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EX-31.1 - Santaro Interactive Entertainment Cov222949_ex31-1.htm
EX-31.2 - Santaro Interactive Entertainment Cov222949_ex31-2.htm
EX-32.2 - Santaro Interactive Entertainment Cov222949_ex32-2.htm
EX-32.1 - Santaro Interactive Entertainment Cov222949_ex32-1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549
 
FORM 10-Q
 
x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarter ended March 31, 2011

OR

¨       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGE ACT OF 1934
 
Commission file number 333-165751
 
SANTARO INTERACTIVE ENTERTAINMENT COMPANY
(Exact name of registrant as specified in its charter)

Nevada
(State or other jurisdiction of incorporation or organization)

901C, 9th Floor, Building 4, Courtyard 1
Shangdi East Road, Haidian District, Beijing 100025
(Address of principal executive offices, including zip code.)

15911041464
(Registrant's telephone number, including area code)
 
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  YES x    NO ¨
 
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 ¨    NO ¨ Not required
 
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a small reporting company.  See the definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
 
Large accelerated filer  ¨
Accelerated filer  ¨
   
Non-accelerated filer ¨
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   ¨      No   x
 
As of May 12, 2011, there are 67,500,000 shares of common stock outstanding.
 
All references in this Report on Form 10-Q to the terms “we,” “our,” “us,” the “Company,” “Santaro,” and the “Registrant” refer to Santaro Interactive Entertainment Company unless the context indicates another meaning.

 
 

 

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

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

 
2

 

Santaro Interactive Entertainment Company
(A Development Stage Company)
Consolidated Balance Sheets
   
March 31, 2011
   
December 31,2010
 
   
(Unaudited)
       
ASSETS
           
Current assets
           
Cash and cash equivalents
  $ 222,030     $ 320,087  
Prepaid expense
    67,005       47,703  
Other receivables
    112,362       152,659  
                 
Total current assets
    401,397       520,449  
                 
Property and equipment, net
    197,285       201,379  
Intangibles
          6,004  
                 
Total Assets
  $ 598,682     $ 727,832  
                 
LIABILITIES AND STOCKHOLDERS’ DEFICIT
               
Current liabilities
               
Other payables and accrued expenses
  $ 169,041     $ 160,087  
Due to related parties
    5,919,047       5,165,582  
                 
Total current liabilities
    6,088,088       5,325,669  
                 
STOCKHOLDERS’ DEFICIT
               
                 
Common stock ($0.001 par value; authorized –75,000,000 shares; issued and outstanding –67,500,000 shares)
    67,500       67,500  
Additional Paid-In Capital
    1,203,726       1,203,726  
Deficit accumulated during the development stage
    (6,617,837 )     (5,755,855 )
Accumulated other comprehensive loss
    (142,795 )     (113,208 )
                 
Total Stockholders’ Deficit
    (5,489,406 )     (4,597,837 )
                 
Total liabilities and Stockholders’ deficit
  $ 598,682     $ 727,832  
See notes to the consolidated financial statements

 
3

 

Santaro Interactive Entertainment Company
(A Development Stage Company)
Consolidated Statements of Operations and Comprehensive Loss
   
Three months ended March 31
   
August 9, 2006
(inception of Beijing Sntaro)
 
   
2011
   
2010
   
through March 31,2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Operating expenses
                 
Research and development expenses
  $ 516,232     $ 385,315     $ 4,449,452  
Sales and marketing expenses
    18,072       2,001       183,568  
General and administrative expenses
    327,678       114,757       2,118,061  
                         
Loss from operations
    (861,982 )     (502,073 )     (6,751,081 )
                         
Non-operating expenses
                439,575  
                         
Loss before income tax benefit and noncontrolling interest
    (861,982 )     (502,073 )     (7,190,656 )
                         
Deferred tax benefit
          (125,518 )      
                         
Net loss before noncontrolling interest
    (861,982 )     (376,555 )     (7,190,656 )
                         
Less: Net loss attributable to the Noncontrolling interest
          (78,488 )     (572,819 )
                         
Net loss attributable to the Company
    (861,982 )     (298,067 )     (6,617,837 )
                         
Other comprehensive income
                       
Net loss
    (861,982 )     (376,555 )     (7,190,656 )
Foreign currency translation adjustment
    (29,587 )     (567 )     (142,795 )
Comprehensive loss
    (891,569 )     (377,122 )     (7,333,451 )
Less: Comprehensive loss attributable to the non-controlling interest
          (78,488 )     (572,818 )
                         
Comprehensive loss attributable to the Company
  $ (891,569 )   $ (298,634 )   $ (6,760,633 )
                         
(Loss)/Earnings per share:
                       
                         
Basic and diluted
  $ (0.013 )   $ (0.007 )        
                         
Weighted average number of common shares outstanding – basic and diluted
    67,500,000       55,670,000          
    See notes to the consolidated financial statements

 
4

 

Santaro Interactive Entertainment Company
(A Development Stage Company)
Consolidated Statements of Changes in Stockholders’ Equity
    
Stockholders’ Equity (Deficit)
             
   
Common Stock
                                     
   
Share
   
$0.001 Par
Value
   
Additional
Paid-In
Capital
   
Deficit accumulated
during development
stage
   
Accumulated other
comprehensive
income (loss)
   
Total deficit of
the Company’s
stockholders
   
Noncontrolling
interest
   
Total deficit
 
                                                 
Balance at August 9, 2006
    55,670,000       55,670       (55,670 )     -       -       -       -       -  
Net (loss)
                    -       (21,583 )     -       (21,583 )     -       (21,583 )
Foreign currency exchange translation adjustment, net of nil income taxes
                    -       -       884       884       -       884  
Inject paid-in capital
                    139,580       -       -       139,580       -       139,580  
Balance at December 31, 2006
    55,670,000       55,670       83,910       (21,583 )     884       118,881       -       118,881  
Net (loss)
                    -       (483,001 )     -       (483,001 )     -       (483,001 )
Foreign currency exchange translation adjustment, net of nil income taxes
                    -       -       10,100       10,100       -       10,100  
Inject paid-in capital
                    492,141       -       -       492,141       -       492,141  
Balance at December 31, 2007
    55,670,000       55,670       576,051       (504,584 )     10,984       138,121       -       138,121  
Net (loss)
                    -       (805,983 )     -       (805,983 )     -       (805,983 )
Foreign currency exchange translation adjustment, net of nil income taxes
                    -       -       6,693       6,693       -       6,693  
Inject paid-in capital
                    739,775       -       -       739,775       -       739,775  
Balance at December 31, 2008
    55,670,000       55,670       1,315,826       (1,310,567 )     17,677       78,606       -       78,606  
Net (loss)
                    -       (1,937,574 )     -       (1,937,574 )     (333,044 )     (2,270,618 )
Foreign currency exchange translation adjustment, net of nil income taxes
                    -       -       (22 )     (22 )     -       (22 )
Inject paid-in capital
                    -       -       -       -       437,771       437,771  
Balance at December 31, 2009
    55,670,000       55,670       1,315,826       (3,248,141 )     17,655       (1,858,990 )     104,727       (1,754,263 )
Net (loss)
            -       -       (2,507,714 )     -       (2,507,714 )     (239,775 )     (2,747,489 )
Foreign currency exchange translation adjustment, net of nil income taxes
            -       -       -       (130,863 )     (130,863 )     -       (130,863 )
Effect of reverse acquisition
    11,830,000       11,830       (112,100 )     -       -       (100,270 )     135,048       34,778  
Balance as of Dec 31, 2010
    67,500,000       67,500       1,203,726       (5,755,855 )     (113,208 )     (4,597,837 )     -       (4,597,837 )
Net (loss)
                            (861,982 )                             (861,982 )
Foreign currency exchange translation adjustment, net of nil income taxes
                                    (29,587 )                     (29,587 )
Balance as of March 31, 2011
    67,500,000       67,500       1,203,726       (6,617,837 )     (142,795 )     (4,597,837 )     -       (5,489,406 )
See notes to the consolidated financial statements

 
5

 

Santaro Interactive Entertainment Company
(A Development Stage Company)
Consolidated Statements of Cash Flows
   
Three months ended March 31
   
August 9, 2006
(inception of
Beijing Sntaro)
through
 
   
2011
   
2010
   
March 31,2011
 
   
(Unaudited)
   
(Unaudited)
   
(Unaudited)
 
Cash flows from operating activities:
                 
Net loss
  $ (861,982 )   $ (376,555 )   $ (7,190,656 )
Adjustments to reconcile net loss to net cash used by operating activities:
                       
Depreciation
    20,240       21,320       237,856  
Amortization of intangible assets
    6,004             6,310  
Deferred tax asset
          (125,518 )      
Changes in operating assets and liabilities:
                       
Prepaid expense
    (18,945 )     1,718       (64,321 )
Other receivable
    31,708       2,491       (108,835 )
Other payables and accrued expenses
    8,147       24,181       154,075  
Due to related parties
                28,243  
Net cash used in operating activities
    (814,828 )     (452,363 )     (6,937,328 )
                         
Cash flows from investing activities:
                       
Purchase of intangible assets
                (6,310 )
Purchase of property and equipment
    (14,885 )     (6,151 )     (421,044 )
Net cash used in investing activities
    (14,885 )     (6,151 )     (427,354 )
                         
Cash flows from financing activities:
                       
Proceeds from shareholders
                1,406,274  
Capital contributed by noncontrolling interest owner
                428,290  
Proceeds from loan from a related party
    729,961       482,736       5,661,653  
Net cash provided by financing activities
    729,961       482,736       7,496,217  
Effect of exchange rate changes on cash and cash equivalents
    1,695       2       90,495  
Net (decrease)/increase in cash and cash equivalents
    (98,057 )     24,224       222,030  
Cash and cash equivalents at the beginning of year
    320,087       12,722        
Cash and cash equivalents at the end of period
  $ 222,030     $ 36,946     $ 222,030  
Supplemental disclosure for cash flow information
                       
Interest paid
  $     $     $  
Income taxes paid
  $     $     $  
See notes to the consolidated financial statements

 
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Santaro Interactive Entertainment Company
(A Development Stage Company)
Notes to Consolidated Financial Statements (unaudited)
1. ORGANIZATION AND DISCRIPTION OF BUSINESS

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

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

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

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

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

(1)
Ningbo Sntaro has the sole discretion to determine the amount of the fees it will receive and it intends to transfer substantially all of the economic benefits of Beijing Sntaro to Ningbo Sntaro;
(2)
The equity owners irrevocably granted the Ningbo Sntaro the right to make all operating and business decisions for Beijing Sntaro on behalf of the equity owners;
(3)
All equity owned by the three equity owners were pledged to Ningbo Sntaro as a collateral against the service fee payable to Ningbo Sntaro;
(4)
The equity owners may not dispose of or enter into any other agreements involving the common shares without prior agreement by Ningbo Sntaro.
(5)
Ningbo Sntaro bears Beijing Sntaro’s operating risk.

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

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

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

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

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

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

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

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

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

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of consolidation and basis of presentation

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

 
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The consolidated interim financial information as of March 31, 2011 and for the three-month periods ended March 31, 2011 and 2010 have been prepared without audit, pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”).  Certain information and footnote disclosures, which are normally included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) have not been included, The interim consolidated financial information should be read in conjunction with the Financial Statements and the notes thereto, included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010, previously filed with the SEC.
 
In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the Company’s consolidated financial position as of March 31, 2011, its consolidated results of operations and cash flows for the three-month periods ended March 31, 2011 and 2010, as applicable, have been made. The interim results of operations are not necessarily indicative of the operating results for the full fiscal year or any future periods.
 
Use of Estimates

The preparation of consolidated financial statements in conformity with the U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets liabilities and disclosures of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets; the fair value determination of financial and equity instruments, the realization of deferred tax assets and; the recoverability of intangible assets and property, plants 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 People’s Republic of China (the “PRC”) currency "Renminbi" ("RMB"), which is determined as the functional currency. The Company’s financial statements are translated into the reporting currency, the United States Dollar (“US$”). Assets and liabilities of the Company are translated at the prevailing exchange rate at each reporting period end. Contributed capital accounts are translated using the historical rate of exchange when capital is injected. Income and expense accounts are translated at the average rate of exchange during the reporting period. Translation adjustments resulting from translation of these financial statements are reflected as accumulated other comprehensive loss in the stockholders’ equity.

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 $142,795 as of March 31, 2011, and $113,208 as of December 31, 2010. The balance sheet amounts with the exception of equity at March 31, 2011 were translated at 6.5701 RMB to $1.00 USD as compared to 6.6118RMB at December 31, 2010. 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, 2011 and 2010 were 6.5894 RMB and 6.83603 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.

 
9

 

Fair Value of Measurements

Effective January 1, 2008, the Company adopted ASC 820-Fair Value Measurements and Disclosure or ASC 820 for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements establishes a framework for measuring fair value and expands disclosure about such fair value measurements. The adoption of ASC 820 did not have an impact on the Company’s financial position or operating results, but did expand certain disclosures.
ASC 820 defines fair value as the price that would be received upon sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1:
Inputs are unadjusted quoted prices in active markets for identical assets or liabilities available at the measurement date.
Level 2:
Inputs are unadjusted quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, inputs other then quoted prices that are observable, and inputs derived from or corroborated by observable market data.
Level 3:
Inputs are unobservable inputs which reflect the reporting entity’s own assumptions on what assumptions the market participants would use in pricing the asset or liability based on the best available information.

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

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

Property and equipment

Property and equipment are stated at cost less accumulated depreciation. Depreciation is computed using the straight-line method over the following estimated useful lives:
     
Computer equipment
  
5 years
Leasehold improvements
  
5 years
Furniture and fixtures
  
5 years

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

Advertising expenses

Advertising costs are expensed when incurred and included in sales and marketing expenses and nil were recognized for the three months ended March 31, 2011 and 2010, respectively.

Research and development expenses

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

 
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Income taxes

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and tax loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in the consolidated statements of income in the period that includes the enactment date. A valuation allowance is provided to reduce the amount of deferred tax assets if it is considered more likely than not that some portion or all of the deferred tax assets will not be realized.

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

Recent issued accounting pronouncements
 
In the first quarter of 2011, The Financial Accounting Standards Board (“FASB”) has issuedASU No. 2011-01 through ASU 2011-3, which is not expected to have a material impact on the consolidated financial statements upon adoption.

3. GOING CONCERN AND LIQUIDITY

The accompanying financial statements are presented on a going concern basis. The Company is in a development stage and has not generated any revenue during the period from its inception to March 31, 2011. The Company has an accumulated deficit of$6,617,837. This condition raises substantial doubt about our ability to continue as a going concern. We currently have very little cash on hand and no other liquid assets. We plan to fund continuing operations through new financing from related parties and equity financing arrangements. On April 29, 2011, the Company entered into an agreement with Mr. Zhilian Chen and Cixi Yide, whereby, as a contribution to the Capital of Beijing Sntaro, Mr. Zhilian Chen and Cixi Yide surrendered all right to collect or otherwise enforce repayment of a debt in principal amount of US $4,460,366, which was occurred during the period from its inception to October 18, 2010. The company will need to generate 1 million registered users in order to meet its revenue goals. We estimate the company will incur approximately $1,500,000 in promotional expenses in order to generate the 1 million registered users. The revenue from these users is expected to cover future key expenses. Our ability to continue as a going concern is dependent on accomplishment of our business plan and continued financial support from related parties and other sources of financing. However, there is no assurance that the Company will be successful in accomplishing this objective. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.

4. OTHER RECEIVABLES

Other receivables of $112,362 and $152,659as of March 31, 2011 and December 31, 2010 consisted of cash advances given to certain employees for use during business operations and are recognized as General and Administration expenses when expensed. It also includes certain rental deposit.

 
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5. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

   
March 31,
   
December 31,
 
   
2011
   
2010
 
   
(Unaudited)
       
Computer equipment
    59,660       306,849  
Furniture and fixtures
    319,090       54,678  
Leasehold improvement
    67,979       67,551  
      446,729       429,078  
Less: Accumulated depreciation
    (249,444 )     (227,699 )
                 
Property and equipment, net
  $ 197,285     $ 201,379  

Depreciation expenses for the three months ended March 31, 2011 and 2010 were $20,240 and $21,320 respectively.

6. INCOME TAX EXPENSES

The Company and its subsidiaries file income tax returns separately.

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

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

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

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

Deferred Tax Assets
In assessing the realization of deferred tax assets, the Company considers projected future taxable income and tax planning strategies in making its assessment, as of March 31, 2011, and December 31, 2010, for PRC income tax purposes. As of March 31, 2011, Beijing Sntaro had a gross tax loss carry-forward of $4,225,837which would expire in future years. Management determined it is more likely than not that all deferred tax assets could not be recognized, so full allowance was provided as of March 31, 2011.

As of March 31, 2011, for PRC income tax purposes, FL Network had $2,307,515 gross loss carry-forwards which would expire in future years.  Management determines it is more likely than not that all deferred tax asset could not be recognized, so full allowance was provided as of March 31, 2011.

 
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7. 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. Total amounts expensed for such employee benefits amounted to $44,548 and $29,497 for the three months ended March 31, 2011 and 2010, respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees.

8. RELATED PARTY TRANSACTIONS AND BALANCES

The Company is in a development stage and has no revenue to date during the period from its inception to March 31, 2011. Cixi Yide Auto Company (the “CixiYide”), a company 97% owned by the Company’s director and 80% ultimate shareholder Mr. Zhilian Chen, provides continuous financial support for Beijing Sntaro’s business and operation. By the end of 2010, Cixi Yide has provided a loan of $4,846,184. During the three months ended March 31 2011, Cixi Yide made an additional loan of $729,961 to the Company. The total amount due to CixiYide is $5,588,956 as of March 31, 2011.

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

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

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

The loans from CixiYide and Mr. Zhilian, Chen are unsecured and interest free, payable on demand, and were outstanding as of March 31, 2011.

9. LEASE COMMITMENTS

The Company has entered into operating lease arrangements mainly relating to its office premises and computer equipment which will all end in 2011. Future minimum lease payments for non-cancelable operating leases as of March 31, 2011 are as follows:

   
Office premises
 
   
( US$)
 
2011
    95,838  
         
Total
    95,838  

Total rental expenses are US$59,232 and US$44,839 for the three months ended March 31, 2011 and 2010 respectively.

10. SUBSEQUENT EVENT
On April 29, 2011, the Company entered into an agreement (the “Agreement”) with Mr. Zhilian Chen and Cixi Yide Auto Co., Ltd. (Collectively the “Creditor”) whereby, as a contribution to the capital of Beijing Sntaro, the Creditor surrendered all rights to collect or otherwise enforce repayment of a debt in the principal amount of U.S. $4,460,366, including any interest due thereupon.

 
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Management has considered all events occurring through the date the financial statements have been issued, and has determined that other than the event disclosed above, there are no such events that are material to the financial statements.
  
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion is an overview of the important factors that management focuses on in evaluating our business; financial condition and operating performance should be read in conjunction with the financial statements included in this Current Report on Form 10-Q. This discussion contains forward-looking statements that involve risks and uncertainties. Actual results could differ materially from those anticipated in these forward-looking statements as a result of any number of factors, including those set forth in the Company’s reports filed with the SEC on Form 10-K, 10-Q and 8-K as well as in this Current Report on Form 10-Q. Given the uncertainties that surround such statements, you are cautioned not to place undue reliance on such forward-looking statements.
Results of Operations
Because the Company is in the development stage, our operations have been limited to developing our products.  As a result, the Company realized no revenue during the period from inception (August 9, 2006) through March 31, 2011. The Company’s business, financial condition and results of operations may be influenced by the political, economic and legal environments in the PRC such as changes in governmental policies with respect to laws and regulations, anti-inflationary measures, currency conversion and remittance abroad, and rates and methods of taxation, among other things.
The following table sets forth a summary, for the periods indicated, our consolidated results of operations. Our historical results presented below are not necessarily indicative of the results that may be expected for any future period.
   
Three Months Ended March 31,
 
   
2011
   
2010
 
   
(Unaudited)
   
(Unaudited)
 
Operating expenses
           
Research and development expenses
  $ 516,232     $ 385,315  
Sales and marketing expenses
    18,072       2,001  
General and administrative expenses
    327,678       114,757  
                 
Loss from operations
    (861,982 )     (502,073 )
                 
Loss before income tax benefit and non-controlling interest
    (861,982 )     (502,073 )
                 
Deferred tax benefit
    -       (125,518 )
                 
Net loss before noncontrolling interest
  $ (861,982 )   $ (376,555 )

 
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Research and Development (R&D) expenses

R&D expenses primarily consist of R&D salary, depreciation, and office and communication fees which occurred for R&D activities. For the three months ended March 31, 2011, R&D expense was $516,232, representing an increase of $130,917 or 33.98%, compared with $385,315 for the corresponding period in 2010 which was due to the salary expenses incurred in the first three months of 2011 increased US$134,918 and social assurance increased US$11,686 compared with same period of 2010. Since the Online game 3Guo Online is in testing stage, the Company hired more technical staff for the R&D. Others variance includes expenses for business entertainment, business travelling, etc. presenting a slight decrease, accumulated about US$38,014.
Sales and marketing expenses
Selling expenses mainly represent advertising costs and fees. For the three months ended March 31, 2011, selling expense was $18,072, representing an increase of $16,071or 803.15%compared with $2,001 for the corresponding period in 2010. It was mainly due to increase of water &electricity fee and promotion fee with the amount of $7,338 and $3,848. As mentioned in the analysis on R&D expenses, more related expenses occurred since it is getting closer to release of the game of 3Guo Online. Others variance includes sundry promotion fee, etc.
General and administrative expenses
General and administrative expenses consist primarily of compensation for personnel, business travelling expense, rental and office expense related to ordinary administration and fees for professional services. For the three months ended March 31, 2011, total general and administrative expenses was $327,678, representing an increase of $212,921, or approximately 185.54% as compared to $114,757for the corresponding period in 2010 which due to the salary expense increased US$79,547, professional service fee increased US$96,806 compared with same periods of 2010 respectively. As for the increase of salary, as mentioned in R&D expenses and Selling expenses, the Company hired more high level staff for the coming release of the game. The Company became listed Company in October 2010, related professional fee increased significantly during the first quarter of 2011. Ningbo Sntaro has a new leasing property for office use in Beijing, China, due on October 24, 2011, presenting an increase of US$46,818.Other variance includes expenses occurred for social insurance for supporting department, communication fee, rental fee and power etc.
Deferred tax expense (benefit)
For the three months ended March 31, 2011, the deferred tax benefit decreased by $125,518 to $0 compared with $(125,518) for the corresponding period in 2010. The change in deferred tax benefit was due to the full allowance of the management’s recognition of relevant deferred tax  assets at the end of March 31, 2011 since it is more likely than not that all of the deferred tax assets will not be realized.
Net loss
For the three months ended March 31, 2011, the net loss increased to $861,982 compared with $376,555 for the corresponding period in 2010. The increase in net loss was primarily due to increases in R&D expense, sales and marketing expenses, general and administrative expense.
Liquidity and Capital Resources
We anticipate that the existing cash and cash equivalents on hand, together with the net cash flows supported by owners and related parties will be sufficient to meet our working capital requirements for our on-going projects and to sustain the business operations for the next twelve months.

 
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Since we initiated our business operations, we have been funded primarily by related parties. Cixi Yide Auto Company (the “Cixi Yide”) provided loan of $5,588,956 for the business’s initial operations. Mr. Zhilian Chen is the major owner of Cixi Yide.
Going Concern and Liquidity
The accompanying financial statements are presented on a going concern basis. The Company is in a development stage and has not generated any revenue during the period from its inception to March 31, 2011. The Company has an accumulated deficit of$6,617,837. This condition raises substantial doubt about our ability to continue as a going concern. We currently have very little cash on hand and no other liquid assets. We plan to fund continuing operations through new financing from related parties and equity financing arrangements. On April 29, 2011, the Company entered into an agreement with Mr. Zhilian Chen and Cixi Yide, whereby, as a contribution to the Capital of Beijing Sntaro, Mr. Zhilian Chen and Cixi Yide surrendered all right to collect or otherwise enforce repayment of a debt in principal amount of US $4,460,366, which was occurred during the period from its inception to October 18, 2010. The company will need to generate 1 million registered users in order to meet its revenue goals. We estimate the company will incur approximately $1,500,000 in promotional expenses in order to generate the 1 million registered users. The revenue from these users is expected to cover future key expenses. Our ability to continue as a going concern is dependent on accomplishment of our business plan and continued financial support from related parties and other sources of financing. However, there is no assurance that the Company will be successful in accomplishing this objective. The financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern.
Three Months Ended March 31, 2011 Compared to Three Months Ended March 31, 2010
 
Three Months EndedMarch 31,
 
 
2011
 
2010
 
 
(Unaudited)
 
(Unaudited)
 
Net cash used in operating activities
  $ (814,828 )   $ (452,363 )
Net cash used in investing activities
    (14,885 )     (6,151 )
Net cash provided by financing activities
    729,961       482,736  
Effect of foreign currency exchange rate changes on cash and cash equivalents
    1,695       2  
Net (decrease) increase in cash and cash equivalents
  $ (98,057 )   $ 24,224  

Net cash used in operating activates: The Company had no revenue from its inception in 2006 to March 31, 2011. Our net cash used in Operating activities increased $362,465 in the three months ended March 31, 2011 compared to that in the three months ended March 31, 2010. Most operating cash flow is the result of cash-paid expenditure during operation. The increase of net cash used in operating activities was due to increasing salary expense and rent expense. Since the Company will complete its R&D of 3Guo Online, the Company hired more high level staff for the preparation of R&D and operating.

 
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Net cash used in investing activities: Our net cash used in investing activities increased $8,734 in the three months ended March 31, 2011 compared to that in the three months ended March 31, 2010. The increase in net cash used in investing activities was the result of an increase in the purchasing of new equipment and facilities during the first three months of 2011.
Net cash provided by financing activities: Our cash provided by financing activities significantly increased from $482,736 for the three months ended March 31, 2010 to $729,961for the Three months ended March 31, 2011, representing an increase of 51.21%. This is a result of that the current financed capital could not support current operation and product development, Cixi Yide, 97% controlled by the Company’s controlling shareholder, continuously provides financial support.
Working capital
Working capital is $(5,686,691) as of March 31, 2011 compared with $(4,805,220) as of December 31, 2010. The significant change in working capital is due to the development stage of the Company’s games. Because the Company’s games are not yet producing any revenue, the Company obtained loans to support daily operations. The Company obtained a loan in the amount of $4,846,184 at December 31, 2010 from CixiYide. As of March 31, 2011, the Company accumulatively obtained loans in the amount of $5,588,956from CixiYide Company.
Recent issued accounting pronouncements
 
In the first quarter of 2011, The Financial Accounting Standards Board (“FASB”) has issued ASU No. 2011-01 through ASU 2011-3, which is not expected to have a material impact on the consolidated financial statements upon adoption.

Off-Balance Sheet Arrangements
The Company does not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on its financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
Description of Property
The Company’s property and equipment consists wholly of computer equipment, leasehold improvements, and furniture. The net value of the Company’s property and equipment was $197,285 as of March 31, 2011.
Employees
The Company currently employs approximately 160 designers and programmers with an average age of 26. The majority of employees have three to five years’ 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.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
 
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.

 
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ITEM 4. CONTROLS AND PROCEDURES
 
Evaluation of Disclosure Controls and Procedures
 
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we have conducted an evaluation of the effectiveness of the design and operation of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act of 1934, as of the end of the period covered by this report.  Based on this evaluation, our principal executive officer and principal financial officer concluded as of the evaluation date that our disclosure controls and procedures were effective such that the material information required to be included in our Securities and Exchange Commission reports is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms relating to our company, particularly during the period when this report was being prepared.
 
Additionally, there were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the evaluation date.  We have not identified any significant deficiencies or material weaknesses in our internal controls, and therefore there were no corrective actions taken.

PART II – OTHER INFORMATION
 
ITEM 1.  LEGAL PROCEEDINGS
 
Currently we are not involved in any pending litigation or legal proceeding.
 
ITEM 1A. RISK FACTORS

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item. 
 
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
 
None.

 
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ITEM 3. DEFAULTS UPON SENIOR SECURITIES
 
None.
 
ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITY HOLDERS
 
Removed and Reserved.
 
ITEM 5. OTHER INFORMATION
 
None. 
 
ITEM 6. EXHIBITS
 
The following documents are filed as a part of this report or are incorporated by reference to previous filings, if so indicated:

Exhibit No.
 
Description
     
3.1
 
Articles of Incorporation (1)
3.2
 
Bylaws (1)
31.1
 
Section 302 Certification of Chief Executive Officer*
31.2
 
Section 302 Certification of Chief Financial Officer *
32.1
 
Section 906 Certification of Chief Executive Officer *
32.2
  
Section 906 Certification of Chief Financial Officer *

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

 
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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.

May 16, 2011

By:           SANTARO INTERACTIVE ENTERTAINMENT COMPANY

By: /s/ Zhilian Chen
 
Zhilian Chen, President
 

 
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