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U.S. Securities and Exchange Commission Washington, D.C. 20549
 Form 10-QSB [X]   QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the quarterly period ended September 30, 2004 [_]   TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT For the transition period from __________ to __________ Commission file number 0-49764 SinoFresh HealthCare, Inc.  Florida
    
    65-1082270(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 516 Paul Morris Drive
Englewood, Florida 34223
(Address of principal executive offices) 941-681-3100
(Issuers telephone number) Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 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  [_] The number of shares outstanding of each of the issuers classes of common
equity as of October 15, 2004: Common Stock, No Par Value 13,627,745 shares Transitional Small Business Disclosure Format (check one): Yes  [_] No
 [X]




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Table of Contents SINOFRESH HEALTHCARE, INC. Index
    
    PagePart I. Financial InformationItem 1. Financial StatementsCondensed Consolidated Balance Sheets as of September 30, 2004 (unaudited) and December 31, 2003
    
    
    2Condensed Consolidated Statements of Operations  for the three and nine months ended September 30, 2004 and
2003 (unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2004 and 2003
(unaudited)
    
    
    4Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Controls and Procedures
    
    
    13Part II.Other Information
    
    
    14Item 1. Legal Proceedings
    
    
    14Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    15Item 3. Defaults Upon Senior Securities
    
    
    15Item 4. Submission of Matters to a Vote of Security Holders
    
    
    15Item 5. Other Information
    
    
    15Item 6. Exhibits
    
    
    15Signatures
    
    
    16Certifications
    
    
    17Ex-31.1: Section 302 Certification of CEOEx-31.2: Section 302 Certification of CFOEx-32: Section 906 Certification of CEO and CFO
  i




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PART I  FINANCIAL STATEMENTS SINOFRESH HEALTHCARE, INC. 
  September 30, 2004
    
    December 31, 2003(Unaudited)ASSETSCURRENT ASSETSCash and cash equivalents
    
    $
    121,231
    
    
    $
    368,394Accounts receivable, net of allowances of $21,083 and $15,000
    
    
    602,397
    
    
    
    645,969Inventory
    
    
    9,020
    
    
    
    172,007Other current assets
    
    
    110,861
    
    
    
    174,283TOTAL CURRENT ASSETS
    
    
    843,509
    
    
    
    1,360,653FURNITURE AND EQUIPMENT, NET
    
    
    117,961
    
    
    
    138,191PATENTS, NET
    
    
    2,576,937
    
    
    
    2,750,010GOODWILL
    
    
    2,409,401
    
    
    
    2,409,401OTHER ASSETS
    
    
    6,418
    
    
    
    7,218TOTAL ASSETS
    
    $
    5,954,226
    
    
    $
    6,665,473LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent portion of convertible notes payable and capital leases
    
    $
    199,699
    
    
    $
    584,826Accounts payable, including $198,948 and $102,866 due to related parties
    
    
    1,781,028
    
    
    
    693,258Accrued expenses, including $172,875 and $245,889 due to related parties
    
    
    548,703
    
    
    
    679,124TOTAL CURRENT LIABILITIES
    
    
    2,529,430
    
    
    
    1,957,208CAPITAL LEASES, NET OF CURRENT MATURITIES
    
    
    67,360
    
    
    
    83,851TOTAL LIABILITIES
    
    
    2,596,790
    
    
    
    2,041,059COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYCommon stock, no par value; 500,000,000 shares authorized; 13,314,323 shares
issued and outstanding as of September 30, 2004; 10,280,083 shares issued
and outstanding and 3,021,740 shares issuable at December 31, 2003
    
    
    2,273,866
    
    
    
    2,251,991Preferred stock, no par value; 200,000,000 shares authorized:Series A convertible preferred stock, voting; 858,170 shares authorized,
issued and outstanding (aggregate liquidation value of $1,716,339 at
 September 30, 2004)
    
    
    1,716,339
    
    
    
    1,716,339Series B convertible preferred stock, voting; 1,500,000 shares authorized,
issued and outstanding (aggregate liquidation value of $3,000,000
at September 30, 2004)
    
    
    3,000,000
    
    
    
    3,000,000Series C convertible preferred stock, voting; 1,250,000 shares authorized;
1,218,711 shares issued and outstanding (aggregate liquidation value
of $2,437,422 at September 30, 2004)
    
    
    2,189,261
    
    
    
    2,189,261Accumulated deficit
    
    
    (5,690,030
    )
    
    
    (4,281,177
    )Warrant subscriptions receivable
    
    
    (132,000
    )
    
    
    (252,000
    )TOTAL STOCKHOLDERS EQUITY
    
    
    3,357,436
    
    
    
    4,624,414TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    5,954,226
    
    
    $
    6,665,473
 See notes to condensed consolidated financial statements. 2




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SINOFRESH HEALTHCARE, INC. 
  Three Months Ended September 30,
    
    Nine Months Ended September 30,2004
    
    2003
    
    2004
    
    2003REVENUE
    
    $
    1,170,425
    
    
    $
    426,163
    
    
    $
    3,285,857
    
    
    $
    777,888COST OF REVENUE
    
    
    325,651
    
    
    
    178,724
    
    
    
    816,010
    
    
    
    271,516GROSS PROFIT
    
    
    844,774
    
    
    
    247,439
    
    
    
    2,469,847
    
    
    
    506,372OPERATING EXPENSESSalaries and related expense
    
    
    301,005
    
    
    
    221,741
    
    
    
    921,442
    
    
    
    503,249Professional fees
    
    
    186,294
    
    
    
    408,688
    
    
    
    1,027,617
    
    
    
    976,800Other general and administrative
    
    
    122,746
    
    
    
    141,156
    
    
    
    413,199
    
    
    
    378,901Marketing and advertising expenses
    
    
    93,268
    
    
    
    168,142
    
    
    
    1,066,883
    
    
    
    466,359Research and development expenses
    
    
    15,496
    
    
    
    73,939
    
    
    
    279,744
    
    
    
    129,874Depreciation and amortization
    
    
    65,448
    
    
    
    63,450
    
    
    
    196,250
    
    
    
    187,860TOTAL OPERATING EXPENSES
    
    
    784,257
    
    
    
    1,077,116
    
    
    
    3,905,135
    
    
    
    2,643,043INCOME (LOSS) FROM OPERATIONS
    
    
    60,517
    
    
    
    (829,677
    )
    
    
    (1,435,288
    )
    
    
    (2,136,671
    )OTHER INCOME (EXPENSE):Interest, net
    
    
    8,228
    
    
    
    (23,136
    )
    
    
    (19,316
    )
    
    
    (65,134
    )Other income (expense)
    
    
    338
    
    
    
    (153,923
    )
    
    
    45,751
    
    
    
    (153,512
    )TOTAL OTHER INCOME (EXPENSE)
    
    
    8,566
    
    
    
    (177,059
    )
    
    
    26,435
    
    
    
    (218,646
    )NET INCOME (LOSS)
BEFORE INCOME TAXES
    
    
    69,083
    
    
    
    (1,006,736
    )
    
    
    (1,408,853
    )
    
    
    (2,355,317
    )PROVISION FOR INCOME TAXES
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    69,083
    
    
    $
    (1,006,736
    )
    
    $
    (1,408,853
    )
    
    $
    (2,355,317
    )NET INCOME (LOSS)
PER COMMON SHARE-basic
    
    $
    0.01
    
    
    $
    (0.09
    )
    
    $
    (0.11
    )
    
    $
    (0.21
    )-diluted
    
    $
    0.00
    
    
    $
    (0.09
    )
    
    $
    (0.11
    )
    
    $
    (0.21
    )WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING-basic
    
    
    13,314,323
    
    
    
    11,362,331
    
    
    
    13,313,639
    
    
    
    10,968,612-diluted
    
    
    19,833,085
    
    
    
    11,362,331
    
    
    
    13,313,639
    
    
    
    10,968,612
 See notes to condensed consolidated financial statements. 3




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SINOFRESH HEALTHCARE, INC. 
  Nine Months Ended September 30,2004
    
    2003CASH FLOWS FROM OPERATING ACTIVITIESNet loss
    
    $
    (1,408,853
    )
    
    $
    (2,355,317
    )Adjustments to reconcile net loss to net cash
provided by (used in) operations:Stock, stock options and warrants issued for services
    
    
    21,875
    
    
    
    706,125Stock issued for as settlement cost and to consultant
    
    
    
    
    
    
    100,000Amortization and depreciation
    
    
    196,250
    
    
    
    187,746Bad debt expense
    
    
    
    
    
    
    14,000Change in allowance for return
    
    
    6,083
    
    
    
    Other
    
    
    
    
    
    
    (3,238
    )Changes in assets and liabilities:Accounts receivable
    
    
    43,572
    
    
    
    (169,130
    )Inventory
    
    
    162,987
    
    
    
    (193,876
    )Other current assets
    
    
    63,422
    
    
    
    (86,756
    )Other assets
    
    
    800
    
    
    
    6,367Accounts payable
    
    
    1,087,770
    
    
    
    433,725Accrued expenses
    
    
    (130,421
    )
    
    
    252,332Deferred revenue
    
    
    
    
    
    
    (17,678
    )NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    43,485
    
    
    
    (1,125,700
    )INVESTING ACTIVITIESAcquisition of SinoFresh Laboratories, Inc., net of cash
    
    
    
    
    
    
    (72,605
    )Payments for furniture and equipment
    
    
    (2,947
    )
    
    
    (17,014
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (2,947
    )
    
    
    (89,619
    )FINANCING ACTIVITIESNet proceeds from issuance of stock and warrants
    
    
    
    
    
    
    1,930,907Payments received on warrant subscriptions receivable
    
    
    120,000
    
    
    
    Proceeds from short-term notes payable
    
    
    
    
    
    
    300,000Payments on short-term notes payable
    
    
    
    
    
    
    (10,500
    )Payments on long-term debt and capital leases
    
    
    (401,618
    )
    
    
    (237,711
    )NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    (281,618
    )
    
    
    1,982,696NET INCREASE (DECREASE) IN CASH
    
    
    (241,080
    )
    
    
    767,377CASH AND CASH EQUIVALENTS  beginning of period
    
    
    368,394
    
    
    
    245,685CASH AND CASH EQUIVALENTS  end of period
    
    $
    127,314
    
    
    $
    1,013,062SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    41,914
    
    
    $
    145,319
 See notes to condensed consolidated financial statements. 4




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SinoFresh HealthCare, Inc. 
   Note 1. Basis of Presentation The accompanying unaudited financial statements of SinoFresh HealthCare,
Inc. (the Company) have been prepared in accordance with generally accepted
accounting principles and the rules and regulations of the United States
Securities and Exchange Commission for interim financial information.
Accordingly, they do not include all of the information and footnotes necessary
for a comprehensive presentation of financial position and results of
operation. The Companys business is subject to various risks and uncertainties. The
Companys ability to continue as a going concern is dependent on its ability to
market and distribute its products, utilize the technology underlying its
patents, and further develop existing and new products. All of these
activities are capital intensive and will be dependent on cash flow from
operations and/or additional outside funding. While the Company has a working
capital deficit at September 30, 2004 of $1,685,921, management believes that
it can secure additional outside funding; however, no assurances can be
provided that such outside funding will be secured or secured at terms
agreeable to the Company. The rate of the Companys future growth and success
will be dependent on its ability to generate the necessary resources through
outside funding, product sales or otherwise. The accompanying statements do not
include any adjustments that might be necessary if the Company is unable to
continue as a going concern. In the opinion of management, all adjustments, consisting of normal
recurring adjustments, have been made in the September 30, 2004 and 2003
financial statements, which are necessary for a fair financial statement
presentation. The results for the three and nine months ended September 30,
2004 and 2003 are not necessarily indicative of financial operations for the
full year. For further information, refer to the financial statements and footnotes
included in the Companys Annual Report on Form 10-KSB as filed with the
Securities and Exchange Commission for the year ended December 31, 2003. The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the condensed
consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates. The Companys significant estimates and assumptions primarily arise
from risks and uncertainties associated with potential future product returns,
the uncollectibility of accounts and other receivables, inventory
obsolescence, valuation of acquired assets for purposes of allocating the
purchase price, including patents and goodwill, subsequent recoverability
analysis, and estimated accruals relating to legal contingencies. Certain reclassifications have been made in the 2003 statements to conform to
the 2004 presentation. Note 2. Shareholders Equity During the nine months ended September 30, 2004, the Company granted
105,000 stock options to employees and 1,000 options to consultants. The
exercise prices range from $1.00 to $1.70 and are equal to the underlying
common stock market prices as of the date of grants. The employee options
expire in five years and vest ratably over a three-year period. The
non-employee options vest immediately and expire in five years. 5




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Basic earnings per share is computed by dividing the net income (loss)
available to common shareholders for the relevant period, by the weighted
average number of shares of common stock issued, outstanding and issuable
during the period. For purposes of calculating diluted earnings per share, the
denominator includes both the weighted average number of shares of common stock
and the number of dilutive common stock equivalents. The number of dilutive
stock equivalents includes the effect of stock options calculated using the
treasury stock method and the number of issuable shares upon the conversion of
preferred stock and convertible debt outstanding. The following table reconciles the basic and dilutive earnings per share calculations for
the three months ended September 30,: 2004
    
    2003Net income (loss), as reported  basic
    
    $
    69,083
    
    
    $
    (1,006,736
    )Add back interest expense from the conversion of debt to
common shares
    
    
    7,482
    
    
    
    Net income (loss) available to common stockholders on a
dilutive basis
    
    $
    76,565
    
    
    $
    (1,006,736
    )Weighted average number of common shares outstanding  basic
    
    
    13,314,323
    
    
    
    11,362,331Effect of dilutive securities:Conversion of preferred stock, Series A, B and C
    
    
    6,295,592
    
    
    
    Conversion of debt
    
    
    223,170
    
    
    
    Assumed exercise of stock options
    
    
    
    
    
    
    Weighted average number of common shares outstanding and
dilutive potential of common shares
    
    
    19,833,085
    
    
    
    11,362,331
 The Company has 3,277,095 options and warrants as of September 30, 2004
that have not been included in the dilutive calculation because their effect
was antidilutive. There are no dilutive securities for the nine months ended
September 30, 2004 or 2003 and for the three months ended September 30, 2003
due to the net loss incurred for those periods. 6




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Note 3. Stock-based Compensation The Company accounts for employee stock-based compensation arrangements
in accordance with the provisions of Accounting Principles Board Opinion (APB)
No. 25, Accounting for Stock Issued to Employees, and complies with the
disclosure provisions of Statement of Financial Accounting Standards (SFAS)
No. 123, Accounting for Stock-Based Compensation (SFAS No. 123). Under APB
No. 25, compensation cost is determined based on the difference, if any, on
the measurement date, which is generally the grant date, between the fair
value of the Company stock and the amount an employee must pay to acquire the
stock. The fair value of each stock option or warrant grant issued to
non-employees is estimated on the measurement date using the fair value
method of SFAS 123. The following table reflects proforma supplemental financial information related to stock-based employee
compensation, as required by SFAS No. 123 and SFAS 148 for the three months ended September 30,: 2004
    
    2003Net income (loss), as reported
    
    $
    69,083
    
    
    $
    (1,006,736
    )Additional stock-based employee compensation costs that would
have been included in the determination of net income (loss)
if the
fair value method (SFAS No. 123) had been applied to all awards
    
    
    (65,263
    )
    
    
    (78,625
    )Pro forma net income (loss), as if the fair value method had
been applied to all awards
    
    $
    3,820
    
    
    $
    (1,085,361
    )Net income (loss) per common share, as reported-basic
    
    $
    0.01
    
    
    $
    (0.09
    )-diluted
    
    $
    0.00
    
    
    $
    (0.09
    )Pro forma net income (loss) per common share, as if the fair
value method had been applied to all awards-basic
    
    $
    0.00
    
    
    $
    (0.10
    )-diluted
    
    $
    0.00
    
    
    $
    (0.10
    )
 The following table reflects proforma supplemental financial information related to stock-based employee
compensation, as required by SFAS No. 123 and SFAS 148 for the nine months ended September 30,: 2004
    
    2003Net loss, as reported
    
    $
    (1,408,853
    )
    
    $
    (2,355,317
    )Additional stock-based employee compensation costs that would
have been included in the determination of net loss if the
fair value method (SFAS No. 123) had been applied to all awards
    
    
    (216,764
    )
    
    
    (78,625
    )Pro forma net loss, as if the fair value method had
been applied to all awards
    
    $
    (1,625,617
    )
    
    $
    (2,433,942
    )Net loss per common share, as reported-basic
    
    $
    (0.11
    )
    
    $
    (0.21
    )-diluted
    
    $
    (0.11
    )
    
    $
    (0.21
    )Pro forma net loss per common share, as if the fair
value method had been applied to all awards-basic
    
    $
    (0.12
    )
    
    $
    (0.22
    )-diluted
    
    $
    (0.12
    )
    
    $
    (0.22
    )
 7




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Note 4:Related Party Information One of the Companys attorneys served as Secretary until April 2003. The
Company had incurred legal fees with this law firm through April 2003 of
approximately $44,000 for the nine months ended September 30, 2003,
respectively. A director of the Company is the principal owner of a law firm that
provided services to the Company. The expenses incurred to that law firm were
approximately $3,000 and $19,000 for the three and nine months ended September
30, 2004, respectively. The Company incurred expenses to this law firm of
approximately $100,000 and $205,000 for the three and nine months ended
September 30, 2003. A former director of the Company provided consulting services to the
Company directly and through his affiliate. Consulting expenses for this
consultant while serving as a director were approximately $18,000 and
$72,000 for the three and nine months ended September 30, 2003. The
consultant resigned as director in September, 2003. The Company incurred consulting fees for the three and nine months ended
September 30, 2003 of approximately $24,000 and $72,000 to an entity
affiliated with a former director/principal stockholder. There were no such
fees incurred in 2004. The Company leases its current facility from an entity controlled by two
of the Companys officers and directors and has contractual arrangements with
other related parties. Rent paid to these parties during the three and nine
months ended September 30, 2004 was approximately $19,000 and $58,000. Rent
paid to these parties during the three and nine months ended September 30,
2003 was approximately $13,000 and $13,000. The Company rented a condominium, on a month to month basis, from an
officer and director at the sum of $1,250 per month. The condominium was used
as corporate housing by the Company. Total rent expensed for the three and
nine months ended September 30, 2004 was $0 and $6,250. Rent expensed for the
three and nine months ended September 30, 2003 was $3,750 and $3,750. This
arrangement was terminated in June 2004. During the nine months ended September 30, 2003, the Company expensed
approximately $79,000 in legal fees incurred by related third parties and the
Companys chairman and CEO in connection with foreign patents. These related
companies had no assets to protect and maintain the foreign patents. As a
result of recoverability concerns, the Company expensed these costs in 2003.
The patents were transferred to the Company in the first quarter of 2004 and all costs incurred in 2004 were for the benefit of the Company. Note 5:Contingencies As disclosed in the Companys Form 10-KSB filed for the year ended
December 31, 2003 and Form 10-QSB for the first and second quarters of 2004,
the Company is involved in various litigation with two of its current directors
and other former consultants to the Company. As of September 30, 2004, the Company is not in compliance with its notes
payable principal reduction requirements and as a result, is in technical
default. As of September 30, 2004, approximately $177,000 of principal was
outstanding on these convertible notes. In July 2004, a lawsuit was filed alleging that the Company breached an
agreement, dated September 1, 2002 by failing to pay for certain executive
search fees. The complaint seeks damages of $14,400. The Company, which was
not incorporated until October 15, 2002 and did not have any assets or
operations until November 2002, contests the validity of the contract and
intends to vigorously defend the suit. In September 2003, the Company issued 10,768,490 shares of common stock,
858,170 shares of Series A preferred stock, 1,500,000 shares of Series B
preferred stock, and 1,218,711 shares of Series C preferred stock in exchange
for the outstanding shares of common stock and preferred stock held by
shareholders of the Companys predecessor, SinoFresh HealthCare, Inc., a
Delaware corporation (HealthCare). That transaction resulted in HealthCare
merging into a wholly-owned subsidiary of the Company, which subsidiary is now
known as SinoFresh Corporation. In connection with that transaction, the
Company has been unable to obtain from either former counsel to the Company or
former counsel to HealthCare (Mr. David Otto, a director of the Company), who
was counsel to 8




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the Company and HealthCare, respectively, at the time of the merger,
information the Company presently believes is sufficient to indisputably
support one or more exemption(s) from registration that were relied upon in
connection with the issuance of the merger shares. If such information is not
available, the issuance of the shares of the Company in respect of the merger
may not have been in compliance with the registration provisions of the federal
and state securities laws. There may have been a violation of Section 5 of the
Securities Act of 1933, as amended due to the unavailability of an exemption
from registration. As a result, the Company may be exposed to claims for
rescission by shareholders who received shares in the merger. Although the
Company would vigorously defend against any such actions, litigation may be
costly and there is no assurance of the outcome. If the Company lost its
defense in any such litigation, the cost of repurchasing the shares could be
material to the Company. Note 6. Subsequent Events In September 2004, the underlying common shares related to the convertible
preferred shares became available for resale under Rule 144. There were no
shares converted in September 2004, however, 156,711 shares of Series C
preferred stock were converted into 313,422 shares of common stock from October
1st through 15th, 2004. 9




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations Forward-Looking Statements and Associated Risks THIS QUARTERLY REPORT ON FORM 10-QSB CONTAINS FORWARD-LOOKING STATEMENTS THAT
HAVE BEEN MADE PURSUANT TO THE PROVISIONS OF THE PRIVATE SECURITIES LITIGATION
REFORM ACT OF 1995. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON MANAGEMENTS
CURRENT EXPECTATIONS, ESTIMATES AND PROJECTIONS, BELIEFS AND ASSUMPTIONS. WORDS
SUCH AS ANTICIPATES, EXPECTS, INTENDS, PLANS, BELIEVES, SEEKS,
ESTIMATES, VARIATIONS OF SUCH WORDS AND SIMILAR EXPRESSIONS ARE INTENDED TO
IDENTIFY SUCH FORWARD-LOOKING STATEMENTS. THESE STATEMENTS ARE NOT GUARANTEES
OF
FUTURE PERFORMANCE AND ARE SUBJECT TO CERTAIN RISKS, UNCERTAINTIES AND
ASSUMPTIONS THAT ARE DIFFICULT TO PREDICT; THEREFORE, ACTUAL RESULTS MAY DIFFER
MATERIALLY FROM THOSE EXPRESSED OR FORECASTED IN ANY SUCH FORWARD-LOOKING
STATEMENTS. THESE RISKS AND UNCERTAINTIES INCLUDE THOSE DISCUSSED IN PART I -
ITEM 1 - DESCRIPTION OF BUSINESS - RISK FACTORS AND PART II - ITEM 6 -
MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF
OPERATIONS CONTAINED IN THE COMPANYS FORM 10-KSB FOR THE YEAR ENDED DECEMBER
31, 2003, AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION. UNLESS REQUIRED
BY LAW, THE COMPANY UNDERTAKES NO OBLIGATION TO UPDATE PUBLICLY ANY
FORWARD-LOOKING
STATEMENTS, WHETHER AS A RESULT OF NEW INFORMATION, FUTURE EVENTS OR OTHERWISE.
INVESTORS SHOULD REVIEW THIS QUARTERLY REPORT IN COMBINATION WITH THE COMPANYS
ANNUAL REPORT ON FORM 10-KSB IN ORDER TO HAVE A MORE COMPLETE UNDERSTANDING OF
THE PRINCIPAL RISKS ASSOCIATED WITH AN INVESTMENT IN THE COMPANYS STOCK. Overview The Company is engaged in the research,
development, and marketing of proprietary products for the prevention and
treatment of upper respiratory disorders. The Companys nasal product, for
which it holds U.S. and international patents, has undergone more than five
years of development and clinical development, and has been proven to be
effective in killing molds and bacteria that colonize in the nose, throat and
sinuses causing non-allergic reactions and symptoms of sinusitis. SinoFresh
Nasal & Sinus Care was distributed by the Company in a limited geographical
area in Florida until May 2003 at which time the Company entered into an
agreement to obtain national distribution through various drug and grocery
store chains. The Company outsources the manufacturing of its current product
to an FDA approved contract-manufacturing facility that also produces
private-label drugs for a number of major U.S. retail chains, including
Wal-Mart. In 2003, all of the Companys revenues were derived from the sale of the
SinoFresh Nasal & Sinus Care product in the United States. By the end of
2003, the principal outlets for this product included approximately 17,000
national drug and food chain stores, mainly CVS, Eckerd, Osco Drug, Publix
Super Markets, Rite Aid, Sav-on Drugs and Walgreens. At year-end 2003, the
nasal product was on the shelf in approximately 80% of these stores. In 2004,
the Company has expanded its retail distribution network to include Wal-Mart
and continues to pursue other national food and drug chain stores and a
significant number of independent pharmacies (about 45,000 in all) which the
Company is endeavoring to reach through sales brokers. Additionally, the
Company will continue its expansion into the remainder of the chain stores that
are already being serviced. Within the next six to nine months, the Company plans to launch LARYNX, a
product designed for oral and throat care. Before the launch, the Company must
conduct focus group research to verify market positioning. The Company also
has a patent pending on a new proprietary over-the-counter (OTC) product for
the treatment of otitis (swimmers ear). 10




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In May 2004, the Company entered into a Research and Development
Agreement with the Lovelace Respiratory Research Institute of Albuquerque, New
Mexico. The effort is focused on joint-sponsored programs designed to find
new therapeutic uses for SinoFreshs popular antiseptic nasal spray product in
the respiratory arena. Initial testing, focused on possible anti-infective
uses for the product, has shown strong anti-viral activity against common
viral pathogens. In assessing the feedback from the Companys test market and initial
product launch for its nasal product, the Company recognized that most OTC drug
products in the sinus category today (primarily antihistamines and
decongestants) treat the symptoms rather than the causes of sinusitis, a
disease that newer developments in the science have determined to be a
non-allergic reaction to a buildup of molds and bacteria in the nostrils and
sinus cavities. The Company is in the process of establishing the protocols
for filing an Investigative New Drug (IND) application with the FDA geared to
non-allergic inflammatory rhinitis and chronic sinusitis and to undertake the
clinical studies necessary to the reclassification and FDA approval of
SinoFresh Nasal & Sinus Care to a New Drug Application (NDA) approved product
for the OTC market. Management believes that the achievement of this
reclassification would set SinoFresh Nasal & Sinus Care apart from the
competition as the only FDA-approved drug for the treatment of chronic
sinusitis in the OTC drug category. According to reports from the Center for
Disease Control, approximately 37 million Americans suffer the debilitating
effects of chronic sinusitis. The end result of the IND process will be to allow the Company to expand
the number of on-label claims for its current nasal product. This process,
however, will require additional capital. If the Company is successful in
securing such capital, it plans to commence Phase III pivotal clinical trials
(multi-site, double blinded studies) in conjunction with leading research
institutions in the United States. The Company expects that these efforts will
be successful, ultimately leading to an FDA approved NDA on SinoFresh Nasal &
Sinus Care within 18 to 24 months from the commencement of clinical trials. Company shares are traded on the Over-the-Counter-Bulletin Board under the
symbol, SFSH.OB. Results of Operations and Financial Position Revenues increased $744,262 from $426,163 to $1,170,425 for the three
months ended September 30, 2003 and 2004, respectively. This increase is a
result of a greater distribution network. Revenues also increased $2,507,969
from $777,888 to $3,285,857 for the nine months ended September 30, 2003 and
2004, respectively. This increase is primarily attributable to the expanded
distribution network in 2004 compared to the prior year and because of an
increase in marketing efforts. Additionally, revenues for the first nine
months of 2004 were affected by the recognition of approximately $800,000 in
pay-to-scan type sales. Shipments for these products took place primarily in
the last quarter of 2003, but the sales recognition process had not been
completed until 2004. The Company is no longer subject to these contingent
sales arrangements. Gross profit for the quarter ended September 30, 2004 was $844,774 (or
72%), compared to $247,439 (or 58%) for the corresponding period in 2003.
Gross profit for the nine months ended September 30, 2004 was $2,469,847 (or
75%), compared to $506,372 (65%) for the nine months ended September 30, 2003.
The percentage increases relate to co-op charges which are offset against
revenues. Co-op programs associated with large national retailers were ramping
up in the third quarter of 2003 and therefore were not in proportion to gross
revenue for the quarter or year to date. Salaries and related expenses increased $79,264, from $221,741 to $301,005
for the three months ended September 30, 2003 and 2004, respectively and
increased $418,193, from $503,249 to $921,442 for the nine months ended
September 30, 2003 and 2004, respectively. These increases are a result of an
increase in personnel in order to support the growing organization. Professional fees decreased $222,394, from $408,688 to $186,294 for the
three months ended September 30, 2003 and 2004, respectively. The third
quarter of 2003 included fees associated with the reverse merger and consulting
fees for services which could not be performed by limited in-house resources.
Additionally, litigation activity slowed down in the third quarter of 2004.
Professional fees increased $47,817, from $976,800 to $1,027,617 for the nine
months ended September 30, 2003 and 2004, respectively. This increase is
primarily related 11




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to an increase in accounting fees associated with filing the 2003 10-KSB,
legal expenses associated with defending corporate patents and other litigation
issues offset by costs associated with the reverse merger and consulting
expenses in 2003. Other general and administrative expenses decreased $18,410,
from $141,156 to $122,746 for the three months ended September 30, 2003 and
2004, respectively and increased $34,298, from $378,901 to $413,199 for the
nine months ended September 30, 2003 and 2004, respectively. Marketing and advertising expenses decreased $74,874 from $168,142 to
$93,268, for the quarters ended September 30, 2003 and 2004, respectively. The
Company has reduced its marketing programs until more funds are available
either through increased revenues or outside financing. For the nine months
ended September 30, 2003 and 2004, marketing and advertising expenses increased
$600,524, from $466,359 to $1,066,883, respectively. The year to date increase
reflects the Companys strategy of marketing its product nationwide. The
Company uses radio advertising and endorsements as a primary means of its
marketing activities. These efforts are necessary in order to continue to
attract consumer interest. Research and development expenditures reflect the costs associated with
basic research, product development, clinical testing, and the costs associated
with regulatory compliance, patent applications and maintenance, trademark
registration, product enhancement and the development of new products related
and unrelated to our current product line. For the quarters ended September 30,
2003 and 2004, the Companys R&D expenditures amounted to $73,939 and $15,496,
respectively. The decrease of $58,443 is reflective of the Companys decision
to slow down these efforts until such time that additional capital is
available. For the nine months ended September 30, 2003 and 2004, these
expenditures were $129,874 and $279,745, respectively. The increase of
$149,871 reflects the companys efforts to expand the use of its current
product primarily through taking the steps necessary to open a New Product
Application with the Food and Drug Administration. Future R&D activities will
be greatly dependent on the availability of capital for such programs. With the emergence of several lawsuits during 2004, management made a
conscious decision to defer certain research, development and marketing
activities during the nine months ended September 30, 2004. Such activities
may be accelerated in future quarters in order to make up for lost efforts. Depreciation and amortization totaled $65,448 and $63,450 for the quarters
ended September 30, 2004 and 2003, respectively. For the nine months ended
September 30, 2004 and 2003, these expenses were $196,249 and $187,860,
respectively. The Company had net income of $69,083 ($0.01 per share) and a net loss of
$1,006,736 ($0.09 per share) for the quarters ended September 30, 2004 and
2003, respectively. Net losses for the nine months ended September 30, 2004
and 2003 were $1,408,853 ($0.11 per share) and $2,355,317 ($0.21 per share),
respectively. As of September 30, 2004, the Company had total assets of $6.0 million,
compared to $6.7 million at December 31, 2003. Total liabilities were $2.6
million at September 30, 2004, compared to $2.0 million at December 31, 2003.
Working capital (deficit) was ($1,685,921) and ($596,555) as of September 30,
2004 and December 31, 2003, respectively. Stockholders equity amounted to $3.4 million at September 30, 2004, as
compared with $4.6 million at December 31, 2003. Inflation and Currency Fluctuation Inflation and currency fluctuations have not previously had a material
impact upon the results of operations and are not expected to have a material
impact in the near future. Cash and Sources of Liquidity The Company historically has satisfied its operating cash requirements
primarily through cash flow from operations, from borrowings and from trade and
equity financings. At September 30, 2004, the Company had $121,231 in cash and
cash equivalents, $602,397 in net accounts receivable, and $132,000 in
subscriptions receivable from equity financings. 12




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The Company will continue to explore additional opportunities for
long-term debt and equity financing. Funds received from these financings, if
and when available, will be used as working capital to finance the growth of
the Company, and to provide financing for future research and development
programs. Although the Companys financing efforts may have been impeded by
certain factors, including the litigation brought against it by certain
shareholders and a decrease in revenue in the second quarter, management of the
Company has considered several financing proposals and elected not to proceed
at that time due to proposed terms that management believed to be too onerous
for the Company and its shareholders. However, any financing ultimately
available to the Company may not be on terms that are favorable to the Company
and its shareholders and may result in substantial dilution to existing
shareholders. 
 Item 3. Controls and Procedures The Companys Chief Executive Officer and Chief Financial Officer
evaluated the Companys disclosure controls and procedures as of the end of the
period covered by this quarterly report. Based upon the evaluation, the
Companys Chief Executive Officer and Chief Financial Officer concluded that
the Companys disclosure controls and procedures are effective in ensuring that
material information required to be disclosed is included in the reports that
it files with the Securities and Exchange Commission. During the quarterly period covered by this report, there were no changes
in our internal controls over financial reporting that materially affected, or
are reasonable likely to materially affect, our internal controls over
financial reporting. 13




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PART II - OTHER INFORMATION 
 Item 1. Legal Proceedings Certain shareholders of the Company, including Charles Fust, Stacey
Maloney-Fust and P. Robert DuPont who are also officers and directors of the
Company, voted by written consent to remove Messrs. Bannon and Otto as
directors and officers of the Company (which attempt was unsuccessful as
discussed below). The decision to remove Messrs. Bannon and Otto was made
after it became apparent that they were not investigating certain improprieties
that may have occurred as a result of actions of Sargon Capital, Inc. and
Andrew Badolato, a former officer and director of the Companys predecessor and
a consultant to the Company. (Upon the request of Messrs. Fust, DuPont and Ms.
Maloney-Fust, the Board earlier had formed a committee comprised of Messrs.
Otto, Bannon and DuPont to investigate the matters regarding Sargon Capital,
Inc. and Andrew Badolato.) Messrs. Bannon and Otto were notified by letter
dated January 30, 2004 that they had been removed as directors. On February 9,
2004, Messrs. Fust, DuPont, Otto, Bannon and Ms. Maloney-Fust received a letter
from an attorney representing Andrew Badolato, Sargon Capital, Inc. and four
shareholders (including Michael Hawkins, a director or other affiliate of
Sargon Capital, Inc.) alleging various breaches of fiduciary duty and
self-dealing purportedly committed by Messrs. Fust, DuPont and Ms.
Maloney-Fust, and demanding an investigation and a report within 30 days. On February 20, 2004, a law suit was filed in the U.S. District Court,
Middle District of Florida, Ft. Myers Division, Case No. 04-CV-95-FTM-29 SPC,
styled Hawkins, et al. vs. Charles Fust, et al., and an amended complaint was
filed on March 3, 2004 which merely changed allegations directed toward the
location where the action may be heard and noted that the Company is a Florida
corporation. This legal proceeding was moved to the U.S. District Court
located in Tampa, Florida. The plaintiffs include Stephen Bannon and David
Otto, directors of the Company, as well as other purported shareholders of the
Company. The defendants are Charles Fust, Stacey Maloney Fust, Robert DuPont,
Russell R. Lee, III, and SinoFresh HealthCare, Inc. The complaint alleges
that it is a class action suit claiming federal securities law violations,
breach of fiduciary duty, rescission of certain acts and contracts of the
Company, and an accounting and constructive trust, being brought by the lead
plaintiffs on behalf of themselves and all persons in a class (other than the
defendants) who purchased the Companys publicly traded shares between January
1, 2003 and February 19, 2004; however, the lawsuit was not certified as a
class action suit. The complaint essentially contained the same allegations as
in the above-described demand letter. In June 2004, the plaintiffs filed a corrected second amended complaint in
the U.S. District Court, Middle District of Florida, Tampa Division, Case No.
8:04-CV-490-T-30MSS. This complaint notes the Company as a nominal defendant
and adds the Companys corporate counsel as additional defendants (seeking
compensatory damages, including reimbursement of legal fees paid by the
Company). The complaint alleges that it is a derivative suit, includes the
same allegations as in the original complaint, and also alleges, among other
things, inadequate disclosure by the defendants in SEC filings regarding
related party transactions and regarding Mr. Fusts beneficial ownership
(wherein Mr. Fust reported ownership of the 1,000,000 shares that Crown IV
Holdings portends to own), all for the alleged purpose of the defendants
maintaining control of the Company. In this complaint the plaintiffs request,
among other things, that the Court appoint a special monitor during the
pendency of the litigation with authority to conduct investigations and issue a
report to the Court; that the Court enjoin the defendant directors from
committing certain violations of Federal securities laws, and from taking
certain actions, including using corporate funds for the defense of the
directors in the suit, conducting transactions in the Companys stock and
soliciting proxies for a 2004 annual meeting. In June 2004, the Company filed a motion with the Court (a) requesting the
Court to appoint an independent person to make a good faith determination,
after conducting a reasonable investigation, as to whether it is in the best
interests of the Company to maintain the shareholder derivative suit, and (b)
requesting a stay of all proceedings in the case until the results of the
investigation are provided to the Court. The interim stay has been granted and
the Court granted the motion for appointment of an independent investigator.
The independent investigator commenced his investigation in September and is
due to report back to the Court no later than February 15, 2005. As the Company described in its Form 10-KSB for the fiscal year ended
December 31, 2003 and its Form 10-QSB for the period ended March 31, 2004, the
Company is also involved as a defendant in two other lawsuits brought against
it by former consultants who claim, among other things, breach of contract. The
Company believes 14




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that it has significant defenses to the claims brought and it intends to
vigorously defend the suits. Although the Company believes that it will prevail
in the litigation on the merits, the ultimate outcome of any such actions
cannot be predicted. The condensed consolidated financial statements include accruals for fees
owed to Sargon with respect to the financial consulting services agreement.
However, no adjustment or provision has been made related to the other
foregoing matters, the ultimate outcome of which cannot be presently
determined. 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds. Not applicable 
 Item 3. Defaults upon Senior Securities The Company has not complied with certain principal reduction requirements
under its amended agreements on two secured convertible notes. As of September
30, 2004, a total of $177,402 in principal was outstanding on these convertible
notes. The note holder is also a shareholder of the Company. 
 Item 4. Submission of Matters to a Vote of Security Holders. Not applicable 
 Item 5. Other Information In September 2003, the Company issued 10,768,490 shares of common stock,
858,170 shares of Series A preferred stock, 1,500,000 shares of Series B
preferred stock, and 1,218,711 shares of Series C preferred stock in exchange
for the outstanding shares of common stock and preferred stock held by
shareholders of the Companys predecessor, SinoFresh HealthCare, Inc., a
Delaware corporation (HealthCare). That transaction resulted in HealthCare
merging into a wholly-owned subsidiary of the Company, which subsidiary is now
known as SinoFresh Corporation. In connection with that transaction, the
Company has been unable to obtain from either former counsel to the Company or
former counsel to HealthCare (Mr. David Otto, a director of the Company), who
were counsel to the Company and HealthCare, respectively, at the time of the
merger, information the Company presently believes is sufficient to
indisputably support one or more exemption(s) from registration that were
relied upon in connection with the issuance of the merger shares. If such
information is not available, the issuance of the shares of the Company in
respect of the merger may not have been in compliance with the registration
provisions of the federal and state securities laws. There may have been a
violation of Section 5 of the Securities Act of 1933, as amended due to the
unavailability of an exemption from registration. As a result, the Company may
be exposed to claims for rescission by shareholders who received shares in the
merger. Although the Company would vigorously defend against any such actions,
litigation may be costly and there is no assurance of the outcome. If the
Company lost its defense in any such litigation, the cost of repurchasing the
shares could be material to the Company. 
 Item 6. Exhibits. (a) Exhibits. ExhibitNumber
    
    Description31.1
    
    Certifications of CEO pursuant to Section 302 of the Sarbanes-Oxley Act31.2
    
    Certifications of CFO pursuant to Section 302 of the Sarbanes-Oxley Act32
    
    Certifications of CEO and CFO pursuant to Section 906 of the Sarbanes-Oxley Act
 15




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act
of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. SINOFRESH HEALTHCARE, INC.October 29, 2004
    
    By:
    
    /s/ Charles A. FustCharles A. Fust, Chief Executive OfficerOctober 29, 2004
    
    By
    
    /s/ Russell R. Lee IIIRussell R. Lee III, Chief Financial Officer
 16