Annual Report (10-k)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

	For the fiscal year ended December 31, 2013

	OR

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

	For the transition period from ______________ to ______________

Commission file number 333-165751

SANTARO INTERACTIVE ENTERTAINMENT COMPANY

(Exact name of registrant as specified in its charter)

Nevada		27-1571493
(State or other jurisdiction of incorporation or organization)		(IRS. Employer Identification No.)

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

Beijing, People’s Republic of China, 100025

(Address of principal executive offices, including zip code)

(8610) 82167111

(Registrant's telephone number, including area code)

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act: Common Stock, $0.001 par value

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨

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	¨	Accelerated filer	¨

Non-accelerated filer	¨	Smaller reporting company	x
(Do not check if a smaller reporting company)

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

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant was approximately $5,774,742 based on the closing price of such shares on June 28, 2013.

As of March 20, 2014, there are 69,875,000 shares of common stock outstanding.

TABLE OF CONTENTS

		Page Number

Special Note Regarding Forward Looking Statements			3

PART I
Item 1.	Business		4
Item 1A.	Risk Factors		19
Item 1B.	Unresolved Staff Comments		19
Item 2.	Properties		19
Item 3.	Legal Proceedings		19
Item 4.	Mine Safety Disclosures		19

PART II
Item 5.	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		19
Item 6.	Selected Financial Data		21
Item 7.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		21
Item 7A.	Quantitative and Qualitative Disclosures about Market Risk		29
Item 8.	Financial Statements and Supplementary Data		30
Item 9.	Changes In and Disagreements With Accountants on Accounting and Financial Disclosure		32
Item 9A.	Controls and Procedures		32
Item 9B.	Other Information.		34

PART III
Item 10.	Directors, Executive Officers and Corporate Governance		34
Item 11.	Executive Compensation		39
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		41
Item 13.	Certain Relationships and Related Transactions, and Director Independence		42
Item 14.	Principal Accounting Fees and Services		43

PART IV
Item 15.	Exhibits, Financial Statement Schedules		44

SIGNATURES			45

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve assumptions, and describe our future plans, strategies, and expectations. Such statements are generally identifiable by use of the words “may,” “will,” “should,” “expect,” “anticipate,” “estimate,” “believe,” “intend,” or “project” or the negative of these words of other variations on these words or comparable terminology. These statements are expressed in good faith and based upon a reasonable basis when made, but there can be no assurance that these expectations will be achieved or accomplished.

Such forward-looking statements include statements regarding, among other things, (a) the potential markets for our products, our potential profitability, and cash flows (b) our growth strategies, (c) anticipated trends in our industry, (d) our future financing plans and (e) our anticipated needs for working capital. This information may involve known and unknown risks, uncertainties, and other factors that may cause our actual results, performance, or achievements to be materially different from the future results, performance, or achievements expressed or implied by any forward-looking statements. These statements may be found under "Item 1. Business" and "Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations," as well as in this Annual Report on Form 10-K generally. Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors as described in this Annual Report on Form 10-K generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Annual Report on Form 10-K will in fact occur. In addition to the information expressly required to be included in this filing, we will provide such further material information, if any, as may be necessary to ensure that the required statements, in light of the circumstances under which they are made, are not misleading.

Although forward-looking statements in this Annual Report on Form 10-K reflect the good faith judgment of our management, forward-looking statements are inherently subject to known and unknown risks, business, economic and other risks and uncertainties that may cause actual results to be materially different from those discussed in these forward-looking statements. Readers are urged not to place undue reliance on these forward-looking statements, which speak only as of the date of this Annual Report on Form 10-K. We assume no obligation to update any forward-looking statements in order to reflect any event or circumstance that may arise after the date of this report, other than as may be required by applicable law or regulation. Readers are urged to carefully review and consider the various disclosures made by us in our reports filed with the Securities and Exchange Commission which attempt to advise interested parties of the risks and factors that may affect our business, financial condition, results of operation and cash flows. If one or more of these risks or uncertainties materialize, or if the underlying assumptions prove incorrect, our actual results may vary materially from those expected or projected.

All references in this Annual Report on Form 10-K to the terms “we”, “our”, “us”, “Santaro” and “the Company” refer to Santaro Interactive Entertainment Company.

ITEM 1. BUSINESS

ORGANIZATIONAL HISTORY

We were incorporated in the State of Nevada on December 30, 2009. We maintain our statutory registered agent's office at EastBiz.com, Inc., 5348 Vegas Drive, Las Vegas, NV 89108, and our business office is located at Taihe Wenhua Plaza B-410, 1A Chenjialin Balizhuang, Chaoyang District Beijing, People’s Republic of China. We have not been subject to any bankruptcy, receivership, or similar proceeding, or any material reclassification or consolidation.

On October 12, 2010, Santaro Interactive Entertainment Company (OTCBB: STIE.OB) (“STIE”) completed the acquisition of 100% of the issued and outstanding capital stock of Santaro Holdings, Ltd. (“SHL”), a limited liability company organized under the laws of British Virgin Islands on December 2, 2009, in exchange for Fifty Five Million Six Hundred Seventy Thousand (55,670,000) shares of STIE. As a result of the acquisition, SHL became our wholly owned subsidiary. As shown in the chart below, SHL’s wholly-owned subsidiary, Santaro Investments, Ltd, a Hong Kong corporation, was incorporated on January 27, 2010. Santaro Investments, Ltd’s wholly-owned subsidiary, Ningbo Sntaro Network Technology Co., Ltd., a wholly foreign owned enterprise (“WFOE”) organized under the laws of the People’s Republic of China (“PRC”), was incorporated on July 13, 2010. Ningbo Sntaro Network Technology Co., Ltd. exercises contractual control over Beijing Sntaro Technology Co., Ltd. (the “Beijing Sntaro”), an operating company organized under the laws of the PRC, which is principally engaged in the development and operation of online games. A detailed discussion regarding the contractual arrangement may be found below under the caption “VIE Structure”. Beijing Sntaro owned a 100% equity interest in Beijing Sntaro Freeland Network Co., Ltd, a company organized under the laws of the PRC, until December 31, 2012, when it transferred such interest to an unrelated third party. As a result of the transfer, FL Network ceased to be our subsidiary starting on December 31, 2012.

On July 18, 2011, Santaro Investments, Ltd established Outlets Internet Sale Limited jointly with New Select Group Limited, an unrelated company incorporated in BVI, each holding a 50% of the equity interest. The primary objective of the joint venture is to further extend and develop our online sales in the PRC.

ORGANIZATIONAL STRUCTURE

VIE Structure

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 businesses providing online games. In September 2010, a series of contractual arrangements were entered into between Ningbo Sntaro and Beijing Sntaro, and its individual owners. These arrangements were renewed in December 5, 2011 due to the change in the paid-in capital of Beijing Sntaro. 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 are as follows:

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

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

(3)	All equity owned by the three equity owners of Beijing Sntaro shall be pledged to Ningbo Sntaro as 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 Beijing Sntaro's residual benefits. Because Ningbo Sntaro and its indirect parent are the sole interest holders of Beijing Sntaro, the Company consolidates Beijing Sntaro from its inception consistent with the provisions of FASB Accounting Standards Codification ("ASC") 810.

In addition, as all of these contractual arrangements are governed by PRC law and provide for the resolution of disputes through either arbitration or litigation in the PRC, they would be interpreted in accordance with PRC law and any disputes would be resolved in accordance with PRC legal procedures. The legal environment in the PRC is not as developed as in other jurisdictions, such as the United States. As a result, uncertainties in the PRC legal system could further limit the Company’s ability to enforce these contractual arrangements. Furthermore, these contracts may not be enforceable in China if PRC government authorities or courts take a view that such contracts contravene PRC laws and regulations or are otherwise not enforceable for public policy reasons. In the event the Company is unable to enforce these contractual arrangements, it may not be able to exert effective control over Beijing Sntaro 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 the 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 only out of 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 a non-resident enterprise without any establishment or place in China, or if the dividends have no connection with such foreign investors’ establishment or place in China, unless such foreign investors’ jurisdiction of incorporation has a tax treaty with China that provides for a different withholding arrangement.

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.

BUSINESS OVERVIEW

Santaro Interactive Entertainment Company is a company that primarily designs, develops and operates web-based Massive Multiplayer Online Role-Playing Games (MMORPGs), mobile games, browser game platforms, as well as related products and services. We launched our first MMORPG, the 108 Warriors, and a browser game platform, www.1799.com, in August 2012 and November 2012, respectively. Since late 2013 the Company has been seeking new business models to market its MMORPG games while cutting operational overhead. The Company intends to utilize a franchise model in which the Company, as the proprietary owner of its games, exclusively franchises a third-party company to operate and bear overall operating game costs. The Company, as the franchisor, will be entitled to a certain portion of revenue generated by the game as franchisee fee. As part of franchise model, the Company is required to maintain and upgrade its games to a level to satisfy the end users.

In its transition to the franchise model, the Company significantly reduced its workforce, and eliminated certain projects, such as the Company’s E-commerce platform, UU World, Three-Kingdom Online, Heroes of Sango and the Company ceased the promotion of 108 warriors. However, the company has continued utilizing its specialized design capabilities for game art design projects for third party gaming companies. Additionally, the Company signed distribution agreements with third-party developers to offer games to users on its platform.

MMORPGs

Santaro continues to employ a development team with strong Research and Development (R&D) expertise and experience in the online gaming industry in China and Korea. Since our establishment, we have invested heavily in developing proprietary SOUL Game Engine and Coral Game Engine for new MMORPG development.

The 108 Warriors

In August 2012 Santaro launched its first MMORPG, the 108 Warriors . While the 108 Warriors has previously been operated directly by Santaro with over 200,000 registered users since development of the game, the Company has ceased direct operation of the 108 Warriors, and the game is now part of the Company’s franchise model described above.

The 108 Warriors, is a Chinese martial arts online game based on traditional Chinese culture and inspired by ancient martial arts techniques. The game involves the twelve animals of the Chinese Zodiac, with masks from the Beijing Opera used to identify various characters. Players will be able to purchase different identities and the themes used are linked to the tribes of Chinese minority groups.

108 Warriors tells stories of a group of heroes who stand for different classes of people daring to struggle against the corrupt and unjust royal court and then rise up at the end of Northern Song Dynasty. It is a realistic martial-art game based on one of the Four Chinese Classical Masterpieces, Outlaws of the Marsh.

108 Warriors won the Golden Plume Award in 2012 for “Best Originality Online Game” after the release of the 3.1.6 version in August 2012. The Golden Plume Award is considered by many to be the most important award in the online gaming industry in China. The award is voted on by more than 50 million gamers across China and is notorious for providing the best representation of gamers in Chinese gaming industry.

Browser Games Platform

In November of 2012, the Company established a web browser game platform, which was later branded as www.1799.com (the “1799 platform”) . The 1799 platform was designed to provide a single platform to access a wide variety of games that appeal to a large and diverse spectrum of users. The platform co-distributes and operates third party web games, while also providing a platform for Santaro’s self-developed browser games. The platform distributes MMORPGs, simulation games, board games, puzzle games and social games.

The platform will continuously increase its web game portfolio by signing more deals with more developers in order to increase its user database. The platform currently operates the below games:

Warlord Flame

Developer: Guangzhou Xianhai Network Technology Co., Ltd.

Game Type: MMORPG

Company entitled revenue share: 70%

Description: Warlord Flame is a real-time strategy web game focusing PvP plays. The game is integrated with advanced micro client technology which will allow user to download the game within seconds. It also has many unique game plays, other functionalities as well as different dungeons which have made a wide range of game scenes, interactive plays and battle field features available to a web-based game. Its highly detailed graphics and story-based dungeons made the game even more real than ever and brought a beautiful fantasy world to the users.

Dragon Warrior 2

Developer: Guangzhou 9yu Network technology Co., Ltd.

Game Type: MMORPG

Company entitled revenue share: 65% if monthly revenue less than RMB1,000,000 or 70% if over

Description: Dragon Warrior 2 is based on the Three Kingdom storyline and was the successor of the original version the Dragon Warrior. The game has been integrated with unique armor system, embattle plays, grouping plays, 10 thousand user battle field and other exciting features which will let the user to better experience the survival rule of the kingdom era.

Kingory 2

Developer: Hangzhou Joyport Technology Co., Ltd.

Game Type: Strategy

Company entitled revenue share: 65%

Description: Kingory 2 is a strategy game set in the period of the Three Kingdoms. It presents an elegant graphical interface, immersing the player into the game world. It is rich in content, offering traditional strategy game features such as building up your town, researching new technologies, recruiting troops, trading, and forging alliances, as well as others such as overseeing your citizens’ happiness, tax rates, generals, battle strategies, weather conditions, events, and more!

Gong Cheng Lue Di

Developer: Shanghai Game Reign Network Technology Co., Ltd.

Game Type: SLG

Company entitled revenue share: 65% if monthly revenue less than RMB50,000 or 70% if over

Description: Gong Cheng Lue Di is a SLG that focusing on battle field feature. The game was developed by the same developing team who developed Ao Shi Tian Di. It has 36 high definition maps that can restore the battle field map of the Three Kingdoms and it also includes 300 cities which made the game the first ever full view real time battle field game.

Wu Dou Qian Kun

Developer: Beijing 9797wan Network Technology Co., Ltd.

Game Type: MMORPG

Company entitled revenue share: 65% if monthly revenue less than RMB100,000 or 70% if over

Description: Wu Dou Qian Kun is a cartoon style fantasy martial art web game. It’s based on a fantasy story line and incorporated with dynasty, fraction and martial art elements. The game’s game world is full of fantasy. The game plot is pretty mature and the graphic design of the game is pretty much diverse.

Swooned Journey to the West

Developer: Guangzhou Jieyou Software Co., Ltd.

Game Type: MMORPG

Company entitled revenue share: 60% if monthly revenue less than RMB1,000,000, 65% if over

Description: Swooned Journey to the West was launched on November 23, 2012. The game’s storyline is based on one of the four masterpieces of Chinese ancient literature, Journey to the West. The game is integrated with multiple elements, including adventure, role-playing, etc. The featured graphic design and visual effects make it a fun playing game.

Fan RenXiu Zhen 2

Developer: Guangzhou Feiyin Information Technology Co., Ltd.

Game Type: MMORPG

Company entitled revenue share: 60% if monthly revenue less than RMB300,000 or 65% if over

Description: The game includes cultivation, pet keeping, quest, escorting, dungeons and 10-thousand user battle field features. The game has 3 different fractions that the user will choose to join when starting the game and each fraction competes with the others.

Blood King Someday

Developer: Beijing Babeltime Technology Co., Ltd.

Game Type: MMORPG

Company entitled revenue share: 65% if monthly revenue less than RMB1,000,000 or 70% if over

Description: The game was rewritten from the blockbuster cartoon One Piece and it is a classic fighting RPG. The game has unique Japanese comics designs that reproduced the characters, pets as well as professions that are originally written in the comics.

New Fantasy City

Developer: Funcity Inc.

Game Type: MMORPG

Company entitled revenue share: 65% if monthly revenue less than RMB300,000 or 70% if over

Description: New Fantasy City was launched on November 16, 2012. The game is a cartoon- style turn-based MMORPG web browser game. It includes multiple battling systems such as group battles and Dungeons. The game has a total of 44 Bosses to compete with, and making the game a unique style in the industry.

Mobile Games

Mobile games are commonly referred to the games that are developed specifically for smart phones and other portable devices. The Company believes that, with the huge number of smart phone users increasing in China, the mobile game sector will become a significant source of revenue for the Company.

MOBILE GAMES:

Meng Jiang Lu

Meng Jiang Lu, also known as MJL is a collectible card game developed for the mobile platform in 2013. The initial testing stage of the game has been finalized on Apple’s Appstore and it’s currently in adjusting stage and expected to be tested for the second round in April 2014.

Collectible Card Games are very easy to play with and have a wide range of users, therefore its user staying rate is quite high. This type of game can successfully capture the fractional gaming habit of the users and its simple strategy plays are well accepted by the users.

The number of users for this type of games is growing rapidly and it accounts for 23.3% of all active users playing mobile games. A couple of classic CCGs are still very much popular. According to industry statistics released on the Tencent games channel, CCGs will keep going up in 2014.

According to i-Research report released by October 2013, the mobile game market in China will reach a level of RMB 9.19 billion, representing a 371.1% increase over last year. i-Research also expects that this market will keep a strong upward momentum with a 100% growth in 2014. This high growth is driven by the ever-increasing smart phone holders tending to play and pay for mobile games more frequently, and by a more maturing mobile games product chain in China as well.

The Android version of MJL will be distributed in co-distribution model and will be focusing on a few key platforms where marketing expenses will be injected accordingly, however its IOS version will be operated independently by the Company.

TECHNOLOGY

SOUL Game Engine

Santaro has developed its own proprietary game engine technology for the development of MMORPGs, namely, the SOUL Game Engine. Three Kingdoms Online and UU World have both been developed using the SOUL Game Engine and, in the future, this engine will continue to be used for the development of both MMORPGs and web games.

Content may be king, but when it comes to Internet content, keeping up with technological innovation is just as crucial. Companies are continually developing new games with the latest technological tools to attract more users and boost revenues. Without its own game engine, a company cannot understand in any depth the key drivers needed for developing an online game. This is the reason why Santaro decided to develop its own proprietary advanced online engine product, which it calls the SOUL Game Engine. Santaro’s proprietary technology will support over 40,000 simultaneous players. This is a larger concurrent user capacity than most online game companies are currently able to operate in China. Below is a brief description of the six key components of the SOUL Game Engine. These include: World Map Editor, Physical Properties Tool, Physical Effects Tool, Visual Material Tool, Artificial Intelligence Tool, and User Interface Tool.

World Map Editor

With highly sophisticated computer graphic design techniques and editing, art designers can build colorful topography and geomorphology through a basic height picture that is dynamic and flexible. Different levels of blending materials can be used, including displacement mapping, normal mapping and all kinds of complicated textures. For example, a rough and winding gravel path can be designed through the hills and tracks covered with various types of plants and vegetation. The SOUL Game Engine’s map editor completely supports the conversion between indoor and outdoor environments and also enables dynamic features per pixel for light and shade effects. With the synthesizing of the world map editor, the game can show and simulate waves, realistic fire, smoke, etc. In addition, the combination of the dynamic sky box and cloud editor system can produce a lifelike sky effect. Santaro’s aim is to create beautifully designed virtual space and have its customers ‘feel’ they are playing in a stimulating and special game environment.

Physical Properties Tool

The ultimate role of the Physical Properties Tool editor is to enable games to appear more realistic. Most backgrounds and objects in earlier 3D games look very unreal. Through the dynamic simulation techniques, the SOUL physical properties tool can set a physical collision bounding box for each model and all the objects in one scene can have the physical information of mass, center of gravity, linear and angular velocity, linear and angular momentum, etc. This tool provides players with an incredible sensation of the real physical world. The SOUL Game Engine physical properties tool enables players to experience the games as a film spectacle, with realistic effects, such as explosions, collisions between different kinds of objects, collapsed buildings, etc.

Physical Effects Tool

The Physical Effects Tool editor covers diverse effects, including a smart particle system that can be used for all objects under any type of scenario, such as fire, shining metal, and smoke on battlefields. For example, the effect of light and shade on weapons can be seen in the game when a warrior shoots an arrow, or a ray of light will appear when a phoenix is passing by. Users can imitate the particle effects from the real world, and experience a more realistic lifelike effect.

Visual Material Tool

The Visual Material Tool editor can create multi-layer blending through adjusting alpha and attenuation. This provides numerous colors and a display function that supports various functions of the games, such as battle, fight, and run. Based on all surface light effects of an object and the physical properties and geometric characteristics of the material, the refractive index and reflectivity of each point can be calculated precisely.

With this tool, a ray of light will travel more naturally and create vivid light and shade effects, e.g. the path of a bullet can be tracked more easily. The most representative usage of the visual material editor is to produce light reflection for the metallic sheen of weapons, such as swords. Providing gloss for precious stones or gold coins is another typical usage.

Artificial Intelligence Tool

The Artificial Intelligence (AI) Tool is used for editing the movements of non-player characters in the games. It mainly focuses on behavior selection and path-finding techniques. For example, the AI tool can make monsters walk along a path, keep them away from barriers, chase after a character, and attack players who are in their sphere of influence. All the monsters in Santaro’s online games will be given specific individual characteristics to make them seem true-to-life, so that online game players feel that the virtual games are close to reality.

User Interface Tool

The User Interface (UI) Tool is used for designing the game players’ interface. Designers establish a main interface, a skills interface, and set up conversation windows by editing all kinds of controls, such as user login interface, role specifications, and a series of other features to help players maximize their game experience.

Coral Game Engine

Santaro has developed another 3D game engine specifically for the development of its 108 Warrior MMORPG. It is integrated with below features:

3D Shadowing

The Coral game engine fully and equally supports OpenGL technology and Direct3D technology, both of which are the dominant technologies on 3D shadowing in the industry.

Compatibility

It is compatible for both 2D and 3D modes, and combines the advantages from both modes as well.

Shadowing Engine

The shadowing engine is highly optimized to reflect real lighting effects.

Hardware Acceleration

It also supports hardware acceleration which results high efficiency on model shadowing.

Scene Management System

Script System

It fully supports LUA script language.

Network Underlying Library

It contains a fast and secure network-underlying library.

User Interface Tool

It contains an easy to use User Interface (UI) Tool, which includes map tools, graphic tools and effects tool etc.

Technology Infrastructure

Santaro’s major Internet Data Centre (IDC) is located in Beijing. This center is critical to Santaro’s overall operations, as it hosts key customer information such as account verification as well as the accounting and billing system. As the center contains key data, it also has a sophisticated security system consisting of firewall, load balance devices, multi-processing and multi-core routers. In addition, when the number of concurrent users reaches 100,000, this core IDC will also play a key role for off-site disaster recovery, if needed. The facility is a major back-up center in case of force majeure events, such as earthquake and five, as well as a center managing users’ data and network traffic.

The Company has built a reliable and secure network infrastructure to fully support its operations. In order to maintain stable operation of its MMORPGs, Santaro once maintained approximately 120 servers located in Internet Data Centers (IDC) in Beijing to support its self-operation. Under the new franchise model, the franchisee, which has built up a number of IDC centers and backbone nodes to support the online games, agreed to let the Company relocate the serves in its self-owned IDCs and utilize backbone nodes for free.

OPERATIONS

Operation Plan

The Company plans to utilize a franchise model in which the Company, as the proprietary owner of its games, exclusively franchises third-party companies to operate and bear overall operating game costs. The Company, as the franchisor, will be entitled to a certain portion of revenue generated by the game as franchisee fee. As part of franchise model, the Company is required to maintain and upgrade its games to a level to satisfy the end users.

In its transition to the franchise model, the Company significantly reduced its workforce, and eliminated certain departments and projects, such as the Company’s E-commerce platform, UU World, and the Company ceased the promotion of 108 warriors. However, the Company has continued utilizing its specialized design capabilities for game art design projects for third party gaming companies. Additionally, the Company signed distribution agreements with third-party developers to offer games to users on its platform.

The Company is currently in negotiation with the Shenzhen Wangten Yuanjing network technology service co., LTD , a subsidiary of PengBoshi Group, an Internet service provider company, to finalize an exclusive agreement for the marketing and operation of The Warrior 108. The agreement is expected to be finalized and the game officially launched before the end of the Company’s second fiscal quarter of 2014.

The PengBoshi Group is an A share listed Internet service provider company (Ticker SH 600804) in China with a capitalization of 29 billion RMB. Its subsidiary, Great Wall Broadband, a top Internet service provider company in China, has an existing network covering 20.88 million homes and it currently has 3.44 million subscribers. The relationship between Santaro and PengBoshi is PengBoshi’s first ever involvement in the online game industry. Santaro management believes that PengBoshi’s choice of Santaro as their partner shows the impact Santaro has made in the game development industry.

The Company is confident that, through PengBoshi’s variant marketing strategies, the Warrior 108 will be well presented to users within PengBoshi’s large user database.

Taking into consideration the unique characteristics of battle field type of games, we will not only use conventional marketing strategies such as: online distribution, internet café chains, ground distribution and so on, but also combine the services that Peng Bosh Group is providing such as: free bandwidth comes with playing games which in another way will accumulate more users for the game.

Product Life Cycle

The Company is also looking constantly for new markets to establish additional distribution channels in order to maximize revenues from products that have already been developed. This is done by maximizing awareness of each online game in the market based on its life cycle. The operational life cycle of any developed retail product can be divided into four phases: warm-up period, commercial period, mature period and steady period.

Warm-up Period: This stage is the beta launch of a new product in the market. In order to attract attention and interest in our products, we will ensure attractive features, side-effects, fashionable trends, and popular themes are contained in each product we develop.

Commercial Period: After modifications are integrated into the product, the commercial operational phase will start and we will start receiving revenue from our customers. Promotion and advertising for this phase will be done via the Internet and by using billboards located in public places with high user density and a large number of viewers.

Mature Period: During this phase, to increase our brand image and awareness of our products in the market, we will increase advertising in the market to gain more online players, and boost revenue. Because in today’s markets there are more and more online players, the demand for games is now from a diversified group of consumers, giving us the opportunity to attract more users.

Steady Period: We will establish a network of cooperation with local communities throughout the country, as well as overseas agents, to further promote our products and increase our customer base.

For each product we develop, we constantly adjust our marketing strategy depending on the outcome of management’s assessment of the opportunity, and at what stage the product is in its current life cycle. In addition, we strive to ensure we have more than one product in the market in order to increase our product offering, strengthen our brand name and annual revenue.

GOVERNMENT REGULATIONS

Our online games, online services and related content on our websites are subject to various PRC laws and regulations relating to the telecommunications industry, Internet and online games. We are regulated by various government authorities, including:

•

the Ministry of Industry and Information Technology and, before its formal establishment in 2008, its predecessor, the Ministry of Information Industry;

•

the General Administration of Press and Publications (the National Copyright Administration);

•

the State Administration for Industry and Commerce;

•

the Ministry of Culture; and

•

the Ministry of Public Security.

The principal PRC regulations governing Internet content, as well as online game services in China include:

•

Telecommunications Regulations (2000);

•

the Administrative Rules for Foreign Investments in Telecommunications Enterprises (2001, and as amended in 2008);

•

the Administrative Measures for Telecommunications Business Operating Licenses (2009);

•

the Internet Information Services Administrative Measures (2000);

•

the Interim Measures for the Administration of Online Games (2010);

•

the Tentative Measures for Administration of Internet Culture (2010);

•

the Tentative Measures for Administration of Internet Publication (2002);

•

the Notice of Implementing the State Council’s “Regulation ‘Sanding’” and Relevant Interpretation Issued by State Commission Office for Public Sector Reform (“SCOPSR”) and Further Strengthen the Administration and Approval of the Pre-approval and Import of Online Games (2009);

•

the Foreign Investment Industrial Guidance Catalog (2011);

•

the Administrative Measures on Electronic Publications (2008);

•

the Administrative Measures on Software Products (2009);

•

the Administrative Measures on Internet Electronic Bulletin Board Services (2000);

•

the Measures on Computer Software Copyright Registration (2002);

•

the Notice of the Ministry of Culture on Enhancing the Content Review Work of Online Game Products (2004);

•

Some Opinions of the Ministry of Culture and the MIIT on the Development and Administration of Online Games (2005);

•

the Notice on the Work of Purification of Online Games (2005);

•

the Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business (2006);

•

the Circular on Implementing Online Game Anti-fatigue System to Protect the Health of the Minors (2007);

•

the Administrative Measures on Internet Video/Audio Program Services (2007);

•

Notice on Initializing the verification of Real-name Registration for Anti-Fatigue System on Internet Games (or the Real-name Registration Notice) (2011);

•

the Tentative Catalog of Internet Video/Audio Program Services (2010);

•

the Notice on the Reinforcement of the Administration of Internet Cafés and Online Games (2007);

•

the Tentative Measures for Administration of Internet Commodity Transaction and Relevant Services (2010);

•

the Notice on Strengthening the Administration of Virtual Currency of Online Games (2009); and

•

the Tentative Measures for Administration of Internet Goods and Relevant Services Transactions (2010).

As the online game industry is at an early stage of development in China, new laws and regulations may be adopted from time to time to require additional licenses and permits. As a result, substantial uncertainties exist regarding the interpretation and implementation of current and any future Chinese laws and regulations applicable to the online game industries.

Restrictions on Foreign Investment

Under the above regulations, a foreign investor is currently prohibited from owning more than 50% of the equity interest in a Chinese entity that provides value-added telecommunications services, including online games and other Internet content provision services. In addition, foreign and foreign invested enterprises are currently not able to apply for certain required licenses to provide these services.

The Circular on Strengthening the Administration of Foreign Investment in and Operation of Value-added Telecommunications Business issued by the MIIT in July 2006, reiterated the regulations on foreign investment in telecommunications business, which require foreign investors to set up foreign-invested enterprises and obtain an ICP license in order to conduct any value-added telecommunications business in China. Under this circular, a domestic company that holds an ICP license is prohibited from leasing, transferring or selling the license to foreign investors in any form, and from providing any assistance in forms of 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 ICP license holder or its shareholders. This circular further requires each ICP license holder to have the necessary facilities for its approved business operations and to maintain such facilities in the regions covered by its license. In addition, all value-added telecommunications service providers are required to maintain network and information security in accordance with the standards set forth under relevant PRC regulations. Due to the lack of further necessary interpretation from the regulators, it remains unclear what impact this 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, GAPP, the National Copyright Administration, and National Office of Combating Pornography and Illegal Publications jointly issued the GAPP Notice, which restates that foreign investors are not permitted to invest in online game-operating businesses in China via wholly owned, equity joint venture or cooperative joint venture investments. The GAPP Notice expressly prohibits foreign investors from gaining control over or participating in domestic online game operators through indirect ways such as establishing other joint venture companies, or contractual or technical arrangements. However, the GAPP Notice does not provide any interpretation of the term “foreign investors” or make a distinction between foreign online game companies and China based companies under a similar corporate structure like ours. Thus, it is unclear whether such regulations will be applicable to us or many other China based companies that rely on similar contractual arrangements with variable interest entities that operate online games in China. Since the promulgation of the GAPP Notice, we have applied for and obtained ISBNs from GAPP for Internet publications of several new games without encountering any problem. We are not aware that GAPP has taken any enforcement action under the GAPP Notice against any online game operators under a similar corporate structure like ours.

We conduct our online game and related businesses through contractual arrangements with Beijing Sntaro. Such arrangements are described in greater details under the caption “VIE Structure”.

Regulation of Licenses for Online Games

Online game operators are required to hold a variety of permits and licenses, which include:

ICP License

Under current Chinese laws and regulations, a commercial operator of Internet content provision services must obtain a value-added telecommunications business-operating license for Internet content provision from the appropriate telecommunications authorities in order to carry on any commercial Internet content provision operations in China. Santaro has obtained the ICP licenses.

Internet Culture Operation License

Each ICP license holder that engages in the supply of Internet culture products and related services, including provision of online games services, must obtain an additional Internet culture operation license from the appropriate culture administrative authorities pursuant to the newly issued Tentative Measures for Administration of Internet Culture (2011), which superseded the Tentative Measures for Administration of Internet Culture (2003, and as amended in 2004).

Internet Publishing License

The GAPP and the MIIT jointly impose a license requirement for any company that intends to engage in Internet publishing, defined as any act by an Internet information service provider to select, edit and process content or programs and to make such content or programs publicly available on the Internet. According to the Tentative Measures for Administration of Internet Publication (2002), the provision of online games services is deemed an Internet publication activity. Therefore, online game operators need to obtain an Internet publishing license in order to directly make their online games services publicly available in China.

Online Bulletin Board Service Approval

The MIIT has promulgated rules requiring ICP license holders that provide online bulletin board services to register with, and obtain approval from, the relevant telecommunication authorities.

Regulation of Internet Content

The Chinese government has promulgated measures relating to Internet content through a number of ministries and agencies, including the MIIT, the Ministry of Culture and the GAPP. These measures specifically prohibit Internet activities, which includes the operation of online games, that result in the publication of any content which is found to, among other things, propagate obscenity, gambling or violence, instigate crimes, undermine public morality or the cultural traditions of the PRC, or compromise State security or secrets. When an Internet content provider or an Internet publisher finds that information falling within the above scope is transmitted on its website or is stored in its electronic bulletin service system, it shall terminate the transmission of such information or delete such information immediately and keep records and report to relevant authorities. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites. In addition, in accordance with the Notice on Enhancing the Content Review Work of Online Game Products (2004) promulgated by the Ministry of Culture, imported and domestic online games should be filed with the Ministry of Culture before the operation of each game.

Regulation of Information Security

Internet content in China is also regulated and restricted from a State security standpoint. The National People’s Congress, China’s national legislative body, has enacted a law that may subject to criminal punishment in China any effort to: (1) gain improper entry into a computer or system of strategic importance; (2) disseminate politically disruptive information; (3) leak State secrets; (4) spread false commercial information; or (5) infringe intellectual property rights.

The Ministry of Public Security has promulgated measures that prohibit use of the Internet in ways which, among other things, result in a leak of State secrets or a spread of socially destabilizing content. The Ministry of Public Security has supervision and inspection rights in this regard, and we may be subject to the jurisdiction of the local public security bureaus. If an ICP license holder violates these measures, the PRC government may revoke its ICP license and shut down its websites.

Intellectual Property Rights

The State Council and the National Copyright Administration have promulgated various regulations and rules relating to protection of software in China. Under these regulations and rules, software owners, licensees and transferees may register their rights in software with the National Copyright Administration or its local branches and obtain software copyright registration certificates. Although such registration is not mandatory under PRC law, software owners, licensees and transferees are encouraged to go through the registration process and registered software rights may receive better protections.

The PRC Trademark Law, adopted in 1982 and revised in 2001, with its implementation rules adopted in 2002, protects registered trademarks. The Trademark Office of the SAIC handles trademark registrations and grants a protection term of ten years to registered trademarks.

Virtual Currency

On February 15, 2007, the Ministry of Commerce, the People’s Bank of China and other relevant government authorities jointly issued the Notice on the Reinforcement of the Administration of Internet Cafes and Online Games, or the Internet Cafés Notice. Under this notice, the People’s Bank of China is directed to strengthen the administration of virtual currency in online games to avoid any adverse impact on the economy and financial system. This notice provides that the total amount of virtual currency issued by online game operators and the amount purchased by individual game players should be strictly limited, with a strict and clear division between virtual transactions and real transactions carried out by way of electronic commerce. This notice also provides that virtual currency should only be used to purchase in-game items.

On June 4, 2009, Ministry of Commerce jointly issued Notice on the Reinforcement of the Administration of Virtual Currency in Online Games, which defines what is virtual currency and requires that entities shall obtain the approval from the Ministry of Commerce before issuing virtual currency and engaging in transactions using virtual currency in connection with online games. Entities are prohibited from using virtual currency to carry out gambling business.

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 1B. UNRESOLVED STAFF COMMENTS

There are no unresolved comments from the SEC.

ITEM 2. PROPERTIES

As of June 2013, the Company relocated to its current headquarters, located at: Taihe Wenhua Plaza B-410, 1A Chenjialin Balizhuang, Chaoyang District Beijing, People’s Republic of China, 100025. We do not own any real property. The Company’s other property and equipment consists wholly of computer equipment, leasehold improvements, and furniture. The net value of the Company’s property was $187,603 as of December 31, 2013.

ITEM 3. LEGAL PROCEEDINGS

On April 15, 2013, Jiangsu TeemSoft, Inc. (“TeemSoft”) filed suit against Ningbo S ntaro in the Suzhou Wujiang District People's Court, alleging breach of a contract entered into with the defendants in June 2012 and seeking a claim equal to the contract amount and liquidated damages totally amounting to $113,917 (RMB706,080). Court of first instance vindicated in favor of TeemSoft with a compensation of $89,994 (RMB557,803) in November, 2013. As a result, management deemed that the judgment of court of first instance was legally binding, and the Company recorded this amount in the financial statement under other expense s account. However, the Company filed a petition to Suzhou Intermediate People's Court due to its belief that judgment of first instance court incorrectly resolved issues. As of the date of the report, the lawsuit remains pending.

ITEM 4. MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

Market Information

Only a limited market exists for our securities. There is no assurance that a regular trading market will develop, or if developed, that it will be sustained. Therefore, a shareholder in all likelihood will be unable to resell his securities in our Company. Furthermore, it is unlikely that a lending institution will accept our securities as pledged collateral for loans unless a regular trading market develops.

Our company's securities are traded on the Over-The-Counter Bulletin Board (“OTCBB”) operated by the Financial Industry Regulatory Authority (FINRA) under the symbol “STIE”.

Fiscal Quarter	High Bid		Low Bid
2013
Fourth Quarter	$	0.15	$	0.02
Third Quarter	$	0.20	$	0.08
Second Quarter	$	0.39	$	0.35
First Quarter	$	0.40	$	0.31

Fiscal Quarter	High Bid		Low Bid
2012
Fourth Quarter	$	2.00	$	0.30
Third Quarter	$	0.90	$	0.16
Second Quarter	$	0.80	$	0.10
First Quarter	$	2.39	$	0.35

Holders

As of March 20, 2014, we had 315 holders of record of our common stock, including shares held by brokerage clearing houses, depositories or otherwise in unregistered form.

Dividends

We have not declared any cash dividends. We do not intend to pay dividends in the foreseeable future, but rather to reinvest earnings, if any, in our business operations.

Section 15(g) of the Securities Exchange Act of 1934

Our shares are covered by section 15(g) of the Securities Exchange Act of 1934, as amended, that imposes additional sales practice requirements on broker/dealers who sell such securities to persons other than established customers and accredited investors (generally institutions with assets in excess of $5,000,000 or individuals with net worth in excess of $1,000,000 or annual income exceeding $200,000 in each of the two most recent years or joint income with a spouse exceeding $300,000 for those years). For transactions covered by the Rule, the broker/dealer must make a special suitability determination for the purchase and have received the purchaser's written agreement to the transaction prior to the sale. Consequently, the Rule may affect the ability of broker/dealers to sell our securities and also may affect your ability to sell your shares in the secondary market.

Section 15(g) also imposes additional sales practice requirements on broker/dealers who sell penny securities. These rules require a one-page summary of certain essential items. The items include the risk of investing in penny stocks in both public offerings and secondary marketing; terms important to in understanding of the function of the penny stock market, such as “bid” and “offer” quotes, a dealers “spread” and broker/dealer compensation; the broker/dealer compensation, the broker/dealers duties to its customers, including the disclosures required by any other penny stock disclosure rules; the customers rights and remedies in causes of fraud in penny stock transactions; and, the FINRA's toll free telephone number and the central number of the North American Administrators Association, for information on the disciplinary history of broker/dealers and their associated persons.

Securities Authorized for Issuance under Equity Compensation Plans

We have no equity compensation plans and accordingly we have no shares authorized for issuance under an equity compensation plan.

ITEM 6. SELECTED FINANCIAL DATA

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

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Forward Looking Statements

This Annual Report on Form 10-K 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, and the Company’s operations and results of operations. Should one or more of these risks or uncertainties materialize, or should the underlying assumptions prove incorrect, actual results may differ significantly from those anticipated believed, estimated, expected, intended, or planned.

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

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

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 December 31, 2013. 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 laid off redundant R&D staff, rented a smaller office to significantly reduce the operating costs.

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 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 early in 2014.

Accounting Policy of 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 stop operating.

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

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

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

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

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

Co-operation of web browser game

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

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.

Results of Operations

Despite the Company’s efforts to promote and operate its self-developed Warrior 108 in 2013, the Company was forced to cease to operate the game due to a lack of funding, which also dragged the Company’s business plan on cooperation of web-based games behind schedule. 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.

	Years Ended December 31,
	2013			2012

Revenue	$	328,600		$	27,571
Cost of revenue		966,306			693,059
Gross loss		(637,706	)		(665,488	)

Operating expenses
Research and development expenses		434,250			2,683,443
Sales and marketing expenses		548,544			362,145
General and administrative expenses		852,780			1,409,898
Total operating expenses		1,835,574			4,455,486

Loss from operations		(2,473,280	)		(5,120,974	)

Other (income) expenses, net		253,217			-
Gain on deconsolidation of subsidiary		-			(15,823	)
Non-operating income		(7,280	)		(7,020	)

Net loss	$	(2,719,217	)	$	(5,098,131	)

Revenue

For the year ended December 31, 2013, revenues were $328,600, representing an increase of $301,029, compared to $ 27,571 for the corresponding period in 2012.The increase in net revenues was primarily due to the revenue contribution from co-operation of web browser games, with an amount of $257,865. The Company also generated revenue from 108 Warriors, a Massive Multiplayer Online Role Playing Game (“MMORPG”) launched in the third quarter of 2012, and art production services with an amount of $54,890 and $15,845, respectively, during the year ended December 31, 2013.

Cost of revenue

For the year ended December 31, 2013, cost of revenues were $ 966,306 , representing an increase of $273,247, compared to $ 693,059 for the corresponding period in 2012.The increase in our cost of revenue was primarily attributable to an increase in business tax with an amount of $23,784 due to the increase in net revenues, salary increase of $201,660 from designers and programmers for the game 108 Warriors, which was launched in August, 2012, an increase in depreciation expenses with an amount of $29,154. Other miscellaneous fees increased by $18,649.

Gross loss

As a result of the foregoing, our gross loss for the year ended December 31, 2013 was $637,706 from $ 665,488 in the same period of 2012. The reason for the negative gross profit was due to the new game 108 Warriors released in the third quarter of 2012 and our web browser games’ maintenance. The Company needs to spend more costs to maintain games’ operation. These costs were primary composed by salaries of operation staffs, depreciations of the operation equipments and server hosting fees.

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 year ended December 31, 2013, R&D expenses were $434,250, representing a decrease of $2,249,193 or 83.82%, compared to $ 2,683,443 for the corresponding period in 2012. The decrease was primarily because R&D employee salary decreased by $1,419,392, and social assurance decreased by $106,478 compared to the corresponding period of 2012, which was due to the Company reclassified the salaries of designers and programmers engaged for the game of 108 Warriors from R&D expense to cost of revenues, since this game was launched in the third quarter of 2012. Besides, the Company changed part of “MMORPG” to co-operation of web browser games to better meet customers’ demand and to improve operational ability, and fewer designers and programmers were needed on the R&D of co-operation of web browser games. So the Company terminated a large number of junior technicians to save labor cost and improve operational ability, and the number of R&D department staff was substantially reduced to 22 in December, 2013 from 95 in January, 2013. Rent expenses decreased by $333,696 due to the relocation and size-reducing of the Company’s main office in Beijing during the year ended December 31, 2013, service fee decreased by $168,233 and testing fee decreased by $59,562 compared to the corresponding period of 2012. Other variances include expenses for office, business entertainment, business travelling, communication fee, water and electricity, sundries, computer accessories, etc., representing an accumulated decrease of about $161,832.

Sales and marketing expenses

Sales and marketing expenses mainly represented selling employee salaries and advertising & promotion fees. For the year ended December 31, 2013, sales and marketing expenses were $548,544, representing an increase of $186,399 or 51.47% compared to $ 362,145 for the corresponding period in 2012. The increase was mainly due to increases in selling employee salary, which increased by $88,088 due to the launch of 108 Warriors, and for the same reason, advertising & promotion fee was also increased by $75,176. Besides, service fee increased by $23,925 and other miscellaneous fees decreased by $790.

General and administrative expenses

General and administrative expenses primarily consist of G&A employee salary, professional service fee, social insurance and depreciation. For the year ended December 31, 2013, total general and administrative expenses were $852,780, representing a decrease of $557,118 or approximately 39.51% as compared to $1,409,898 for the corresponding period in 2 012. The decrease was due to a reduction in G&A employee salaries of $293,712 and in social insurance of $26,403, in professional service fee of $183,849, in welfare expenses of $15,966, in membership expenses of $14,320 and in business entertainment of $13,025, compared to the same period in 2012, respectively. The decrease of $293,712 in G&A employee salaries was mainly because the Company reclassified the salaries of sales staff for 108 Warriors to sales and marketing expenses, which was recorded in G&A expenses in the corresponding period of 2012 since no game launched before the third quarter of 2012, and also reduced the number of sales staff significantly in 2013 due to duplicated positions and less work required for operating the game as opposed to developing. And for the same reason, social insurance and welfare expenses decreased accordingly. Other variances include expenses occurred for communication fees, travelling expenses, etc., representing an accumulated decrease of $9,843.

Net loss

For the year ended December 31, 2013, net loss decreased to $2,719,217 from $ 5,098,131 for the corresponding period in 2012. The decrease in net loss was primarily due to increases in revenue, and decreases in R&D expenses and G&A expenses. In order to maintain the game operation, the Company had laid off a large number of operating, marketing and R&D staffs and made deep cuts in spending to support the general operating costs from the second quarter of 2013.

Liquidity and Capital Resources

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

Since we initiated our business operations, we have been funded primarily by related parties. 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 December 31, 2012, the total amount of the balance of the loan that had been provided by CixiYide was $4,222,732, and the balance of the loan from Mr. Zhilian Chen was $170,589. 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.

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 and non-related entities. The Company has an accumulated deficit of $17,347,671 and $14,628,454 as of December 31, 2013 and 2012, 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 December 31, 2012, CixiYide and Mr. Zhilian Chen had provided the Company loans in the aggregate amount of $4,222,732 and $170,589, respectively. As of 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. 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 2013, 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. Meanwhile, 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 laid off 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 continuing operations mainly through operating revenue from the current business lines and through new 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.

Cash Flows

	Years ended December 31,
	2013			2012

Net cash used in operating activities	$	(2,251,802	)	$	(4,418,714	)
Net cash provided by (used in) investing activities		7,018			(205,565	)
Net cash provided by financing activities		2,232,074			2,631,412
Effect of foreign currency exchange rate changes on cash and cash equivalents		(30,386	)		13,759
Net decrease in cash and cash equivalents	$	(43,096	)	$	(1,979,108	)

Net cash used in operating activities: The Company had limited amount of revenue from its inception in 2006 to December 31, 2013. Our net cash used in operating activities decreased by $2,166,912 in the year ended December 31, 2013 compared to that in the year ended December 31, 2012, representing a decrease of 49.04%. Most operating cash flow is the result of cash-paid expenditure during operation. The decrease of net cash used in operating activities was due to decreases in salary expenses and rent expenses. In order to better meet customer demand and to improve operational ability, the Company changed part of “MMORPG” to co-operation of web browser games. Since the technique requirement of co-operation of web browser games is lower than the “MMORPG”, the Company fired several junior technicians to save labor cost and improve operational ability. Rent expenses decreased due to the relocation and size-reducing of the Company’s main office in Beijing during the year ended December 31, 2013.

Net cash provided by (used in) investing activities: Our investing activities cash flow changed from net cash used in investing activities of $205,565 to net cash flow provided by investing activities of $7,018 in the year ended December 31, 2013 compared to the corresponding period of 2012. The change in net investing cash flow was mainly due to the result of a decrease in the purchasing of new equipment in an amount of $183,503, the decrease in the purchasing of intangibles in an amount of $8,038, and the cash received from disposal of fixed assets in the amount of $36,865 during the year ended December 31, 2013.

Net cash provided by financing activities: Our cash provided by financing activities decreased from $2,631,412 for the year ended December 31, 2012 to $2,232,074 for the year ended December 31, 2013, representing a decrease of 15.18%. The current financed capital could not support current operation and product development. Through December 31, 2013, CixiYide has been continuously providing financial support.

Working capital

We have working capital deficit of $961,957 as of December 31, 2013, compared with working capital of $4,927,588 as of December 31, 2012, representing a decrease of deficit of 80.48%. 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 might continue to require additional financing to fund operations and to undertake our new business plans. As of December 31, 2013, the Company accumulatively obtained loans in the amount of $6,675,064 from CixiYide and Mr. Zhilian Chen. On December 5, 2011, Mr. Zhilian Chen converted parts of the loan provided by CixiYide to Beijing Sntaro, i.e., $4,626,818 (RMB 29,260,000), into the registered capital of Beijing Sntaro by the way of subscribing for the increased capital of Beijing Sntaro and then let Beijing Sntaro pay back the increased capital to CixiYide. The Company also received proceeds in the aggregate of $4.75 million upon the issuance of 2.375 million shares of common stock and warrants to purchase up to 1,187,500 shares of our common stock in 2011.

Description of Property

The Company’s property and equipment consists wholly of computer equipment, leasehold improvements, and furniture. The book value of the Company’s property and equipment was $187,603 as of December 31, 2013.

Employees

As of December 31, 2013, the Company employed approximately 21 designers and programmers. 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.

Recent issued accounting pronouncements

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

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

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 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.

ITEM 7A. 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 under this item.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

SANTARO INTERACTIVE ENTERTAINMENT COMPANY

CONSOLIDATED AUDITED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2013

SANTARO INTERACTIVE ENTERTAINMENT COMPANY

AND SUBSIDIARIES

CONTENTS

	Pages
Report of Independent Registered Public Accounting Firm		F1
Consolidated Balance Sheets		F2
Consolidated Statements of Operations and Comprehensive Loss		F3
Consolidated Statements of Changes in Stockholders' Equity (Deficit)		F4
Consolidated Statements of Cash Flows		F5
Notes to Consolidated Audited Financial Statements		F6 – F25

Report of Independent Registered Public Accounting Firm

To the Board of Directors and Shareholders of

Santaro Interactive Entertainment Company

We have audited the accompanying consolidated balance sheets of Santaro Interactive Entertainment Company and its subsidiaries (the “Company”) as of December 31, 2013 and 2012, and the related consolidated statements of operations and comprehensive loss, changes in stockholders’ equity (deficit), and cash flows for the years then ended. The Company’s management is responsible for these consolidated financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing standards as established by the Auditing Standards Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of the Company as of December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.

The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2, the Company has incurred significant losses from operations for the years ended December 31, 2013 and 2012, and has a working capital deficiency. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

/S/ Marcum Bernstein &Pinchuk LLP

New York, New York

March 28, 2014

F-1

Santaro Interactive Entertainment Company

Consolidated Balance Sheets

	December 31, 2013			December 31, 2012

ASSETS
Current assets
Cash and cash equivalents	$	6,408		$	49,504
Prepaid expenses		71,325			4,751
Other receivables		42,293			10,592
Due from a related party		26,258			-

Total current assets		146,284			64,847

Property and equipment, net		187,603			556,884
Long term investment		644			644
Intangibles, net		7,128			31,575

Total Assets	$	341,659		$	653,950

LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities
Advance from Customers	$	69,841		$	79,861
Business taxes payable		16,619			737
Deferred revenue		10,040			17,461
Other payables and accrued expenses		677,883			467,976
Due to related parties		333,858			4,426,400
Total current liabilities		1,108,241			4,992,435
Due to a related party, non current		6,464,867			-
Total Liabilities		7,573,108			4,992,435
Commitments and contingencies		-			-
STOCKHOLDERS’ DEFICIT
Common stock ($0.001 par value; authorized –100,000,000 shares; issued and outstanding –69,875,000 shares at December 31, 2013 and December 31, 2012, respectively)		69,875			69,875
Additional paid-in capital		10,578,169			10,578,169
Deficit accumulated during the development stage		(16,969,683	)		(14,628,454	)
Accumulated deficit		(377,988	)		-
Accumulated other comprehensive loss		(531,822	)		(358,075	)

Total stockholders’ deficit		(7,231,449	)		(4,338,485	)

Total Liabilities and Stockholders’ Deficit	$	341,659		$	653,950

See notes to the consolidated financial statements

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

F-2

Santaro Interactive Entertainment Company

Consolidated Statements of Operations and Comprehensive Loss

	Years Ended December 31,
	2013			2012

Revenue	$328,600			$	27,571
Cost of revenue		966,306			693,059
Gross loss		(637,706	)		(665,488	)

Operating expenses
Research and development expenses		434,250			2,683,443
Sales and marketing expenses		548,544			362,145
General and administrative expenses		852,780			1,409,898
Total operating expenses		1,835,574			4,455,486

Loss from operations		(2,473,280	)		(5,120,974	)

Other (income) expenses, net		253,217			-
Gain on deconsolidation of subsidiary		-			(15,823	)
Non-operating income		(7,280	)		(7,020	)

Net loss		(2,719,217	)		(5,098,131	)

Other comprehensive loss
Foreign currency translation adjustment		(173,747	)		2,661
Comprehensive loss	$	(2,892,964	)	$	(5,095,470	)

Loss per share:

Basic and diluted	$	(0.04	)	$	(0.07	)

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

See notes to the consolidated financial statements

F-3

Santaro Interactive Entertainment Company

Consolidated Statements of Changes in Stockholders’ Equity (Deficit)

	Common Stock				Additional		Deficit Accumulated During						Accumulated Other			Total Stockholders’
	Share		$0.001 Par Value		Paid-In Capital		Development Stage			Accumulated Deficit			Comprehensive Loss			Equity (Deficit)

Balance as of December 31, 2011		69,875,000	$	69,875	$	10,578,169	$	(9,530,323	)	$	-		$	(360,736	)	$	756,985
Net (loss)				-		-		(5,098,131	)		-			-			(5,098,131	)
Foreign currency exchange translation adjustment, net of nil income taxes				-		-		-			-			2,661			2,661
Balance as of December 31, 2012		69,875,000		69,875		10,578,169		(14,628,454	)		-			(358,075	)		(4,338,485	)
Net (loss)				-		-		(2,341,229	)		(377,988	)		-			(2,719,217	)
Foreign currency exchange translation adjustment, net of nil income taxes				-		-		-			-			(173,747	)		(173,747	)
Balance as of December 31, 2013		69,875,000	$	69,875	$	10,578,169	$	(16,969,683	)	$	(377,988	)	$	(531,822	)	$	(7,231,449	)

See notes to the consolidated financial statements

F-4

Santaro Interactive Entertainment Company

Consolidated Statements of Cash Flows

	Years Ended December 31,
	2013			2012
Cash flows from operating activities:
Net loss	$	(2,719,217	)	$	(5,098,131	)
Adjustments to reconcile net loss to net cash used by operating activities:
Loss on sale of fixed assets		176,368			-
Depreciation		199,035			223,138
Amortization of intangible assets		10,355			9,991
Loss on disposal of intangible asset		14,789			-
Gain on deconsolidation of subsidiary		-			(15,823	)
Changes in operating assets and liabilities:
Prepaid expenses		(65,516	)		319,750
Other receivables		(30,924	)		146,065
Due from a related party		(25,902	)		-
Advance from customers		(12,488	)		79,814
Business taxes payable		15,642			737
Deferred revenue		(7,890	)		17,450
Other payables and accrued expenses		193,946			(137,081	)
Due to a related party		-			35,376
Net cash used in operating activities		(2,251,802	)		(4,418,714	)

Cash flows from investing activities:
Net cash received from disposal of fixed assets		36,865			-
Purchase of property and equipment		(29,847	)		(213,350	)
Purchase of intangibles		-			(8,038	)
Cash effect on deconsolidation of subsidiary		-			15,823
Net cash provided by (used in) investing activities		7,018			(205,565	)

Cash flows from financing activities:
Loan from related parties		2,232,074			2,631,412
Net cash provided by financing activities		2,232,074			2,631,412
Effect of exchange rate changes on cash and cash equivalents		(30,386	)		13,759
Net decrease in cash and cash equivalents		(43,096	)		(1,979,108	)
Cash and cash equivalents at the beginning of year		49,504			2,028,612
Cash and cash equivalents at the end of year	$	6,408		$	49,504
Supplemental disclosure for cash flow information
Interest paid	$	-		$	-
Income taxes paid	$	-		$	-

See notes to the consolidated financial statements

F-5

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. Historically, the Company has been considered a development stage company. From the fourth quarter of 2013, the Company transitioned its development stage to operational activities. Accordingly, reporting as a development stage company is no longer required.

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

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

FL Network was a 100% subsidiary of Beijing S ntaro 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.

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 S ntaro 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 S ntaro 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.

F-6

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 31, 2013.

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 S ntaro Network Technology Co., Ltd. (“Ningbo S ntaro”), a Wholly Foreign Owned Enterprise (WFOE) organized under the laws of the People’s Republic of China (“PRC”). Ningbo S ntaro exercises control through a series of agreements over Beijing S ntaro 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 S ntaro has 100% ownership interest in Beijing S ntaro Freeland Network Co., Ltd. (the “FL Network”) until December 31, 2012 , a company organized under the laws of the PRC. The beneficial controlling stockholders of the Company own all the outstanding shares of Beijing S ntaro. In addition, SHL is the indirect parent of Ningbo S ntaro and controls this entity through its ownership of Santaro HK.

On July 18, 2011, Santaro HK established Outlets Internet Sale Limited jointly with New Select Group Limited (BVI), each party holds 50% shares of this newly established entity. The primary objective of this JV establishment is for the further extension and development of on-line business of “Outlet” in PRC China.

Beijing S ntaro 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 and investment in online games projects.

Beijing S ntaro 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 S ntaro changed its equity ownership as follows; Mr. Zhilian Chen, Mr. Xiaobo Li and Mr. Wenjie Lu became the owners of Beijing S ntaro, 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 S ntaro 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 S ntaro, 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 S ntaro established FL Network (only through December 31, 2012), 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 S ntaro, and 30% owned by Beijing East Free Land Media & Film Co., Ltd (the “FL Media”).

In April 2010, Beijing S ntaro 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 S ntaro to Mr. Zhilian Chen, another owner of Beijing S ntaro, 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.

F-7

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 S ntaro, who had 67.5% ownership interest in FL Network. As of December 31, 2010, Beijing S ntaro has 100% ownership interest in the FL Network until December 31, 2012 .

In December 2011, Beijing S ntaro entered into its fourth change of equity ownership. According to the shareholders resolutions and amendments to the articles of association of Beijing S ntaro dated December 5, 2011, Mr. Zhilian Chen subscribed for $4,626,818 of the increased registered capital of Beijing S ntaro. After this newly capital injection, Mr. Zhilian Chen’s, Mr. Xianhua Shen’s and Ms. Yingnv Sun’s equity in Beijing S ntaro changed, with their percentage of ownership at 95.4%, 2.3%, and 2.3%, respectively, and paid-in capital of $5,724,014, $137,150, and $137,150, respectively.

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. 108 Warriors, a Massively Multiplayer Online Role Playing Game (“MMORPG”) game, was launched in the third quarter of 2012. UU World is another MMORPG of the Company, which was also under development, but this game has been suspended right now, because management considered this game is not suitable for current customer’s needs. In order to better meet the market demand, the Company decided to search a proper opportunity to transfer this game into another kind of product.

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

F-8

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 S ntaro and Beijing S ntaro and its individual owners. Pursuant to the agreements, Ningbo S ntaro provides exclusive technical consulting and management services to Beijing S ntaro. 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.

F-9

Pursuant to the above arrangements, all of the equity owners' rights and obligations of Beijing S ntaro were assigned to Ningbo Sntaro, which resulted in the equity owners of Beijing S ntaro lacking the ability to make decisions that have a significant effect on Beijing S ntaro's operations, and enable Ningbo S ntaro to extract the profits from the operation of Beijing S ntaro, and assume the Beijing S ntaro's residual benefits. Because the Ningbo S ntaro and its indirect parent are the sole interest holders of Beijing S ntaro, the Company consolidates Beijing S ntaro 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.

F-10

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

The following financial statement amounts and balances of the VIEs were included in the accompanying consolidated financial statements as of and for the year ended December 31:

	December 31,		December 31,
	2013		2012
Total assets	$	127,217	$	123,052

Total liabilities	$	3,055,420	$	2,682,517

	For Year Ended December 31,
	2013		2012
Revenues	$	328,600	$	27,571

Net loss	$	337,662	$	256,072

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.

F-11

4. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Principles of Consolidation and Basis of Presentation

The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). In the opinion of management, all adjustments (which include normal recurring adjustments) necessary to present a fair statement of the financial position as of December 31, 2013 and 2012, and the results of operations and cash flows for the years ended December 31, 2013 and 2012, have been made.

The accompanying consolidated financial statements as of December 31, 2013 and 2012, and for the years then ended include the Companies, SHL, Santaro HK, Ningbo S ntaro, Beijing S ntaro and FL Network (only through December 31, 2012) . All inter-company transactions and balances have been eliminated in consolidation.

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 revenue recognition on Massively Multiplayer Online Role-Playing Games (“MMORPG”); the useful lives of fixed assets; the realization of deferred tax assets and the recoverability of intangible assets and property and equipment. 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 accumulated other comprehensive loss in the consolidated statement of operations and comprehensive loss and amounted $531,822 as of December 31, 2013, and $358,075 as of December 31, 2012. The balance sheet amounts with the exception of equity at December 31, 2013 were translated at 6.1140 RMB to $1.00 USD as compared to 6.3161 RMB at December 31, 2012. The equity accounts were stated at their historical rate. The average translation rates applied to income statement accounts for the years ended December 31, 2013 and 2012 were 6.1982 RMB and 6.3198 RMB, respectively.

F-12

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 year ended December 31, 2013.

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

F-13

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 year ended December 31, 2013 and 2012 , respectively.

Revenue Recognition

F-14

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.

F-15

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

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 year ended December 31, 2013 and 2012 were $25,501 and $1,717, 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 December 31, 2013, no costs have been capitalized.

F-16

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 year ended December 31, 2013 and 2012 were $548,544 and $362,145, respectively.

Gain on Deconsolidation of Subsidiary

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

a. The aggregate of all of the following:

1. The fair value of any consideration received;

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

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

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

Income Taxes

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

F-17

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

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.

F-18

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

	2013			2012

Net loss for basic and diluted loss per share	$	(2,719,217	)	$	(5,098,131	)

Weighted average shares used in basic and diluted computation		69,875,000			69,875,000
Loss per share:
Basic and diluted	$	(0.04	)	$	(0.07	)

6. PREPAID EXPENSES

Prepaid expenses of $71,325 and $4,751 as of December 31, 2013 and December 31, 2012 consisted of prepaid rent for the office and prepayment of printer’s service fee.

7. OTHER RECEIVABLES

Other receivables of $42,293 and $ 10,592 as of December 31, 2013 and 2012 consisted of cash advances given to certain employees for use during business operations and are recognized as general and administration expenses when expenses are incurred. It also includes certain rental deposit.

8. PROPERTY AND EQUIPMENT

Property and equipment are summarized as follows:

	December 31,			December 31,
	2013			2012

Computer equipment	$	461,692		$	670,268
Furniture and fixtures		39,791			221,666
Leasehold improvement		91,697			216, 373
		593,180			1,108,307
Less: Accumulated depreciation		(405,577	)		(551,423	)

Property and equipment, net	$	187,603		$	556,884

Depreciation expenses for the years ended December 31, 2013 and 2012 were $199,035 and $223,138, respectively.

During year 2013, the Company sold parts of the property and equipments with an amount of $431,546 in cost, and net loss on sale of property and equipments were $102,154. Also the Company moved to a smaller office in Beijing and disposed of all the leasehold improvement related to the old office, with an amount of $150,474 in cost and an amount of $74,214 in net loss.

F-19

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 year ended December 31, 2013.

10. DECONSOLIDATION OF FL NETWORK

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

11. OTHER PAYABLES AND ACCRUED EXPENSES

Other payables and accrued expenses consist of the following:

	December 31,		December 31,
	2013		2012

Other payables	$	581,940	$	447,147
Accrued salaries		95,943		20,829

Total	$	677,883	$	467,976

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

F-20

12. OTHER (INCOME) EXPENSES

Other (income) expenses consist of the following:

	For the year ended December 31,			For the year ended December 31,
	2013			2012

Other expenses	$	290,186		$	-
Other income		(36,969	)		-

Total	$	253,217		$	-

Other expenses of $290, 186 for the year ended December 31, 2013 primarily consisted of loss on disposal of operating-related fixed assets of $176,368, loss on disposal of one intangible asset of $14,789, a litigation estimated compensation of $89,994 (RMB557,803) and a litigation final compensation of $8,228. There were no other expenses for the year ended December 31, 2012.

Other income of $36,969 for the year ended December 31, 2013 primarily consisted of compensation paid by Beijing Lingyoufang Network Technology Co., Ltd for breach of contract with an amount of $32,267 . There was no other income for the year ended December 31, 2012.

13. 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 December 31, 2013 and therefore was not subject to Hong Kong Profits Tax. The payments of dividends by Hong Kong companies are not subject to any Hong Kong withholding tax.

F-21

PRC

Ningbo S ntaro, Beijing S ntaro and FL Network (only through December 31, 2013) 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 December 31, 2013 and 2012, for PRC income tax purposes.

Ningbo S ntaro had deferred tax assets of approximately $2,269,974 and $1,666,526 as of December 31, 2013 and 2012, which consisted of a tax loss carry-forward of $9,011,455 and $6,630,454, respectively. Ningbo S ntaro had no other temporary differences as of December 31, 2013 and 2012. Management determines it is more likely than not that all deferred tax asset could not be recognized, so full allowances were provided as of December 31, 2013 and 2012. The deferred tax assets begin to expire in 2016.

Beijing S ntaro had deferred tax assets of approximately $1,945,230 and $2,006,076 as of December 31, 2013 and 2012, which consisted of a tax loss carry-forward of $7,884,801 and $8,133,000, respectively. Beijing S ntaro had no other temporary differences as of December 31, 2013 and 2012. Management determines it is more likely than not that all deferred tax asset could not be recognized, so full allowances were provided as of December 31, 2013 and 2012.The deferred tax assets begin to expire in 2012. The deferred tax assets of approximately $153,216 began to expire in 2013, which consisted of a tax loss of $612,863 in year 2006 and 2007.

As of December 31, 2013 and 2012, an aggregated valuation allowance of $4,215,204 and $3,672,602 was provided since management determines it is more likely than not that all deferred tax asset could not be recognized. As a result of the 100% reserve of the deferred tax assets, the effective tax rate differs from the statutory tax rate.

14. 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 years ended December 31, 2013 and 2012, total amounts expensed for such employee benefits amounted to $138,600 and $198,687, respectively. The PRC government is responsible for the medical benefits and ultimate pension liability to these employees.

F-22

15. 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 2012, CixiYide had provided loans to Beijing S ntaro in the aggregate amount of $2,534,982. During the year ended December 31, 2013 , CixiYide made an additional loan in the amount of $173,752 to Beijing Sntaro . The total amount due to CixiYide from Beijing Sntaro was $2,708,734 as of December 31, 2013. Mr. Zhilian Chen provided a loan in the amount of $7,066 to Beijing Sntaro. The total amount due to Mr. Zhilian Chen from Beijing Sntaro was $7,066 as of December 31, 2013.

Santaro HK entered into a loan agreement with Mr. Zhilian Chen on August 2, 2010 for $310,000 for the payment of Ningbo S ntaro’s registered paid-in-capital in accordance with Chinese legal requirements. Santaro HK received the loan in September 2010. At December 31, 2013, the balance of the loan was $150,007.

By the end of 2012, Mr. Zhilian Chen has provided loans in the amount of $20,582 to Ningbo S ntaro. During the year ended December 31, 2013, Mr. Zhilian Chen made an additional loan of $32,542 to Ningbo S ntaro. The total amount due to Mr. Zhilian Chen from Ningbo S ntaro was $53,124 as of December 31, 2013. By the end of 2012, CixiYide has provided loans in the amount of $1,687,750 to Ningbo S ntaro. During the year ended December 31, 2013, CixiYide made an additional loan in the amount of $2,068,383 to Ningbo S ntaro. The total amount due to CixiYide from Ningbo S ntaro was $3,756,133 as of December 31, 2013.

As of December 31, 2013, the total balance of loans due to CixiYide and Mr. Zhilian Chen from the Company was $6,675,064. The loans are unsecured and interest free, payable on demand, and are outstanding.

During the year ended December 31, 2012, Mr. Mingyang Li, the Company’s CEO, provided a loan in the amount of $16,545 to Beijing S ntaro and a loan in the amount of $16,534 to Ningbo S ntaro. These loans increased by $92,425 to Beijing S ntaro and decreased by $1,843 to Ningbo S ntaro during the year ended December 31, 2013, respectively. As of December 31, 2013, the total balance of loans due to Mr. Mingyang Li from the Company was $123,661. The loans are unsecured and interest free, payable on demand, and are outstanding.

During the year ended December 31 , 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. The total amount due from Shanghai Shangyi network technology co., LTD was $26,258 as of December 31 , 2013.

F-23

16. 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 December 31, 2013 are as follows:

	Rental
Fiscal Year	Commitments

2014	$	53, 546
2015		107,093
2016		53,547

Total	$	214,186

Total rental expenses are $264,264 and $565,695 for the years ended December 31, 2013 and 2012, respectively.

17. 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.

18. CONTINGENCIES

F-24

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 S ntaro and Beijing Sntaro and our contractual arrangements with Beijing S ntaro 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 S ntaro 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 S ntaro; 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.

19. 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.

F-25

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE

None.

ITEM 9A. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed in our Exchange Act reports is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. We conducted an evaluation (the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), of the effectiveness of the design and operation of our disclosure controls and procedures (“Disclosure Controls”) as of the end of the period covered by this report pursuant to Rule 13a-15 of the Exchange Act. Based on this Evaluation, our CEO and CFO concluded that our Disclosure Controls were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting and Remediation Activities

On September 30, 2013 our former CFO resigned from the Company and our CEO, Mr. Mingyang Li, who obtained a PhD from Institute European des Affaires (IEDA) in France and a Master’s Degree from INSEEC, one of the top business schools in France, has taken the role of CFO concurrently to assume the role of overseeing the finance operation and financial reporting process. Though Mr. Li has possessed a good knowledge and experience from his academic background and working experience, the Company has provided remediation plan by employing a professional third-party consulting firm to assist Mr. Li in preparing the financial statements under U.S. GAAP at the transition period when the former CFO left.

Other than these noted changes, there has been no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) during the most recent fiscal quarter ended December 31, 2013 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Limitations on the Effectiveness of Controls

Our management, including our CEO and CFO, does not expect that our Disclosure Controls and internal controls will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management or board override of the control.

The design of any system of controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may become inadequate because of changes in conditions, or the degree of compliance with the policies or procedures may deteriorate. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.

CEO and CFO Certifications

Appearing immediately following the Signatures section of this report there are Certifications of the CEO and the CFO. The Certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act of 2002 (the Section 302 Certifications). This Item of this report, which you are currently reading is the information concerning the Evaluation referred to in the Section 302 Certifications and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

Management’s Report on Internal Control over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined in Exchange Act Rule 13a-15(f). The Company’s internal control over financial reporting is a process designed to provide reasonable assurance to our management and board of directors regarding the reliability of financial reporting and the preparation of the financial statements for external purposes in accordance with accounting principles generally accepted in the United States of America.

Our internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with accounting principles generally accepted in the United States of America, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal controls over financial reporting may not prevent or detect misstatements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of overriding controls. Accordingly, even effective internal control over financial reporting can provide only reasonable assurance with respect to financial statement preparation. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Our management assessed the effectiveness of our internal control over financial reporting as of December 31, 2013. In making this assessment, it used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control-Integrated Framework. Based on our assessment, we believe that, as of December 31, 2013, the Company’s internal control over financial reporting was effective based on those criteria.

This annual report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to the rules of the Securities and Exchange Commission that permit us to provide only management’s report in this annual report.

ITEM 9B. OTHER INFORMATION

None.

ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE

Directors and Executive Officers

The Company’s management team is highly qualified, with most members having previously worked in leading foreign or domestic online games and/or IT companies. The majority of senior staff members bring more than 10 years’ individual professional team management experience. Executive Officers who are responsible for day-to-day operations of the Company are listed in the table below.

Position	Name	Age
Chairman and Director	Zhilian Chen	48
CEO, CFO, Treasurer	Mingyang Li	37

Board of Directors

Our Board of Directors is comprised of five members. Mr. Zhilian Chen, Mr. Mingyang Li, and Mr. Xiongbing Zhong are executive directors of the Company, with Mr. Chen as Chairman. Mr. David Cohen and Mr. Ji Chen are independent directors. Mr. David Cohen serves as Chairman of the Audit Committee; Mr. David Cohen and Mr. Ji Chen comprise the Compensation Committee (Mr. Ji Chen as Chairman); and Mr. Ji Chen is the only member of the Nomination Committee.

Background and Experience

Mingyang Li - Chief Executive Officer, Chief Financial Officer, Treasurer. Mr. Li joined Beijing Sntaro in September 2007 as CEO. His role involves many key tasks, such as strategic planning (operational and financial), setting up and modernizing the management system, managing various departments and their annual budgets as well as performance and resources planning. Prior to joining Sntaro, Mr. Li worked from November 2006 to August 2007 for Western Union (France) and was involved in the R&D of several key projects such as the discount card program. Mr. Li began his professional working career as an intern in the Purchasing Department of France’s automobile company Renault Group in May 2005. Mr. Li has a PhD from Institute European des Affaires (IEDA) in France and a Master’s Degree from INSEEC, one of the top business schools in France.

Zhilian Chen –Chairman, Director . Mr. Chen founded Beijing Sntaro in 2006 and is a member of the Board of Directors. Born in 1965, Mr. Chen is an experienced and successful businessman and has maintained several positions as Legal Representative throughout his career. Mr. Chen commenced his professional career in 1985 in the supply and marketing department in Cixi, Zhejiang Province. In 1991, he established a Sino-foreign joint venture Xinlian Clothing and Shoes Co., Ltd in Ningbo, Zhejiang Province, whose products were exported to over 20 countries. In 2001, he founded Shente Chemical Fiber Co., Ltd in Zhejiang Province. As one of the top hundred enterprises in Cixi City, the company today mainly focuses on chemical fiber production. During 2005 and 2006, he worked at the BMW Auto Sales shop, Toyota Auto Sales shop and Volkswagen Auto Sales shop. These auto sales ventures now sell over 9,000 vehicles annually.

Mr. Ji Chen - Independent Director . Mr. Ji Chen was born in 1952. He graduated from Beijing Normal University with the bachelor degree in 1976 and graduated from Beijing Administrative College with master degree in 1998. From 1988 to 1995, Mr. Chen worked as chief editor of the Beijing Youth Daily. From 1995 until the present, Mr. Chen provided services for Beijing Star Group Corporation as the vice-president.

Mr. David Cohen - Independent Director . David Cohen is a licensed attorney who has been a member of the New York State Bar Association for the last 25 years. For the last 5 years he has been a sole practitioner with a general business law practice with a specialty in litigation and creditors’ issues. Previously, David managed the bankruptcy practice at Herzfeld & Rubin, P.C. and prior to that was a partner at Cohen&Lippman, LLP a law firm with primarily a business law practice. From 2001 to 2004, David Cohen has served as an independent Director of Laidlaw Global Corporation, a Financial Holding company with multiple subsidiaries while the Company was listed on the American Stock Exchange and for a time on the OTC Bulletin-Board. In that function, he served as an independent Director and Member of the Audit Committee and the Compensation Committee. Prior to becoming a lawyer, Mr. Cohen was a Senior Executive for an Aviation company headquartered in Vienna, Austria. Earlier Mr. Cohen served in the United States military in a communication unit based in Germany. Mr. Cohen was graduated from New York Law School and holds a J.D. degree.

Zhong Xiongbing - Executive Director . Mr. Zhong worked for Zhong Shan technology school as a teacher in Guang Dong province from 1984 to 1989. After then, during 1989 and 1997 Mr. Zhong did some business in GuangHua commercial firm in Guang Dong province. From 1997 to 2005, Mr. Zhong took the responsible of general manager for Guang Dong Free Land movie studio. Prior to joining Sntaro, Mr. Zhong was general manager in Beijing Hua You Free Land digital musical Tech. Co. Ltd. From 2009 till now, Mr. Zhong is Beijing Sntaro Free Land’s general director.

Mr. Zhong has a physics diploma from Shao Guan University.

KEY EMPLOYEES

Hang Song - Vice President . Mr. Hang Song joined the gaming industry in 2003, has 11 years of R&D experience, and worked for Ladder Tech Co., Ltd.; Possodility Space Co., Ltd.; and Cross Light Tech Co., Ltd. as Art Director. Mr. Hang Song participated in the development of “Warrior Epic” and “Galaxy”. Song Hang has extensive project experience, and excellent design and management capabilities. Mr. Hang Song joined Santaro as art director and vice president, and is responsible for the game art design of “108 Warriors”. He also led a team of professional game art designer to take game art design projects from other third-party game research companies.

Jian Yang - Vice President. Mr. Jian Yang joined the software industry in 2003, has 11 years of software development experience, and worked as programmer and senior programmer in Beijing IDN Internet Safety Co., Ltd and Tsinghua Ziguang High-technology Co., Ltd; Mr. Jian Yang has accumulated over 10 years of working experience in gaming software development and a deep understanding of gaming development management. Mr. Jian Yang led in the development of games such as Fire of War, Huge Dragon and 108 Warriors. Mr. Jian Yang joined Santaro as chief programmer and vice president. He is pivoting the R&D team to maintain and update 108 Warriors, and lead R&D team to develop the mobile games.

Family Relationships

There are no family relationships between or among any of our current directors, executive officers or persons nominated or charged by the Company to become directors or executive officers. There are no family relationships among our officers and directors and the officers and directors of our direct and indirect subsidiaries.

Involvement in Certain Legal Proceedings

To the best of our knowledge, none of our directors or executive officers, during the past ten years, has been involved in any legal proceeding of the type required to be disclosed under applicable SEC rules, including:

Any petition under the Federal bankruptcy laws or any state insolvency law being filed by or against, or a receiver, fiscal agent or similar officer being appointed by a court for the business or property of such person, or any partnership in which he was a general partner at or within two years before the time of such filing, or any corporation or business association of which he was an executive officer at or within two years before the time of such filing;

Conviction in a criminal proceeding, or being a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses);

Being the subject of any order, judgment, or decree, not subsequently reversed, suspended or vacated, of any court of competent jurisdiction, permanently or temporarily enjoining him from, or otherwise limiting, the following activities:

Acting as a futures commission merchant, introducing broker, commodity trading advisor, commodity pool operator, floor broker, leverage transaction merchant, any other person regulated by the Commodity Futures Trading Commission, or an associated person of any of the foregoing, or as an investment adviser, underwriter, broker or dealer in securities, or as an affiliated person, director or employee of any investment company, bank, savings and loan association or insurance company, or engaging in or continuing any conduct or practice in connection with such activity;

ii.

Engaging in any type of business practice; or

iii.

Engaging in any activity in connection with the purchase or sale of any security or commodity or in connection with any violation of Federal or State securities laws or Federal commodities laws;

Being the subject of any order, judgment or decree, not subsequently reversed, suspended or vacated, of any Federal or State authority barring, suspending or otherwise limiting for more than 60 days the right of such person to engage in any activity described in paragraph (3)(i) of this section, or to be associated with persons engaged in any such activity;

Being found by a court of competent jurisdiction in a civil action or by the Securities and Exchange Commission to have violated any Federal or State securities law, and the judgment in such civil action or finding by the Commission has not been subsequently reversed, suspended, or vacated;

Being found by a court of competent jurisdiction in a civil action or by the Commodity Futures Trading Commission to have violated any Federal commodities law, and the judgment in such civil action or finding by the Commodity Futures Trading Commission has not been subsequently reversed, suspended or vacated;

Being the subject of, or a party to, any Federal or State judicial or administrative order, judgment, decree, or finding, not subsequently reversed, suspended or vacated, relating to an alleged violation of:

Any Federal or State securities or commodities law or regulation; or

ii.

Any law or regulation respecting financial institutions or insurance companies including, but not limited to, a temporary or permanent injunction, order of disgorgement or restitution, civil money penalty or temporary or permanent cease-and-desist order, or removal or prohibition order; or

iii.

Any law or regulation prohibiting mail or wire fraud or fraud in connection with any business entity; or

Being the subject of, or a party to, any sanction or order, not subsequently reversed, suspended or vacated, of any self-regulatory organization (as defined in Section 3(a)(26) of the Exchange Act (15 U.S.C. 78c(a)(26))), any registered entity (as defined in Section 1(a)(29) of the Commodity Exchange Act (7 U.S.C. 1(a)(29))), or any equivalent exchange, association, entity or organization that has disciplinary authority over its members or persons associated with a member.

Compliance with Section 16(a) of the Exchange Act

Based solely on review of the copies of such forms furnished to the Company, or written representations that no reports were required, the Company believes that for the year ended December 31, 2013, our directors and executive officers complied with Section 16(a) filing requirements applicable to them.

Audit Committee and Charter

Mr. David Cohen, independent directors of the Company, is the Chairman of our Audit Committee. Our audit committee is responsible for: (1) selection and oversight of our independent accountant; (2) establishing procedures for the receipt, retention and treatment of complaints regarding accounting, internal controls and auditing matters; (3) establishing procedures for the confidential, anonymous submission by our employees of concerns regarding accounting and auditing matters; (4) engaging outside advisors; and, (5) funding for the outside auditory and any outside advisors engagement by the audit committee.

Audit Committee Financial Expert

None of our directors or officers has the qualifications or experience to be considered a financial expert. We believe the cost related to retaining a financial expert at this time is prohibitive. Further, because of our limited operations, we believe the services of a financial expert are not warranted.

Code of Ethics

We have adopted a corporate code of ethics. We believe our code of ethics is reasonably designed to deter wrongdoing and promote honest and ethical conduct; provide full, fair, accurate, timely and understandable disclosure in public reports; comply with applicable laws; ensure prompt internal reporting of code violations; and provide accountability for adherence to the code.

Disclosure Committee and Charter

We have a disclosure committee and disclosure committee charter. Our disclosure committee is comprised of all of our officers and directors. The purpose of the committee is to provide assistance to the Chief Executive Officer and the Chief Financial Officer in fulfilling their responsibilities regarding the identification and disclosure of material information about us and the accuracy, completeness, and timeliness of our financial reports.

ITEM 11. EXECUTIVE COMPENSATION

The following table sets forth information with respect to compensation paid by the registrant to its officers during the last two completed fiscal years ended December 31, 2013, and December 31, 2012, respectively.

Executive Officer Compensation Table
Name and principal position (a)	Year (b)		Salary (US$) (c)		Bonus (US$) (d)		Stock Awards (US$) (e)		Option Awards (US$) (f)		Non-Equity Incentive Plan Compensation (US$) (g)		Nonqualified Deferred Compensation Earnings (US$) (h)		All Other Compensation (US$) (i)		Total (US$) (j)
Ms. Dong Yan,		2013	$	23,232		0		0		0		0		0		0	$	23,232
CFO		2012	$	28,481		0		0		0		0		0		0	$	28,481

Mr. Mingyang Li,		2013	$	71,634		0		0		0		0		0		0	$	71,634
CEO&CFO		2012	$	69,230		0		0		0		0		0		0	$	69,230

* Ms. Dong Yan, our former CFO ， has left the Company in September 2013.

Compensation Discussion and Analysis

We intend to provide our named executive officers (as defined in Item 402 of Regulation S-K) with a competitive base salary that is in line with their roles and responsibilities.

It is not uncommon for PRC private companies to have base salaries as the sole form of compensation. The base salary level is established and reviewed based on the level of responsibilities, the experience and tenure of the individual, and the current and potential contributions of the individual.

The following table sets forth information with respect to compensation paid by the registrant to its directors during the fiscal year ended December 31, 2013.

Director Compensation
Name (a)	Fees Earned or Paid in Cash (US$) (b)		Stock Awards (US$) (c)		Option Awards (US$) (d)		Non-Equity Incentive Plan Compensation (US$) (e)		Change in Pension Value and Nonqualified Deferred Compensation Earnings (US$) (f)		All Other Compensation (US$) (g)		Total (US$) (h)
Mr. Zhilian Chen		0		0		0		0		0		0		0
Mr. Xiongbing Zhong		0		0		0		0		0		0		0
Mr. Mingyang Li	$	71,634		0		0		0		0		0	$	71,634
Mr. David Cohen	$	10,000		0		0		0		0		0	$	10,000
Mr. Ji Chen		0		0		0		0		0		0		0

All compensation received by our officers and directors has been disclosed.

There are no stock option, retirement, pension, or profit sharing plans for the benefit of our officers and directors.

Long-Term Incentive Plan Awards

We do not have any long-term incentive plans that provide compensation intended to serve as incentive for performance.

Indemnification

Under our Bylaws, we may indemnify an officer or director who is made a party to any proceeding, including a lawsuit, because of his position, if he acted in good faith and in a manner he reasonably believed to be in our best interest. We may advance expenses incurred in defending a proceeding. To the extent that the officer or director is successful on the merits in a proceeding as to which he is to be indemnified, we must indemnify him against all expenses incurred, including attorney's fees. With respect to a derivative action, indemnity may be made only for expenses actually and reasonably incurred in defending the proceeding, and if the officer or director is judged liable, only by a court order. The indemnification is intended to be to the fullest extent permitted by the laws of the State of Nevada.

Regarding indemnification for liabilities arising under the Securities Act of 1933, which may be permitted to directors or officers under Nevada law, we are informed that, in the opinion of the Securities and Exchange Commission, indemnification is against public policy, as expressed in the Act and is, therefore, unenforceable.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS

As of March 20, 2014, an aggregate of 69,875,000 shares of our common stock were outstanding. The registrant has no compensation plans (including individual compensation arrangements) under which equity securities of the registrant are authorized for issuance.

The following table sets forth, as of March 20, 2014, the total number of shares beneficially owned by each of our directors and officers, individually and as a group, and each person who is known by us to beneficially own more than 5% of our total outstanding shares.

Title of Class	Name of Beneficial Owner	Number of Shares			Percent of class

Common Stock	Zhilian Chen, Chairman /Director		33,473,000	(1)		47.904	%

Common Stock	Yan Dong, Chief Financial Officer,		100	(2)			*

Common Stock	Mingyang Li, Chief Executive Officer, Chief Financial Officer and Director		500,000	(3)			*

Common Stock	Xiongbing Zhong, Director		3,200,000	(4)		4.580	%

All Officers & Directors			37,173,100			53.20	%

* Less than one percent.

(1)The shares are held through Morning Express Limited with the address of PO Box 957, Offshore Incorporations Centre, Road Town, Tortola, British Virgin Islands, of which Mr. Zhilian Chen is the 100% shareholder and sole director. Mr. Chen’s address is 901C, 9th Floor, Building 4, Courtyard 1 Shangdi East Road, Haidian District, Beijing, PRC.

(2)Yan Dong’s address is 24-201 Yang Zhuang Xiao Qu, Shijingshan, Beijing, PRC. Ms. Dong left the Company in September 2013.

(3) Mingyang Li’s address is Room 2-3-2, Xiao He Xi Lu Road No. 84 Shen He District, Shenyang City, Liaoning Province, PRC.

(4) Zhong Xiongbing’s address is Room 601, Building No.8, ZongLv Yuan Lane No.1, Hui Jing Xin Cheng, Guang Yuan Dong Lu Street, Guangzhou City, PRC.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE

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 S ntaro’s business and operation. By the end of 2012, CixiYide had provided loans to Beijing S ntaro in the aggregate amount of $2,534,982. During the year ended December 31, 2013 , CixiYide made an additional loan in the amount of $173,752 to Beijing Sntaro . The total amount due to CixiYide from Beijing Sntaro was $2,708,734 as of December 31, 2013. Mr. Zhilian Chen provided a loan in the amount of $7,066 to Beijing Sntaro. The total amount due to Mr. Zhilian Chen from Beijing Sntaro was $7,066 as of December 31, 2013.

By the end of 2012, Mr. Zhilian Chen has provided loans in the amount of $20,582 to Ningbo S ntaro. During the year ended December 31, 2013, Mr. Zhilian Chen made an additional loan of $32,542 to Ningbo S ntaro. The total amount due to Mr. Zhilian Chen from Ningbo Sntaro was $53,124 as of December 31, 2013. By the end of 2012, CixiYide has provided loans in the amount of $1,687,750 to Ningbo S ntaro. During the year ended December 31, 2013, CixiYide made an additional loan in the amount of $2,068,383 to Ningbo S ntaro. The total amount due to CixiYide from Ningbo S ntaro was $3,756,133 as of December 31, 2013.

ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES

(1) Audit Fees

The aggregate fees billed for each of the last two fiscal years for professional services rendered by the principal accountant for our audit of annual financial statements and review of financial statements included in our Form 10-Qs or services that are normally provided by the accountant in connection with statutory and regulatory filings or engagements for those fiscal years was:

2013	$	105,000

2012	$	137,500

(2) Audit-Related Fees

There is no fee billed in each of the last two fiscal years for assurance and related services by the principal accountants that are reasonably related to the performance of the audit or review of our financial statements and are not reported in the preceding paragraph.

(3) Tax Fees

There is no fee billed in each of the last two fiscal years for professional services rendered by the principal accountant for tax compliance, tax advice, and tax planning.

(4) All Other Fees

There is no fee billed in each of the last two fiscal years for the products and services provided by the principal accountant, other than the services reported in paragraphs (1), (2), and (3).

(5) Our audit committee’s pre-approval policies and procedures described in paragraph (c)(7)(i) of Rule 2-01 of Regulation S-X were that the audit committee pre-approve all accounting related activities prior to the performance of any services by any accountant or auditor.

(6) There is no hour expended on the principal accountant’s engagement to audit our financial statements for the most recent fiscal year that were attributed to work performed by persons other than the principal accountant’s full time and permanent employees was.

ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES

Exhibit	Document Description	Form	Date	Number	herewith

3.1	Articles of Incorporation	S-1	03-29-2010	3.1
3.2	Bylaws	S-1	03-29-2010	3.2
4.1	Specimen Stock Certificate	S-1	03-29-2010	4.1
14.1	Code of Ethics	10-K	03-29-2012	14.1
31.1	Certification of Chief Executive Officer pursuant to 13a-15(e) and 15d-15(e), promulgated under the Securities and Exchange Act of 1934, as amended.				X
31.2	Certification of Chief Financial Officer pursuant to 13a-15(e) and 15d-15(e), promulgated under the Securities and Exchange Act of 1934, as amended.				X
32.1	Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section
	906 of the Sarbanes-Oxley Act of 2002 (Chief Executive Officer)				X
99.1	Audit Committee Charter	10-K	03-29-2012	99.1
99.2	Disclosure Committee Charter	10-K	03-29-2012	99.2

101.INS **	XBRL Instance Document	X

101.SCH **	XBRL Taxonomy Extension Schema Document	X

101.CAL **	XBRL Taxonomy Extension Calculation Linkbase Document	X

101.DEF **	XBRL Taxonomy Extension Definition Linkbase Document	X

101.LAB **	XBRL Taxonomy Extension Label Linkbase Document	X

101.PRE **	XBRL Taxonomy Extension Presentation Linkbase Document	X

______________________

** XBRL (Extensible Business Reporting Language) information is furnished and not filed or a part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of Section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereto duly authorized.

	SANTARO INTERACTIVE ENTERTAINMENT COMPANY

Date: March 28, 2014	By:	/s/ Mingyang Li
		Mingyang Li
		Chief Executive Officer,
		(Principal Executive Officer)

Date: March 28, 2014	By:	/s/ Mingyang Li
		Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, this Report has been signed below by the following persons on behalf of the Registrant in the indicated capacities and on the dates indicated.

/s/ Zhilian Chen			Date: March 28, 2014
Zhilian Chen, Chairman/Director

/s/ Xiongbing Zhong			Date: March 28, 2014
Xiongbing Zhong, Director

/s/ Mingyang Li			Date: March 28, 2014
Mingyang Li, Director

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