-specified number of game points for consumption. All prepaid cards sold to distributors require upfront advance cash payments. The prepaid game cards entitle end users to purchase virtual items in the Company’s online games. Prepaid cards will expire two years after the date of card production if they have never been activated. The proceeds from the expired game cards are recognized as revenue upon expiration of cards. In contrast, once the prepaid cards are activated and credited to a player’s personal game account, they will not expire as long as the personal game account remains active. The personal game account will always remain active before the game stop operating.

The end users also could choose bank recharge method directly to exchange Santaro currency (“Long Bi”) or game currency of 108 warriors (“Silver”) through third-party payment platforms.

All proceeds received from distributors or through direct online payment systems are deferred when received, revenues are recognized over estimated life of the virtual items that game players purchase or as the virtual items are consumed. The below description are the detailed revenue recognition method adopted by the company.

Instant consumption mode is used when users purchase instant services or items with Silver. And as that service or item will be immediately consumed right after the Silver is paid by the user, therefore the reflected RMB value (from equivalent Silver) can be confirmed and recorded as revenue after the completion of the purchase (exchange Long Bi for Silver) by the user.

Limited consumption mode is used when users purchase the items or services with limited effective time. This type of items or services will be fully consumed by the end of the effective time. Therefore the reflected RMB value of that purchase will be confirmed as revenue after the item or service has been fully consumed (expired).

Apportioned consumption mode is used for perpetual virtual items and services, which can be used unlimited times through their estimated life spans. The delivery criterion for perpetual virtual items is generally met ratably over the expected delivery obligation period, which, in this case, is the estimated life of the perpetual virtual items purchased. Revenue is recognized proportionately over the estimated life spans which are based on data related to paying game player usage patterns for each category of virtual item. The game log, which records the whole process of a specific item or service being purchased and consumed, will be used periodically to readjust the estimation on perpetual virtual items’ life spans.

Co-operation Web-based game

As the operator, the Company signed distribution agreements with third-party developers to offer games to users on its websites or platforms. Although the Company is the party that signs user agreements and is responsible for its users’ experience, its remaining obligation is deemed to be inconsequential and perfunctory after the end users recharge to exchange the game coins of these web-based games. Besides, the third-party developers are obliged to provide on-going services to users, so a proportion of the full revenue received from end users is recorded as revenue according to the distribution agreements.

Cost of revenue

Cost of revenue consists primarily of service fee, depreciation, salary and social insurance and other expenses incurred by the Company and are recorded on an accrual basis.

Costs incurred for maintenance after the online games are available for marketing are expensed when incurred and are included in product cost of revenues.

Cost of revenue also includes business tax and surcharges with 5.60% tax rate. Business tax and surcharges for the three months ended March 31, 2013 and 2012 were $5,814 and $0, respectively.

Research and Development Expenses

For software development costs, including online games, to be sold or marketed to customers, the Company expenses software development costs incurred prior to reaching technological feasibility. Once a software product has reached technological feasibility, all subsequent software costs for that product are capitalized until that product is released for marketing. After an online game is released, the capitalized product development costs are amortized over the estimated product life. To date, the Company has essentially completed its software development concurrently with the establishment of technological feasibility. As of March 31, 2013, no costs have been capitalized.

Research and development expenses consist primarily of outsourced research and development expenses, payroll, depreciation charge and other overhead expenses for the development of the Company’s proprietary games, and are recorded on an accrual basis.

Sales and marketing expenses

Sales and marketing expenses consist primarily of salary, advertising and promotion fee, and other expense incurred by the Company’s sales and marketing personnel. Sales and marketing expenses are recorded on an accrual basis. Sales and marketing expenses for the three months ended March 31, 2013 and 2012 were $140,544 and $9,625, respectively.

Gain on deconsolidation of subsidiary

The Company accounts for deconsolidation of subsidiaries in accordance with ASC Topic 810 “Consolidation”. In accordance with ASC Topic 810, the parent shall account for the deconsolidation of a subsidiary by recognizing a gain or loss in net income attributable to the parent, measured as the difference between:

a. The aggregate of all of the following:

1. The fair value of any consideration received;

2. The fair value of any retained non-controlling investment in the former subsidiary at the date the subsidiary is deconsolidated;

3. The carrying amount of any non-controlling interest in the former subsidiary (including any accumulated other comprehensive income attributable to the non-controlling interest) at the date the subsidiary is deconsolidated.

b. The carrying amount of the former subsidiary’s assets and liabilities.

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 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 February 2013, the FASB issued ASU 2013-02, “Comprehensive Income (Topic 220): Reporting of Amounts Reclassified Out of Accumulated Other Comprehensive Income”, The ASU does not change the current requirements for reporting net income or other comprehensive income in financial statements. However, this ASU requires an entity to provide information about the amounts reclassified out of accumulated other comprehensive income by component. In addition, an entity is required to present, either on the face of the statement where net income is presented or in the notes, significant amounts reclassified out of accumulated other comprehensive income by the respective line items of net income but only if the amount reclassified is required under U.S. GAAP to be reclassified to net income in its entirety in the same reporting period. For other amounts that are not required under U.S. GAAP to be reclassified in their entirety to net income, an entity is required to cross-reference to other disclosures required under U.S. GAAP that provide additional detail about those amounts. The guidance is effective prospectively for reporting periods beginning after December 15, 2012 for public entities. The adoption of this standard is not expected to have a material impact on the Company’s consolidated financial position or results of operations.

The Company does not believe other recently issued but not yet effective accounting standards from ASU 2013-03 to ASU 2013-05, if currently adopted, would have a material effect of the consolidated financial position, results of operation and cash flows.

5. EARNINGS (LOSS) PER SHARE

The FASB’s accounting standard for earnings (loss) per share requires presentation of basic and diluted earnings (loss) per share in conjunction with the disclosure of the methodology used in computing such earnings (loss) per share. Basic earnings (loss) 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 (loss) 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. Warrants issued on June 27, 2011 and August 29, 2011 to purchase a total of 1,187,500 shares of common stock of the Company were not included in the diluted calculation since our common stock’s average market price did not exceed the warrant exercise price. In addition, the Company had a net loss during current period so dilutive securities would decrease negative EPS and have an anti-dilutive effect.

The following is a reconciliation of the basic and diluted earnings (loss) per share computations for the three months ended March 31, 2013 and 2012:

	2013			2012
	(Unaudited)			(Unaudited)
Net loss for basic and diluted earnings (loss) per share	$	(946,001	)	$	(1,124,105	)

Weighted average shares used in basic and diluted computation		69,875,000			69,875,000
Earnings (loss) per share:
Basic and diluted	$	(0.014	)	$	(0.016	)

6. PREPAID EXPENSES

Prepaid expenses of $163,203 and $4,751 as of March 31, 2013 and December 31, 2012 consisted of prepaid rent for the office and prepayment of printer’s service fee.

7. OTHER RECEIVABLES

Other receivables of $77,293 and $10,592 as of March 31, 2013 and December 31, 2012 consisted of cash advances given to certain employees for use during business operations and are recognized as general and administration expenses when expenses are incurred. It also includes certain rental deposit and a prepayment of $63,678 to a third party for obtaining usage right of a wed-based game, which is named as “rainblood”.

8. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

	March 31, 2013			December 31, 2012
	(Unaudited)

Computer equipment	$	661,121		$	670,268
Furniture and fixtures		222,883			221,666
Leasehold improvement		217,562			216,373
		1,101,566			1,108,307
Less: Accumulated depreciation		(594,551	)		(551,423	)

Property and equipment, net	$	507,015		$	556,884

Depreciation expenses for the three months ended March 31, 2013 and 2012 were $63,899 and $47,336 respectively.

9. LONG TERM INVESTMENT

On July 18, 2011, Santaro HK and a non-related company, New Select Group Limited (BVI), established a legal entity named Outlets Internet Sale Limited. Each party holds a 50% interest in Outlets Internet Sale Limited that was formed for the purpose of the development of an online outlet business. Management has classified the investment as a joint venture and will account for the investment under the equity-method of accounting since each investor may participate, directly or indirectly, in the overall management of the joint venture and has joint control in accordance with the provisions of Accounting Standards Codification (ASC) 323 “Investments - Equity Method and Joint Ventures”. There was no activity during the three months ended March 31, 2013.

10. DECONSOLIDATION OF FL NETWORK

FL network was incorporated on March 9, 2009 by Beijing Santaro and a third party FL media where Beijing Santaro held 70% ownership interest. On October 12, 2010, Beijing Santaro completed purchasing the remaining 30% interest of FL Network who became the Company’s wholly held subsidiary through December 31, 2012. On December 31, 2012, an independent third party bought 100% equity interest of FL network with a cash consideration of approximately $15,800 (RMB100,000). The deconsolidation of FL network was accounted for in accordance with ASC Topic 810 “Consolidation”. The Company recognized a gain of approximately $15,800 upon deconsolidation of FL network, which was recorded as a gain on deconsolidation of subsidiaries in the Company’s consolidated statements of income and comprehensive income. This gain represents the difference between the fair value of consideration received and the carrying amount of the former subsidiary's assets and liabilities as of the date of deconsolidation. The operating activities of FL network in 2012 were insignificant.

11. OTHER PAYABLES AND ACCRUED EXPENSES

Other payables and accrued expenses consist of the following:

	March 31, 2013		December 31, 2012
	(Unaudited)
Other payables	$	466,873	$	447,147
Accrued salaries		145,017		20,829

Total	$	611,890	$	467,976

Other Payable of $466,873 as of March 31, 2013 consisted of the interest-free loan of $238,793 from a third party named Ningbo Jufeng Textile Co., Ltd, to the Company. Other Payable of $447,147 as of December 31, 2012 consisted of the interest-free loan of $237,488 from Ningbo Jufeng Textile Co., Ltd. The loan is unsecured, payable on demand and is outstanding.

12. 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. 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. (“Santaro HK”), was incorporated in Hong Kong on January 27, 2010. Santaro HK did not earn any income that was derived in Hong Kong for the three months ended March 31, 2013 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 (only through December 31, 2012) 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 PRC 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 March 31, 2013 and December 31, 2012, for PRC income tax purposes.

Ningbo Sntaro had deferred tax assets of approximately $1,867,710 and $1,666,526 as of March 31, 2013 and December 31, 2012, which consisted of a tax loss carry-forward of $7,434,652 and $6,630,454, respectively. Ningbo Sntaro had no other temporary differences as of March 31, 2013 and December 31, 2012. Management determines it is more likely than not that all deferred tax asset could not be recognized, so full allowances were provided as of March 31, 2013 and December 31, 2012. The deferred tax assets begin to expire in 2016.

Beijing Sntaro had deferred tax assets of approximately $1,895,017 and $2,006,076 as of March 31, 2013 and December 31, 2012, which consisted of a tax loss carry-forward of $7,688,504 and $8,133,000, respectively. Beijing Sntaro had no other temporary differences as of March 31, 2013 and December 31, 2012. Management determines it is more likely than not that all deferred tax asset could not be recognized, so full allowances were provided as of March 31, 2013 and December 31, 2012. The deferred tax assets begin to expire in 2012. The deferred tax assets of approximately $153,216 expired in 2013, which consisted of a tax loss of $612,863 in year 2006 and 2007.

As of March 31, 2013 and December 31, 2012, an aggregated valuation allowance of $3,762,727 and $3,672,602 was provided since management determines it is more likely than not that all deferred tax asset could not be recognized. As a result of the 100% reserve of the deferred tax assets, the effective tax rate differs from the statutory tax rate.

13. 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 March 31, 2013 and 2012, total amounts expensed for such employee benefits amounted to $57,072 and $52,430, respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees.

14. RELATED PARTY TRANSACTIONS AND BALANCES

The Company is in a development stage and only has an insignificant amount of revenue to date during the period from its inception (August 9, 2006) to March 31, 2013. CixiYide is a company 100% beneficially owned by Mr. Zhilian Chen, the Company’s Chairman and major stockholder. CixiYide provides continuous financial support for Beijing Sntaro’s business and operation. By the end of 2012, CixiYide had provided loans to Beijing Sntaro in the aggregate amount of $2,534,982. Due to changes in currency exchange rates, the total amount due to CixiYide is $2,548,905 as of March 31, 2013.

Santaro HK entered into 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 the loan in September 2010. At March 31, 2013, the balance of the loan was $150,007.

By the end of 2012, Mr. Zhilian Chen had provided loans in the amount of $20,582 to Ningbo Sntaro. During the three months ended March 31, 2013, Mr. Zhilian Chen made an additional loan of $25,585 to Ningbo Sntaro. The total amount due to Mr. Zhilian Chen from Ningbo Sntaro was $46,167 as of March 31, 2013. By the end of 2012, CixiYide had provided loans in the amount of $1,687,750 to Ningbo Sntaro. During the three months ended March 31, 2013, CixiYide made an additional loan in the amount of $934,193 to Ningbo Sntaro. The total amount due to CixiYide from Ningbo Sntaro was $2,621,943 as of March 31, 2013.

As of March 31, 2013, the total balance of loans due to CixiYide and Mr. Zhilian Chen from the company was $5,367,022. The loans are unsecured and interest free, payable on demand, and are outstanding.

During the year ended December 31, 2012, Mr. Mingyang Li, the Company’s CEO, provided a loan in the amount of $16,545 to Beijing Sntaro and a loan in the amount of $16,534 to Ningbo Sntaro. These loans increased by $2,956 and $11 during the three months ended March 31, 2013, respectively. As of March 31, 2013, the total balance of loans due to Mr. Mingyang Li from the Company was $36,046. The loans are unsecured and interest free, payable on demand, and are outstanding.

15. LEASE COMMITMENTS

The Company has entered into operating lease arrangements mainly relating to its office premises which will end on December 26, 2014. Future minimum lease payments for non-cancelable operating leases as of March 31, 2013 are as follows:

	Rental
Fiscal Year		Commitments

2013	$	261,136
2014		516,471

Total	$	777,607

Total rental expenses are $95,513 and $151,849 for the three months ended March 31, 2013 and 2012, respectively.

16. SALE OF COMMON STOCK AND WARRANTS

On June 27, 2011, the Company entered into subscription agreements with certain institutional investors to sell an aggregate of one million (1,000,000) shares of its common stock, and warrants to purchase a total of five hundred thousand (500,000) shares of its common stock 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.

On August 29, 2011, the Company entered into subscription agreements with certain institutional investors to sell an aggregate of one million three hundred seventy five thousand (1,375,000) shares of its common stock, and warrants to purchase a total of six hundred eighty seven thousand five hundred (687,500) shares of its common stock to the buyers for gross proceeds of $2,750,000 before deducting fees and expenses and excluding the proceeds, if any, from the exercise of the warrants. The warrants mature in three years and have a strike price of $5.00 per share.

All warrants were evaluated for liability treatment and were determined to be equity instruments.

Above two transactions have been completed as of December 31, 2011.

17. CONTINGENCIES

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 Sntaro and Beijing Sntaro and our contractual arrangements with Beijing Sntaro 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 give assurance that the 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 Sntaro 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 Sntaro; 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.

18. 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

Forward Looking Statements

This quarterly report on Form 10-Q and other reports filed by the Company from time to time with the Securities and Exchange Commission (collectively the “Filings”) contain or may contain forward-looking statements and information that are based upon beliefs of, and information currently available to, the Company’s management as well as estimates and assumptions made by Company’s management. Readers are cautioned not to place undue reliance on these forward-looking statements, which are only predictions and speak only as of the date hereof. When used in the Filings, the words “anticipate”, “believe”, “estimate”, “expect”, “future”, “intend”, “plan”, or the negative of these terms and similar expressions as they relate to the Company or the Company’s management identify forward-looking statements. Such statements reflect the current view of the Company with respect to future events and are subject to risks, uncertainties, assumptions, and other factors (including the risks contained in the section of this report entitled “Risk Factors”) relating to the Company’s industry, the Company’s operations and results of operations, and any businesses that the Company may acquire. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated believed, estimated, expected, intended, or planned.

Although the Company believes that the expectations reflected in the forward-looking statements are reasonable, the Company cannot guarantee future results, levels of activity, performance, or achievements. Except as required by applicable law, including the securities laws of the United States, the Company does not intend to update any of the forward-looking statements to conform these statements to actual results. Readers are urged to carefully review and consider the various disclosures made throughout the entirety of this quarterly report, which attempt to advise interest parties of the risks and factors that may affect our business, financial condition, results of operations, and prospects.

Our financial statements are prepared in accordance with U.S. GAAP. These accounting principles require us to make certain estimates, judgments and assumptions. We believe that the estimates, judgments and assumptions upon which are relied are reasonable based upon information available to us at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect the reported amounts of assets and liabilities as of the date of the financial statements as well as the reported amounts of expenses during the periods presented. Our financial statements would be affected to the extent there are material differences between these estimates and actual results. In many cases, the accounting treatment of a particular transaction is specifically dictated by U.S. GAAP and does not require management’s judgment in its application. There are also areas in which management’s judgment in selecting any available alternative would not produce a materially different result.

Accounting Policy of Revenue Recognition

MMOG operations

The end users also could choose bank recharge method directly to exchange Santaro currency (“Long Bi”) or game currency of 108 warriors (“Silver”) through third-party payment platforms.

Co-operation Web-based game

As the operator, the Company signed distribution agreements with third-party developers to offer the games to users on its websites or platforms. Although the company is the party that signs the user agreement with its users and is responsible for its users’ experience on its Websites or platforms, its remaining obligation is deemed to be inconsequential and perfunctory after the end users recharge to exchange the game coins of these web-based games. Besides, the third party developers obliged to provide on-going services to users, so a proportion of the full revenue received from end users is recorded as revenue according to the distribution agreements.

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 only has generated an insignificant amount of revenue during the period from August 9, 2006, its inception, through March 31, 2013. 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.

	Three months ended March 31,
	2013			2012
	(Unaudited)			(Unaudited)
Revenue	$	78,776		$	-
Cost of revenue		437,928			-
Gross loss		(359,152	)		-

Operating expenses
Research and development expenses		151,513			698,064
Sales and marketing expenses		140,544			9,625
General and administrative expenses		295,551			419,857
Total operating expenses		587,608			1,127,546

Loss from operations		(946,760	)		(1,127,546	)

Non-operating (income) expenses		(759	)		(3,441	)

Net loss	$	(946,001	)	$	(1,124,105	)

Revenue

For the three months ended March 31, 2013, revenues were $78,776, representing an increase of $78,776, compared to $0 for the corresponding period in 2012. The increase in net revenues was primarily due to the revenue contribution from web games, with an amount of $52,284. The Company also generated minor revenue from 108 Warriors, a Massive Multiplayer Online Role Playing Game (“MMORPG”) launched in the third quarter of 2012, with an amount of $26,492, during the three months ended March 31, 2013.

Cost of revenue

For the three months ended March 31, 2013, cost of revenues were $437,928, representing an increase of $437,928, compared to $0 for the corresponding period in 2012. The increase in cost of revenues from online games was primarily due to the cost from 108 Warriors.

Gross loss

As a result of the foregoing, our gross loss for the three months ended March 31, 2013 was $359,152 from $0 in the same period of 2012. The reason for the negative gross profit was due to the new game 108 Warriors. Because the game was in introduction stage, the Company needed to spend more costs to launch and operate this new game. These costs were primary composed by salaries of operation staffs, depreciation of the operation equipment, and server hosting fees.

Research and Development (R&D) expenses

R&D expenses primarily consist of rent expenses, depreciation, and property management fee for R&D activities. For the three months ended March 31, 2013, R&D expenses were $151,513, representing a decrease of $546,551 or 78.30%, compared to $698,064 for the corresponding period in 2012. The decrease was primarily because R&D employee salary decreased by $426,921 and social assurance decreased by $23,994 compared to the corresponding period of 2012, which was due to the Company reclassified the salaries of designers and programmers engaged for the game of 108 Warriors from R&D expense to cost of revenues, since this game was launched in the third quarter of 2012. Besides, the Company changed part of “MMORPG” to web games to better meet customers’ demand, and less designers and programmers needed on the R&D of web games, so the Company terminated several junior technicians to save labor cost and improve operational ability. Rent expenses decreased by $56,213 due to the owner of Ningbo office offered one month’s rent-free period during the first quarter of 2013, service fee decreased by $10,586 and testing fee decreased by $23,247 compared to the corresponding period of 2012. Other variances include business entertainment, communication fee, depreciation, amortization, etc., presenting a slight decrease, accumulated about $5,590.

Sales and marketing expenses

Selling expenses mainly represented selling employee salaries and advertising & promotion fees. For the three months ended March 31, 2013, selling expenses were $140,544, representing an increase of $130,919 or 1,360.20% compared to $9,625 for the corresponding period in 2012. The increase was mainly due to increases in selling employee salaries, which increased by $73,300 due to the launch of 108 Warriors, and for the same reason, advertising & promotion fee was also increased by $55,324. Other miscellaneous fees increased by $2,295.

General and administrative expenses

General and administrative expenses consisted primarily of professional services fees, G&A employee salaries, social insurance and depreciation. For the three months ended March 31, 2013, total general and administrative expenses were $295,551, representing a decrease of $124,306 or approximately 29.61% as compared to $419,857 for the corresponding period in 2012. The decrease was due to decreases in G&A employee salaries, which decreased by $73,113, in social insurance, which decreased by $12,556, in welfare expenses, which decreased by $8,639, compared to the same period in 2012, respectively. The decrease of $73,113 in G&A employee salaries was mainly because the Company reclassified the salaries of sales staff for 108 Warriors to sales and marketing expenses, which was recorded in G&A expenses in the corresponding period of 2012, since no game launched before the third quarter of 2012. And for the same reason, social insurance and welfare expenses decreased accordingly. Other variances include expenses occurred for business entertainments, membership expenses, communication fees, travelling expenses, etc., presenting a slight decrease, aggregating at $29,998.

Net loss

For the three months ended March 31, 2013, net loss decreased to $946,001 from $1,124,105 for the corresponding period in 2012. The decrease in net loss was primarily due to decreases in R&D expenses and G&A expenses.

Liquidity and Capital Resources

For the three months ended March 31, 2013 and 2012, we met our working capital requirement mainly by using cash flows from related parties. We anticipate that the existing cash and cash equivalents on hand, together with the net cash flows supported by 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. During the past two years, Mr. Zhilian Chen, our Chairman, and CixiYide Auto Co., Ltd. (“CixiYide”), a company 100% beneficially owned by Mr. Chen, provided continuous financial support to the Company. As of December 31, 2012, CixiYide and Mr. Zhilian Chen had provided the Company loans in the aggregate amount of $4,222,732 and $170,589, respectively. As of March 31, 2013, CixiYide and Mr. Zhilian Chen had provided the Company loans in the aggregate amount of $5,170,848 and $196,174, respectively.

Going Concern and Liquidity

The accompanying financial statements are presented on a going concern basis. The Company is in a development stage and only generated an insignificant amount of revenue during the period from its inception (August 9, 2006) to March 31, 2013. The company has recurring net losses and negative cash flows from operations and has been dependent on debt and equity financing. The Company has an accumulated deficit of $15,574,455 as of March 31, 2013. During the year ended December 31, 2011, the Company obtained funding in the amount of $4,750,000 from the issuance of 2,375,000 shares of our common stock, and warrants to purchase a total of 1,187,500 shares of our common stock. On December 5, 2011, Mr. Zhilian Chen converted parts of the loan provided by CixiYide to Beijing Sntaro, i.e., $4,626,818 (RMB 29,260,000), into the registered capital of Beijing Sntaro by the way of subscribing for the increased capital of Beijing Sntaro and then let Beijing Sntaro to pay back the increased capital to CixiYide. There can be no assurance that the Company will be able to obtain additional debt or equity financing on terms acceptable to it, or if at all. Management plans to fund continuing operations through new financing from related parties and equity financing arrangements. These factors raise substantial doubt about our ability to continue as a going concern.

Cash Flows

	Three months ended March 31,
	2013			2012
	(Unaudited)			(Unaudited)
Net cash used in operating activities	$	(952,199	)	$	(1,086,071	)
Net cash used in investing activities		(5,441	)		(74,064	)
Net cash provided by financing activities		924,306			-
Effect of foreign currency exchange rate changes on cash and cash equivalents		248			13,053
Net decrease in cash and cash equivalents	$	(33,086	)	$	(1,147,082	)

Net cash used in operating activities: The Company had insignificant amount of revenue from its inception in 2006 to March 31, 2013. Our net cash used in operating activities decreased by $133,872 in the three months ended March 31, 2013 compared to that in the three months ended March 31, 2012, representing a decrease of 12.33%. Most operating cash flow is the result of cash-paid expenditure during operation. The decrease of net cash used in operating activities was due to decreases in salary expense and rent expense. In order to better meet customer demand, the Company changed part of “MMORPG” to web games. Since the technique requirement of web game is lower than the “MMORPG”, the Company fired several junior technicians to save labor cost and improve operational ability. Rent expenses decreased due to the owner of Ningbo office offered one month’s rent-free period during the first quarter of 2013.

Net cash used in investing activities: Our net cash used in investing activities decreased by $68,623 in the three months ended March 31, 2013 compared to the corresponding period of 2012. The decrease in net cash used in investing activities was mainly due to the result of a decrease in the purchasing of new equipment with an amount of $60,421, and the decrease in intangibles with an amount of $7,120 during the three month ended March 31, 2013.

Net cash provided by financing activities: Our cash provided by financing activities increased from $0 for the three month ended March 31, 2012 to $924,306 for the corresponding period of 2013, representing an increase of 100% which was a loan provided by CixiYide. The current financed capital could not support current operation and product development. Through March 31, 2013, CixiYide has been continuously providing financial support.

Working capital

We have working capital deficit of $5,844,621 as of March 31, 2013, compared with working deficit of $4,927,588 as of December 31, 2012, representing an increase of deficit of 18.61%. The change in working capital is due to the development stage of the Company’s games. Because the Company’s games only produced insignificant amount of revenue, the Company had to obtain loans to support daily operations. As of March 31, 2013, the Company accumulatively obtained loans in the amount of $5,367,022 from CixiYide and Mr. Zhilian Chen. On December 5, 2011, Mr. Zhilian Chen converted parts of the loan provided by CixiYide to Beijing Sntaro, i.e., $4,626,818 (RMB 29,260,000), into the registered capital of Beijing Sntaro by the way of subscribing for the increased capital of Beijing Sntaro and then let Beijing Sntaro to pay back the increased capital to CixiYide. The Company also received proceeds in the aggregate of $4.75 million upon the issuance of 2.375 million shares of common stock and warrants to purchase up to 1,187,500 shares of our common stock in 2011.

Description of Property

The Company’s property and equipment consists wholly of computer equipment, leasehold improvements, and furniture. The book value of the Company’s property and equipment was $507,015 as of March 31, 2013.

Employees

As of march 31, 2013, the Company employed approximately 69 designers and programmers. The majority of employees have three to five years’ of experience in the online games industry.

Competition for talented and well-educated professionals is intense among local online gaming companies. Management has set up an attractive work environment to stimulate employee creativity. A career advancement program has been prepared to provide opportunities for employees to receive additional training and promotion.

Recent issued accounting pronouncements

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.

Additional Disclosure

ITEM 3 QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Pursuant to Item 301(c) of Regulation S-K (§ 229.301(c)), the Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

ITEM 4. CONTROLS AND PROCEDURES.

Evaluation of Disclosure Controls and Procedures

Based on an evaluation under the supervision and with the participation of the Company’s management, the Company’s principal executive officer and principal financial officer have concluded that the Company’s disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (“Exchange Act”) were effective as of March 31, 2013.

Changes in Internal Control over Financial Reporting

There were no significant changes in our internal control over financial reporting that occurred during the fiscal quarter covered by this Quarterly Report on Form 10-Q 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

None.

ITEM 1A. RISK FACTORS

Not required for smaller reporting companies.

ITEM 2 UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

None.

ITEM 3 DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4 MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5 OTHER INFORMATION

None.

ITEM 6 EXHIBITS

The exhibits listed on the Exhibit Index are filed as part of this report.

(a) Exhibits:

31.1 Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

31.2 Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.

32.1 Certification by Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

101 The following financial statements from Santaro Interactive Entertainment Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Loss; (iii) the Consolidated Statements of Changes in Stockholders’ Equity (Deficit); (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Unaudited Financial Statements, tagged in detail.

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.

Dated: May 15, 2013

	SANTARO INTERACTIVE ENTERTAINMENT COMPANY

	By:	/s/ Mingyang Li
		Name: Mingyang Li
		Title: Chief Executive Officer

	By:	/s/ Yan Dong
		Name: Yan Dong
		Title: Chief Financial Officer

EXHIBIT INDEX

Exhibit No.		Description
31.1		Certification by Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
31.2		Certification by Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
32.1		Certification by Chief Executive Officers and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
101		The following financial statements from Santaro Interactive Entertainment Company’s Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2012 formatted in XBRL (eXtensible Business Reporting Language): (i) the Consolidated Balance Sheets; (ii) the Consolidated Statements of Operations and Comprehensive Loss; (iii) the Consolidated Statements of Changes in Stockholders’ Equity (Deficit); (iv) the Consolidated Statements of Cash Flows; and (v) the Notes to Consolidated Unaudited Financial Statements, tagged in detail.

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