Santaro Interactive Entertainment Co - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Santaro Interactive Entertainment Co	Financial_Report.xls
EX-31.1 - CERTIFICATION - Santaro Interactive Entertainment Co	stie_ex311.htm
EX-31.2 - CERTIFICATION - Santaro Interactive Entertainment Co	stie_ex312.htm
EX-32.1 - CERTIFICATION - Santaro Interactive Entertainment Co	stie_ex321.htm
EX-32.2 - CERTIFICATION - Santaro Interactive Entertainment Co	stie_ex322.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 quarterly period ended March 31, 2014

¨ TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File # 333-165751

SANTARO INTERACTIVE ENTERTAINMENT COMPANY

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

Nevada

(State or other jurisdiction of incorporation or organization)

27-1571493

(IRS Employer Identification Number)

Taihe Wenhua Plaza B-410, 1A Chenjialin Balizhuang, Chaoyang District

Beijing, People’s Republic of China, 100025

(Address of principal executive offices)

(8610) 82167111

(Issuer’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required 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 day. Yes o No x

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-Y (§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 “small 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 May 29, 2014, 69,875,000 shares of the issuer’s common stock, par value $0.001, were outstanding.

All references in this Quarterly 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.

SANTARO INTERACTIVE ENTERTAINMENT COMPANY

TABLE OF CONTENTS

		Page

PART I – FINANCIAL INFORMATION

Item 1.	Financial Statements	3
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	23
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31
Item 4.	Controls and Procedures	31

PART II – OTHER INFORMATION

Item 1.	Legal Proceedings	32
Item 1A.	Risk Factors	32
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	32
Item 3.	Defaults Upon Senior Securities	32
Item 4.	Mine Safety Disclosures (Not Applicable)	32
Item 5.	Other Information	32
Item 6.	Exhibits	33

SIGNATURES		34

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

Santaro Interactive Entertainment Company

Consolidated Balance Sheets

	March 31, 2014			December 31, 2013
	(Unaudited)
ASSETS
Current assets
Cash and cash equivalents	$	5,774		$	6,408
Prepaid expenses		37,655			71,325
Other receivables		35,987			42,293
Due from a related party		26,044			26,258

Total current assets		105,460			146,284

Property and equipment, net		153,471			187,603
Long term investment		644			644
Intangibles, net		565			7,128

Total Assets	$	260,140		$	341,659

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Advance from Customers	$	127,949		$	69,841
Business taxes payable		17,698			16,619
Deferred revenue		7,823			10,040
Other payables and accrued expenses		554,455			677,883
Due to related parties		435,250			333,858
Total current liabilities		1,143,175			1,108,241
Due to a related party, non current		6,496,365			6,464,867
Total Liabilities		7,639,540			7,573,108
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, 2014 and December 31, 2013, respectively)		69,875			69,875
Additional paid-in capital		10,578,169			10,578,169
Accumulated deficit		(17,554,484	)		(17,347,671	)
Accumulated other comprehensive loss		(472,960	)		(531,822	)

Total stockholders’ deficit		(7,379,400	)		(7,231,449	)

Total Liabilities and Stockholders’ Deficit	$	260,140		$	341,659

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

Consolidated Statements of Operations and Comprehensive Loss

	Three Months Ended March 31,
	2014			2013
	(Unaudited)			(Unaudited)

Revenue	$	46,576		$	78,776
Cost of revenue		98,576			437,928
Gross loss		(52,000	)		(359,152	)

Operating expenses
Research and development expenses		13,729			151,513
Sales and marketing expenses		12,154			140,544
General and administrative expenses		187,384			295,551
Total operating expenses		213,267			587,608

Other income		(58,466	)		-

Loss from operations		(206,801	)		(946,760	)

Non-operating (income) expenses		12			(759	)

Net loss		(206,813	)		(946,001	)

Other comprehensive income (loss)
Foreign currency translation adjustment		58,862			(23,282	)
Comprehensive loss	$	(147,951	)	$	(969,283	)

Loss per share:

Basic and diluted	$	(0.003	)	$	(0.014	)

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

Consolidated Statements of Cash Flows

	Three Months Ended March 31,
	2014			2013
	(Unaudited)			(Unaudited)
Cash flows from operating activities:
Net loss	$	(206,813	)	$	(946,001	)
Adjustments to reconcile net loss to net cash used by operating activities:
Non-operating income		(563	)		(794	)
Depreciation		32,835			63,899
Amortization of intangible assets		579			2,552
Changes in operating assets and liabilities:
Prepaid expenses		33,328			(158,320	)
Other receivables		6,004			(66,598	)
Advance from customers		59,106			(17,719	)
Business taxes payable		1,224			2,863
Deferred revenue		(2,150	)		2,844
Other payables and accrued expenses		(119,286	)		136,837
Due to a related party		-			28,238
Net cash used in operating activities		(195,736	)		(952,199	)

Cash flows from investing activities:
Net cash received from disposal of fixed assets		-			1,082
Net cash received from disposal of intangible assets		6,536			-
Purchase of fixed assets		-			(6,523	)
Net cash provided by (used in) investing activities		6,536			(5,441	)

Cash flows from financing activities:
Loan from related parties		188,612			924,306
Net cash provided by financing activities		188,612			924,306
Effect of exchange rate changes on cash and cash equivalents		(46	)		248
Net decrease in cash and cash equivalents		(634	)		(33,086	)
Cash and cash equivalents at the beginning of period		6,408			49,504
Cash and cash equivalents at the end of period	$	5,774		$	16,418
Supplemental disclosure for cash flow information
Interest paid	$	-		$	-
Income taxes paid	$	-		$	-

See notes to the consolidated financial statements

Santaro Interactive Entertainment Company

Notes to Consolidated 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

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, LIQUIDITY AND MANAGEMENT PLANS

The accompanying financial statements are presented on a going concern basis. The Company has recurring net losses and negative cash flows from operations and has been dependent on debt and equity financing from related entities. The Company has an accumulated deficit of $17,554,484 and $17,347,671 as of March 31, 2014 and December 31, 2013, respectively. During the past two years, Mr. Zhilian Chen, our Chairman and Director, and CixiYide Auto Co., Ltd. (“CixiYide”), a company 100% beneficially owned by Mr. Chen, provided continuous financial support to the Company. As of March 31, 2014, CixiYide and Mr. Zhilian Chen had provided the Company loans in the aggregate amount of $6,496,365 and $219,438, respectively. The Company has relied exclusively on related party financing to sustain its operations. Accordingly, there is substantial doubt about its ability to continue as a going concern. 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.

In the three months ended March 31, 2014, the Company derived most of the revenue from co-operation of web browser games and game art designs outsource business, in which our game art design department took projects from third-party game companies by virtue of our specialized design capabilities. The Company has actively been exploring new ways of operating its core product, 108 Warriors by franchising it out to a third-party game operation company that will bear all game promotion cost and will share with the Company a certain portion of monetary interests derived from the game, and the Company will still put most of its efforts in updating and optimizing the 108 Warriors. As such the Company shut down its operation department and marketing department and terminated redundant R&D staff, rented a smaller office to significantly reduce the operating costs.

The Company believes that it will need approximately $1 million during the next 12 months for maintaining existing products, continued research and development of new products, as well as for general corporate purposes.

The Company plans to fund operations mainly through operating revenue from the current business lines and through new debt and equity financing from related parties and equity financing arrangements if the operating revenue is not adequate to sustain operations.

The ability of the Company to continue as a going concern is dependent on its ability to successfully accomplish the plan described in the preceding paragraphs and eventually attain profitable operations.The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

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 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 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 enable Ningbo Sntaro 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.

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, 2014, 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, 2014		December 31, 2013
	(Unaudited)

Total assets	$	102,233	$	127,217

Total liabilities	$	3,241,105	$	3,055,420

	Three Months Ended March 31,
	2014		2013
	(Unaudited)		(Unaudited)

Revenues	$	46,576	$	78,776

Net loss	$	79,962	$	141,365

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 Renminbi 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, 2013 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, 2013, 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.

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 loss in stockholders’ deficit.

Translation adjustments resulting from this process are included in other comprehensive income (loss) in the consolidated statement of operations and accumulated other comprehensive loss in the consolidated balance sheets and amounted to $472,960 as of March 31, 2014, and $531,822 as of December 31, 2013. The balance sheet amounts with the exception of equity at March 31, 2014 were translated at 6.1644 RMB to $1.00 USD as compared to 6.1140 RMB at December 31, 2013. 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, 2014 and 2013 were 6.1198 RMB and 6.2858 RMB, respectively.

Transactions denominated in currencies other than the functional currency are translated into the functional currency at the exchange rates prevailing at the dates of the transactions. The resulting exchange differences are included in the determination of net income (loss) in the consolidated financial statements for the respective periods.

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, 2014.

As of March 31, 2014, 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.

Impairment of Long-lived Assets

Long-lived assets are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability of long-lived assets to be held and used is measured by a comparison of the carrying amount of the asset to the estimated undiscounted future cash flows expected to be generated by the asset. If the carrying amount of an asset exceeds its estimated future undiscounted cash flows, an impairment loss is recognized for the difference between the carrying amount of the asset and its fair value. There were no impairment losses for the three months ended March 31, 2014 and 2013, respectively.

Revenue Recognition

The Company currently provides online game services in the PRC and recognizes revenue in accordance to the criteria of ASC subtopic 605 and 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 MMORPG operations, Co-operation of web browser game and game art design services.

MMORPG operations

The Company operates Massively 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 stops 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 of web browser game

The Company established an online distribution platform www.1799.com to operate third-party web browser games in November, 2012. The focus of the platform is to provide diversification and make available a wide variety of games to a large and diverse spectrum of users and be a credit to the Company’s user database. On the other hand, as the operator, the Company signed distribution agreements with third-party developers to offer games to users on its platform. 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 browser 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.

Game art design services

The Company also receives game art design service income from third-parties in PRC by providing game art design service when available. The service fees are determined based on contract terms, which are fixed or determinable, and collectability is reasonably assured. The service revenue is recognized when substantially all material services or conditions relating the sales have been performed or satisfied.

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, 2014 and 2013 were $2,911 and $5,814, 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, 2014, 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, 2014 and 2013 were $12,154 and $140,544, respectively.

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 loss 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

The Company does not believe any recently issued but not yet effective accounting standards, 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, 2014 and 2013:

	2014			2013
	(Unaudited)			(Unaudited)

Net loss for basic and diluted loss per share	$	(206,813	)	$	(946,001	)

Weighted average shares used in basic and diluted computation		69,875,000			69,875,000
Loss per share:
Basic and diluted	$	(0.003	)	$	(0.014	)

6. PREPAID EXPENSES

Prepaid expenses of $37,655 and $71,325 as of March 31, 2014 and December 31, 2013 consisted of prepaid rent for the office and prepayment of printer’s service fee.

7. OTHER RECEIVABLES

Other receivables of $35,987 and $42,293 as of March 31, 2014 and December 31, 2013 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.

8. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

	March 31, 2014			December 31, 2013
	(Unaudited)

Computer equipment	$	457,917		$	461,692
Furniture and fixtures		39,466			39,791
Leasehold improvement		90,947			91,697
		588,330			593,180
Less: Accumulated depreciation		(434,859	)		(405,577	)

Property and equipment, net	$	153,471		$	187,603

Depreciation expenses for the three months ended March 31, 2014 and 2013 were $32,835 and $63,899, 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, 2014 and 2013.

10. OTHER PAYABLES AND ACCRUED EXPENSES

Other payables and accrued expenses consist of the following:

	March 31, 2014		December 31, 2013
	(Unaudited)

Other payables	$	458,096	$	581,940
Accrued salaries		96,359		95,943
Total	$	554,455	$	677,883

Other Payable of $458,096 as of March 31, 2014 consisted of the interest-free loan of $243,333 from Ningbo Jufeng Textile Co., Ltd, a third party of the Company. Other Payable of $581,940 as of December 31, 2013 consisted of the interest-free loan of $245,339 from Ningbo Jufeng Textile Co., Ltd. The loan is unsecured, payable on demand and is outstanding.

11. OTHER INCOME

Other income of $58,466 for the three months ended March 31, 2014 represented a reversal of litigation compensation, which was estimated at $89,994 (RMB557,803) regarding a pending lawsuit against Ningbo Sntaro as of December 31, 2013. The lawsuit was finally settled in March, 2014 and the final claim was $58,466 less than that estimated. There was no other income for the three months ended March 31, 2013.

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 year ended March 31, 2014 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, 2014 and December 31, 2013, for PRC income tax purposes.

Ningbo Sntaro had deferred tax assets of approximately $2,301,457 and $2,269,974 as of March 31, 2014 and December 31, 2013, which consisted of a tax loss carry-forward of $9,138,303 and $9,011,455, respectively. Ningbo Sntaro had no other temporary differences as of March 31, 2014 and December 31, 2013. 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, 2014 and December 31, 2013. The deferred tax assets begin to expire in 2016.

Beijing Sntaro had deferred tax assets of approximately $1,737,501 and $1,945,230 as of March 31, 2014 and December 31, 2013, which consisted of a tax loss carry-forward of $7,054,461 and $7,884,801, respectively. Beijing Sntaro had no other temporary differences as of March 31, 2014 and December 31, 2013. 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, 2014 and December 31, 2013. The deferred tax assets begin to expire in 2012. The deferred tax assets of approximately $380,791 expired in 2014, which consisted of a tax loss of $1,523,164 in year 2006, 2007 and 2008.

As of March 31, 2014 and December 31, 2013, an aggregated valuation allowance of $4,038,958 and $4,215,204 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 20% 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, 2014 and 2013, total amounts expensed for such employee benefits amounted to $12,602 and $57,072, 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 has recurring net losses and negative cash flows from operations and has been dependent on debt and equity financing. 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 2013, CixiYide had provided loans to Beijing Sntaro in the aggregate amount of $2,708,734. During the three months ended March 31, 2014, CixiYide made an additional loan in the amount of $62,209 to Beijing Sntaro. The total amount due to CixiYide from Beijing Sntaro was $2,770,943 as of March 31, 2014. The total amount due to Mr. Zhilian Chen from Beijing Sntaro was $7,066 as of December 31, 2013. Due to changes in currency exchange rates, the total amount due to Mr. Zhilian Chen from Beijing Sntaro was $7,008 as of March 31, 2014.

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. As of March 31, 2014, the balance of the loan was $150,007.

By the end of 2013, Mr. Zhilian Chen has provided loans in the amount of $53,124 to Ningbo Sntaro. During the three months ended March 31, 2014, Mr. Zhilian Chen made an additional loan of $9,299 to Ningbo Sntaro. The total amount due to Mr. Zhilian Chen from Ningbo Sntaro was $62,423 as of March 31, 2014. By the end of 2013, CixiYide has provided loans in the amount of $3,756,133 to Ningbo Sntaro. Due to changes in currency exchange rates, the total amount due to CixiYide from Ningbo Sntaro was $3,725,422 as of March 31, 2014.

As of March 31, 2014, the total balance of loans due to CixiYide and Mr. Zhilian Chen from the Company was $6,715,803. The loans are unsecured and interest free, payable on demand, and are outstanding.

By the end of 2013, Mr. Mingyang Li, the Company’s CEO, provided a loan balance of $108,970 to Beijing Sntaro and a loan balance of $14,691 to Ningbo Sntaro. These loans increased by $92,235 to Beijing Sntaro and decreased by $84 to Ningbo Sntaro during the three months ended March 31, 2014, respectively. As of March 31, 2014, the total balance of loans due to Mr. Mingyang Li from the Company was $215,812. The loans are unsecured and interest free, payable on demand, and are outstanding.

By the end of 2013, Beijing Sntaro provided a loan in the amount of $26,258 to Shanghai Shangyi network technology co., LTD, which is a company 70% owned by Mr. Zhilian Chen’s daughter, for it to operate a mobile game with the purpose of co-operate the game or purchase the game in near future. Due to changes in currency exchange rates, the total amount due from Shanghai Shangyi network technology co., LTD was $26,044 as of March 31, 2014.

15. LEASE COMMITMENTS

The Company has entered into operating lease arrangements mainly relating to its office premises which will end on July 5, 2016.

Future minimum lease payments for non-cancelable operating leases as of March 31, 2014 are as follows:

	Rental
Fiscal Year	Commitments

2014	$	53,109
2015		106,217
2016		53,108

Total	$	212,434

Total rental expenses are $26,748 and $95,513 for the three months ended March 31, 2014 and 2013, 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.

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 the Company’s 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; 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 interested 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.

Business Overview

The Company primarily designs, develops and operates 3D online games, including web-based Massive Multiplayer Online Role-Playing Games (MMORPGs). Although our first MMORPG, 108 Warriors was launched in the third quarter of 2012, the Company only has generated a limited amount of revenue related to this game during the period from August 9, 2006, its inception, through March 31, 2014. From the fourth quarter of 2013, we transitioned our development stage to operational activities. Accordingly, reporting as a development stage company is no longer required, and we are confident in the quality and market acceptability of 108 Warriors. After years of research and public beta version test, we started to invest in marketing activities and operate the 108 Warriors on our own. However, due to the lack of funding, we were forced to cease the promotion of 108 Warriors, instead decided to temporarily focus on co-operation of web browser games and game art design outsource business, in which our art design department took projects from third-party game companies by virtue of our specialized design capabilities, to support the general operating costs from the second quarter of 2013. Online game market is a rapidly changing market and the trend of online games now is pretty much different from what it was when the 108 Warriors was initially developed. Despite the suspension of promotion of this game due to funding shortage, the Company is actively exploring new ways of operating this game, such as franchising out to a third-party game operation company that will bear all game promotion cost and will share with the Company a certain portion of monetary interests derived from the game. As such the Company shut down operation department and marketing department and redundant R&D staff, rented a smaller office to significantly reduce the operating costs.

The Company established an online distribution platform www.1799.com to operate third-party web browser games. The focus of the platform is to provide diversification and make available a wide variety of games to a large and diverse spectrum of users and be a credit to the Company’s user database. On the other hand, as the operator, the Company signed distribution agreements with third-party developers to offer games to users on its platform. Since the technique requirement of web browser games is lower than the “MMORPG”, the Company reduced a significant number of technicians to save labor cost and improve operational ability.

The Company has a team of professional and creative game art designers. In addition to occasional design work on the current games, the team took art design projects from other third-party game development companies that could not afford to build up a seasoned design team, or that are unable to deliver an artistic game design of high quality as required. With online games booming in China, there is a substantial need for professional art design talents. By leveraging our team’s capabilities, we intend to dig in this niche market and take as many projects as we can. We intend to build up a game art design league to include individual artists and smaller art studios to co-work on the projects once our capacity is fully utilized.

Mobile games, which mainly consist of online games released through the Apple store and Android platform, have undergone an explosive growth of Chinese market in 2014. As mobile games tend to take much shorter time to develop and much less research and development investment, we are in the process of developing a mobile game and intend to launch the game in late 2014.

Accounting Policy of Revenue Recognition

MMORPG 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 of web browser game

Game art design services

Results of Operations

For the three months ended March 31, 2014, the Company derived most of the revenue from co-operation of web browser games and game art designs outsource business, in which our game art design department took projects from third-party game companies by virtue of our specialized design capabilities. Even though the Company franchised its self-developed core product, 108 Warriors, out to a third-party game operation company that will bear all game promotion cost and will share with the Company a certain portion of monetary interests derived from the game, the game has not been fully in operation as such the Company has not received any revenue stream thereon. As a result the Company has generated a limited amount of revenue. 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,
	2014			2013
	(Unaudited)			(Unaudited)

Revenue	$	46,576		$	78,776
Cost of revenue		98,576			437,928
Gross loss		(52,000	)		(359,152	)

Operating expenses
Research and development expenses		13,729			151,513
Sales and marketing expenses		12,154			140,544
General and administrative expenses		187,384			295,551
Total operating expenses		213,267			587,608

Other income		(58,466	)		-

Loss from operations		(206,801	)		(946,760	)

Non-operating (income) expenses		12			(759	)

Net loss	$	(206,813	)	$	(946,001	)

Revenue

For the three months ended March 31, 2014, revenues were $46,576, representing a decrease of $32,200, compared to $78,776 for the corresponding period in 2013. The decrease in net revenues was primarily due to the decrease from 108 Warriors and web browser games, with an amount of $65,985, and the increase from game art design service, with an amount of $33,785. The Company has franchised the 108 Warriors, which was self-operated in 2013, to a third party company in 2014. However, the game has not been in operations thus not generated revenue. The Company also receives game art design service income from third-parties in PRC by providing game art design service when available.

Cost of revenue

For the three months ended March 31, 2014, cost of revenues were $98,576, representing a decrease of $339,352, compared to $437,928 for the corresponding period in 2013. The decrease in cost of revenues was primarily due to decrease in salary for designers and programmers as a result of terminating redundant staff in the latter part of 2013.

Gross loss

As a result of the foregoing, our gross loss for the three months ended March 31, 2014 was $52,000 from $359,152 in the same period of 2013. The reason for the narrowing in the gross loss was that the Company has franchised the game 108 Warriors to a third-party company, thus the Company has significantly downsized the operation staff, and reduced the server hosting fee which was borne by the third party company.

Research and Development (R&D) expenses

R&D expenses primarily consist of R&D employee salary, rent expenses, social assurance, depreciation, service fee, property management fee and testing fee for R&D activities. For the three months ended March 31, 2014, R&D expenses were $13,729, representing a decrease of $137,784 or 90.94%, compared to $151,513 for the corresponding period in 2013. The decrease was mainly attributable to cost-cut measures such as office relocation and disposal of redundant equipment taken in latter part of 2013 with the impact manifested in the comparative periods, including rental and property management fee aggregately decreased by $108,197 as a result of R&D office relocation, depreciation expenses of computers and equipment decreased by $22,215. Other variances include communication fee, water and electricity, sundries, etc., representing an accumulated decrease of about $7,372.

Sales and marketing expenses

Sales and marketing expenses mainly represented selling employee salaries and advertising & promotion fees. For the three months ended March 31, 2014, sales and marketing expenses were $12,154, representing a decrease of $128,390 or 91.35% compared to $140,544 for the corresponding period in 2013. The decrease was mainly due to decreases in selling employee salary, which decreased by $66,017, in advertising & promotion fee, which decreased by $60,704. Other miscellaneous fees decreased by $1,669. The decrease is primarily due to the strategy of running our 108 Warriors has changed from self-operation model in 2013 to franchise model in 2014 in which the franchisee will operate the game and bear all operation costs such as marketing expenses.

General and administrative expenses

General and administrative expenses primarily consist of G&A employee salary, professional service fee, social insurance and depreciation. For the three months ended March 31, 2014, total general and administrative expenses were $187,384, representing a decrease of $108,167 or approximately 36.60% as compared to $295,551 for the corresponding period in 2013. The decrease was due to decreases in G&A employee salaries, which decreased by $52,376, in social insurance, which decreased by $12,425, and in professional service fee, which decreased by $45,402, compared to the same period in 2013, respectively. The decrease of $52,376 in G&A employee salaries was mainly due to G&A redundant staff downsizing. And for the same reason, social insurance and welfare expenses decreased accordingly. The decrease of professional service fee was mainly due to the decrease in the legal and accountant service fee offered for 2014 compared to 2013. Other variances include expenses occurred for communication fees, travelling expenses, etc., representing an accumulated increase of $2,036.

Net loss

For the three months ended March 31, 2014, net loss decreased to $206,813 from $946,001 for the corresponding period in 2013. The decrease in net loss was primarily due to decreases in cost of revenue, R&D expenses, sales and marketing expenses and G&A expenses.

Liquidity and Capital Resources

For the three months ended March 31, 2014 and 2013, 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, 2013, CixiYide and Mr. Zhilian Chen had provided the Company loans in the aggregate amount of $ $6,464,867 and $210,197, respectively. As of March 31, 2014, CixiYide and Mr. Zhilian Chen had provided the Company loans in the aggregate amount of $6,496,365 and $219,438, respectively.

Going Concern, Liquidity and Management Plans

The accompanying financial statements are presented on a going concern basis. The Company has recurring net losses and negative cash flows from operations and has been dependent on debt and equity financing from related entities. The Company has an accumulated deficit of $17,554,484 as of March 31, 2014. During the past two years, Mr. Zhilian Chen, our Chairman and Director, and CixiYide Auto Co., Ltd. (“CixiYide”), a company 100% beneficially owned by Mr. Chen, provided continuous financial support to the Company. As of March 31, 2014, CixiYide and Mr. Zhilian Chen had provided the Company loans in the aggregate amount of $6,496,365 and $219,438, respectively. The Company has relied exclusively on related party financing to sustain its operations. Accordingly, there is substantial doubt about its ability to continue as a going concern. 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.

Cash Flows

	Three months ended March 31,
	2014			2013
	(Unaudited)			(Unaudited)

Net cash used in operating activities	$	(195,736	)	$	(952,199	)
Net cash provided by (used in) investing activities		6,536			(5,441	)
Net cash provided by financing activities		188,612			924,306
Effect of foreign currency exchange rate changes on cash and cash equivalents		(46	)		248
Net decrease in cash and cash equivalents	$	(634	)	$	(33,086	)

Net cash used in operating activities: The Company had limited amount of revenue from its inception in 2006 to March 31, 2014. Our net cash used in operating activities decreased by $756,463 in the three months ended March 31, 2014 compared to that in the three months ended March 31, 2013, representing a decrease of 79%. The decrease of net cash used in operating activities was due to decreases in salary expense, rental and marketing expenses. The Company has changed the strategy of running the 108 Warriors game from self-operation model in 2013 to franchise model in 2014, as such the Company has downsized the redundant staff and squeezed the marketing expenses. Also the Company has adopted many cost-saving measures since the latter part of 2013 such as relocation to a cheaper office.

Net cash provided by (used in) investing activities:Our investing activities cash flow changed from net cash used in investing activities of $5,441 to net cash flow provided by investing activities of $6,536 in the three months ended March 31, 2014 compared to the corresponding period of 2013. The change in net investing cash flow was mainly due to the proceeds from sales of software to a third-party company with an amount of $6,536 during the three month ended March 31, 2014.

Net cash provided by financing activities: Our cash provided by financing activities decreased from $924,306 for the three month ended March 31, 2013 to $188,612 for the corresponding period of 2014, representing a decrease of 80%. The Company has been relying on the shareholder financing to support its operation but the tendency has been lowering in 2014. It is mainly due to the improvement of the Company’s operation not only by the change of business model but also by many cost-saving measures taken.

Working capital

We have working capital deficit of $1,037,715 as of March 31, 204, compared with working deficit of $961,957 as of December 31, 2013, representing an increase of deficit of 7.88%. In the fourth quarter of 2013, we transitioned from the development stage and began operative activities. We will support the operations mainly by revenues from current business line and continue to require additional financing to fund operations and to undertake our new business plans. Because the Company has not reaped significant revenue from its newly franchised Warrior 108 game, the Company had to obtain loans from related parties to support daily operations. As of March 31, 2014, the Company accumulatively obtained loans in the amount of $6,715,804 from CixiYide and Mr. Zhilian, and $215,811 from Mr. Mingyang Li, the Company’s CEO.

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 $153,471 as of March 31, 2014.

Employees

As of March 31, 2014, the Company employed approximately 26 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

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.

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 the Company is a “smaller reporting company,” as defined by Rule 229.10(f)(1).

ITEM 4. CONTROLS AND PROCEDURES

Disclosure controls and procedures

As of the end of the period covered by this report (the “Evaluation Date”), the Company carried out an evaluation, under the supervision and with the participation of the Company's Principal Executive Officer and Principal Financial Officer (the “Certifying Officers”) of the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in rules 13a-15(e) and 15d-15(e)) under the Exchange Act. Based on that evaluation, the Certifying Officers have concluded that, as of the Evaluation Date, the disclosure controls and procedures in place were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act, is recorded, processed, summarized and reported on a timely basis in accordance with applicable rules and regulations.

Internal control over financial reporting

The Certifying Officers reviewed our internal control over financial reporting (as defined in rules 13a-15(f) and 15d-15(f)) under the Exchange Act as of the Evaluation Date and concluded that no changes occurred in such control or in other factors during the quarter ended March 31, 2014 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

None.

ITEM 1A. RISK FACTORS

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 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

EXHIBIT INDEX

Number		Exhibit Description

31.1		Certification of the Chief Executive Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

31.2		Certification of the Chief Financial Officer pursuant to Rules 13a-14(a) and 15d-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

32.2		Certification of the 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 March 31, 2014 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.

	SANTARO INTERACTIVE ENTERTAINMENT COMPANY

Date: June 12, 2014	By:	/s/ Mingyang Li
	Name:	Mingyang Li
	Title:	Chief Executive Officer & Chief Financial Officer

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