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U.S. Securities and Exchange Commission Washington, D.C. 20549
 Form 10-QSB þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the quarterly period ended March 31, 2004 o
    
    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  o The number of shares outstanding of each of the issuers classes of common
equity as of March 31, 2004: Common Stock, No Par Value 13,314,323 shares Transitional Small Business Disclosure Format (check one): Yes  o    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 March 31, 2004 (unaudited) and December 31, 2003
    
    
    2Condensed Consolidated Statements of Operations
  for the three months ended March 31, 2004 and 2003 (unaudited)
    
    
    3Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 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
    
    
    9Item 3. Controls and Procedures
    
    
    12Part II. Other Information
    
    
    13Item 1. Legal Proceedings
    
    
    13Item 2. Changes in Securities
    
    
    13Item 3. Defaults Upon Senior Securities
    
    
    14Item 4. Submission of Matters to a Vote of Security Holders
    
    
    14Item 5. Other Information
    
    
    14Item 6. Exhibits and Reports on Form 8-K
    
    
    14Signatures
    
    
    15Certifications
    
    
    16Ex-10.24 Teaming AgreementEx-31.1 302 Certification of CEOEx-31.2 302 Certification of CFOEx-32 906 Certification of CEO and CFO
 i




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PART I  FINANCIAL STATEMENTS 
 SINOFRESH HEALTHCARE, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS March 31, 2004
    
    December 31, 2003(Unaudited)ASSETSCURRENT
ASSETS
Cash and cash equivalents
    
    $
    842,418
    
    
    $
    368,394Accounts receivable, net of allowances of $15,000
    
    
    583,981
    
    
    
    645,969Inventory
    
    
    86,525
    
    
    
    172,007Other current assets
    
    
    160,263
    
    
    
    174,283TOTAL CURRENT ASSETS
    
    
    1,673,187
    
    
    
    1,360,653FURNITURE AND EQUIPMENT, NET
    
    
    133,477
    
    
    
    138,191PATENTS, NET
    
    
    2,692,318
    
    
    
    2,750,010GOODWILL
    
    
    2,409,401
    
    
    
    2,409,401OTHER ASSETS
    
    
    6,418
    
    
    
    7,218TOTAL ASSETS
    
    $
    6,914,801
    
    
    $
    6,665,473LIABILITIES AND STOCKHOLDERS EQUITYCURRENT
LIABILITIES
Current portion of notes payable and capital leases
    
    $
    282,966
    
    
    $
    584,826Accounts payable, including $195,280 and $102,866 due to related parties
    
    
    836,995
    
    
    
    693,258Accrued expenses, including $172,875 and $245,889 due to related parties
    
    
    704,770
    
    
    
    679,124TOTAL CURRENT LIABILITIES
    
    
    1,824,731
    
    
    
    1,957,208CAPITAL LEASES, NET OF CURRENT MATURITIES
    
    
    78,454
    
    
    
    83,851TOTAL LIABILITIES
    
    
    1,903,185
    
    
    
    2,041,059COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITYCommon stock, no par value; 500,000,000 shares authorized; 12,063,073 shares
issued and outstanding and 1,251,250 shares issuable at March 31, 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 March 31, 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
as of March 31, 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 March 31, 2004)
    
    
    2,189,261
    
    
    
    2,189,261Accumulated deficit
    
    
    (4,035,850
    )
    
    
    (4,281,177
    )Warrant subscriptions receivable
    
    
    (132,000
    )
    
    
    (252,000
    )TOTAL STOCKHOLDERS EQUITY
    
    
    5,011,616
    
    
    
    4,624,414TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    6,914,801
    
    
    $
    6,665,473
 See notes to condensed consolidated financial statements. 2




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SINOFRESH HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited) Three Months Ended March 31,2004
    
    2003REVENUE
    
    $
    1,931,569
    
    
    $
    130,199COST OF REVENUE
    
    
    408,556
    
    
    
    43,788GROSS PROFIT
    
    
    1,523,013
    
    
    
    86,411OPERATING
EXPENSES
Salaries and other compensation expenses
    
    
    307,480
    
    
    
    156,993Professional fees
    
    
    396,555
    
    
    
    283,937Other general and administrative expenses
    
    
    133,624
    
    
    
    103,548Marketing and advertising expenses
    
    
    308,942
    
    
    
    94,278Research and development expenses
    
    
    90,617
    
    
    
    33,974Depreciation and amortization
    
    
    65,352
    
    
    
    46,350TOTAL OPERATING EXPENSES
    
    
    1,302,570
    
    
    
    719,080INCOME (LOSS) FROM OPERATIONS
    
    
    220,443
    
    
    
    (632,669
    )OTHER INCOME (EXPENSE):Interest, net
    
    
    (15,529
    )
    
    
    (21,885
    )Other income (expense)
    
    
    40,413
    
    
    
    2,334TOTAL OTHER INCOME (EXPENSE)
    
    
    24,884
    
    
    
    (19,551
    )NET INCOME (LOSS) BEFORE INCOME TAXES
    
    
    245,327
    
    
    
    (652,220
    )PROVISION FOR INCOME TAXES
    
    
    
    
    
    
    NET INCOME (LOSS)
    
    $
    245,327
    
    
    $
    (652,220
    )NET INCOME (LOSS) PER COMMON SHARE-basic
    
    $
    0.02
    
    
    $
    (0.06
    )-diluted
    
    $
    0.01
    
    
    $
    (0.06
    )WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-basic
    
    
    13,312,263
    
    
    
    10,768,490-diluted
    
    
    20,504,018
    
    
    
    10,768,490
 See notes to condensed consolidated financial statements. 3




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SINOFRESH HEALTHCARE, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited) Three Months Ended March 31,2004
    
    2003CASH FLOWS
FROM OPERATING ACTIVITIES
Net income (loss)
    
    $
    245,327
    
    
    $
    (652,220
    )Adjustments to reconcile net income (loss) to net cash
provided by (used in) operations:Stock issued for services
    
    
    21,875
    
    
    
    Amortization and depreciation
    
    
    65,352
    
    
    
    46,350Changes in assets and liabilities:Accounts receivable
    
    
    61,988
    
    
    
    (24,592
    )Inventory
    
    
    85,482
    
    
    
    12,519Other current assets
    
    
    14,020
    
    
    
    (2,088
    )Other assets
    
    
    800
    
    
    
    10,001Accounts payable
    
    
    143,737
    
    
    
    20,980Accrued expenses
    
    
    25,646
    
    
    
    5,870Deferred revenue
    
    
    
    
    
    
    (17,678
    )NET CASH PROVIDED BY (USED IN) OPERATING ACTIVITIES
    
    
    664,227
    
    
    
    (600,858
    )INVESTING
ACTIVITIES
Acquisition of SinoFresh Laboratories, Inc., net of cash
    
    
    
    
    
    
    (54,332
    )Payments for furniture and equipment
    
    
    (2,946
    )
    
    
    (9,267
    )NET CASH USED IN INVESTING ACTIVITIES
    
    
    (2,946
    )
    
    
    (63,599
    )FINANCING
ACTIVITIES
Net proceeds from issuance of stock and warrants
    
    
    
    
    
    
    768,522Payments received on warrant subscriptions receivable
    
    
    120,000
    
    
    
    Payments on long-term debt and capital leases
    
    
    (307,257
    )
    
    
    (89,144
    )NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES
    
    
    (187,257
    )
    
    
    679,378NET INCREASE IN CASH
    
    
    474,024
    
    
    
    14,921CASH AND CASH EQUIVALENTS  beginning of period
    
    
    368,394
    
    
    
    245,685CASH AND CASH EQUIVALENTS  end of period
    
    $
    842,418
    
    
    $
    260,606SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    6,128
    
    
    $
    11,900
 See notes to condensed consolidated financial statements. 4




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SinoFresh HealthCare, Inc.
Notes to Unaudited Condensed Consolidated Financial Statements 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 March 31, 2004 of $151,544, management is encouraged by net
income of $245,327 and cash flow from operations of $664,227 for the three
months ended March 31, 2004. Further, management believes that these risks are
mitigated by the growth in revenues and believes that it can secure additional
outside funding. The rate of the Companys future growth and success will be
dependent on its ability to generate the necessary resources through 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 March 31, 2004 and 2003 financial
statements, which are necessary for a fair financial statement presentation.
The results for the three months ended March 31, 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 Current 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. Note 2. Shareholders Equity In January 2004, the Company granted 50,000 stock options to a certain
employee. The exercise price is $1.70 which was equal to the market price as
of the date of grant. The options expire in five years and vest ratably over a
three-year period. On January 15, 2004, the Company issued 12,500 shares to an employee in
accordance with an employment agreement. The market value of the shares as of
the date of issuance was $21,875 and was recorded as compensation expense. 5




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Basic earnings per share is computed by dividing the net income 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 for the three months
ended March 31, 2004 and 2003, 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 March 31,: 2004
    
    2003Net income (loss), as reported  basic
    
    $
    245,327
    
    
    $
    (652,220
    )Add back interest expense from the conversion of debt to
common shares
    
    
    11,935
    
    
    
    Net income (loss) available to common stockholders on a
dilutive basis
    
    $
    257,262
    
    
    $
    (652,220
    )Weighted average number of common shares outstanding  basic
    
    
    13,312,263
    
    
    
    10,768,490Effect of dilutive securities:Conversion of preferred stock, Series A, B and C
    
    
    6,295,592
    
    
    
    Conversion of debt
    
    
    282,242
    
    
    
    Assumed exercise of stock options
    
    
    613,921
    
    
    
    Weighted average number of common shares outstanding and
dilutive potential of common shares
    
    
    20,504,018
    
    
    
    10,768,490
 The Company has 1,584,010 options and warrants as of March 31, 2004 that
have not been included in the dilutive calculation because their effect was
antidilutive. 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. There were no such issuances for the three months
ending March 31, 2004 and March 31, 2003. 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 March 31,: 2004
    
    2003Net income (loss), as reported
    
    $
    245,327
    
    
    $
    (652,220
    )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
    
    
    (123,750
    )
    
    
    Unaudited pro forma net income (loss), as if the fair value method
had been applied to all awards
    
    $
    121,577
    
    
    $
    (652,220
    )Net income (loss) per common share, as reported-basic
    
    $
    0.02
    
    
    $
    (0.06
    )-diluted
    
    $
    0.01
    
    
    $
    (0.06
    )Unaudited pro forma net income (loss) per common share, as if the
fair value method had been applied to all awards-basic
    
    $
    0.01
    
    
    $
    (0.06
    )-diluted
    
    $
    0.01
    
    
    $
    (0.06
    )
 Note 4:Income Taxes The estimated income tax expense for the three months ended March 31, 2004
of approximately $70,000 has been fully offset by the use of the Companys net
operating loss carryforward. Note 5: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 of approximately $31,000 for
the three months ended March 31, 2003. 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 $15,000 and $77,000 for the three months ended March 31, 2004 and
2003, respectively. 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 $36,000 for the
three months ended March 31, 2003. The consultant did not serve as a
director in 2004. The Company incurred consulting fees for the three months ended March 31,
2003 to an entity affiliated with a former director/principal stockholder
amounting to approximately $16,000. 7




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The Company leases its current facility from an entity controlled by two
of the Companys officers and has contractual arrangements with other related
parties. Rent paid to these parties during the three months ended March 31,
2004 was approximately $19,000. The Company rents on a month to month basis from an officer and director
at the sum of $1,250 per month a condominium apartment owned by the officer and
director and which is used as corporate housing by the Company. Total rent
expensed for the three months ended March 31, 2004 was $3,750. Note 6:Contingencies As disclosed in the Companys Form 10-KSB filed for the year ended
December 31, 2003, the Company is involved in various litigation with two of
its current directors and other former consultants to the Company. In April 2004, a lawsuit was filed alleging that the Company breached an
agreement by failing to pay fees for a broker financing arrangement. The
complaint seeks damages of $120,000 plus interest and attorneys fees. The
company denies the allegations and intends to vigorously defend the suit. As of March 31, 2004, the Company is not in compliance with its notes
payable principal reduction requirements and as a result, is in technical
default. 8




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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 a pharmaceutical company engaged in the research,
development, and marketing of proprietary products for the prevention and
treatment of sinusitis and related disorders. SinoFresh Nasal & Sinus Care,
the Companys first commercial product, 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 of its nasal product
through various national drugstores and grocery store chains. The Company
outsources the manufacturing of its current product to a FDA approved
contract-manufacturing facility that also produces private-labeled drugs for a
number of major U.S. drug 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. The principal
outlets for this product currently include 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 plans
to expand its retail distribution network to include Wal-Mart, Duane Reed, the
remainder of the chain stores the Company is already servicing, 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 master
brokers. Within the next twelve months, the Company plans to launch LarynFresh.
Before the launch, the Company must conduct focus group research to verify
market positioning. 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. The Company also has a patent pending on
a new proprietary over-the-counter (OTC) product for the treatment of otitis. 9




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Currently, the Company has under development several promising new drugs
for upper respiratory disorders and related diseases. The Company is in the
early stages of developing a medical device and pharmaceutical-dosing system
in collaboration with the Silverstein Institute of Sarasota, Florida, a world
renowned medical institute specializing in ear, nose and throat medicine. 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 emphasis will center on possible anti-infective
applications of the product. The collaboration hopes to prove efficacy in the
protection against various strains of virus of concern to bio-defense. 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. In the second quarter of 2004 the Company plans to establish
the protocols and file 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. If the Company is successful in securing sufficient capital, it plans to
expand the number of on-label claims for its current nasal product by opening
an IND application with the FDA in the second half of 2004. Towards this end,
the Company expects to commence Phase III pivotal clinical trials (multi-site,
double blinded studies) in conjunction with leading research institutions in
the United States within the next six to twelve months. The Company also
expects that these efforts will be successful; ultimately leading to an FDA
approved NDA on SinoFresh Nasal & Sinus Care within 18 to 24 months. Company shares are traded on the Over-the-Counter-Bulletin Board under the
symbol, SFSH. Results of Operations and Financial Position Revenues increased $1,801,370 from $130,199 to $1,931,569 for the three
months ended March 31, 2003 and 2004, respectively. The increase is a result
of an expansion of marketing efforts from alpha and beta testing in southwest
Florida during the first quarter of 2003 to nationwide accounts during the
first quarter of 2004. Gross profits for the quarter ended March 31, 2004 were $1,523,013 (or
78.8%), compared to $86,411 (or 66.4%) for the corresponding period in 2003.
The percentage increase relates to obsolete inventory written off in 2003
offset by higher average pricing in 2003 due to the shift in customer base in
the first quarter of 2003 versus 2004. In 2003, a significant portion of sales
were to individual consumers as opposed to retail outlets in 2004. Sales to
retail outlets are priced less than sales to individual consumers. The
companys primary focus going forward will be on retail outlets. Salaries and other compensation expenses increased $150,487, from $156,993
to $307,480 for the three months ended March 31, 2003 and 2004, respectively as
a result of an increase in personnel in order to support the growing
organization. Professional fees increased $112,618, from $283,937 to $396,555
for the three months ended March 31, 2003 and 2004, respectively. This
increase is primarily related to an increase in accounting fees associated with
filing the 2003 10-KSB, legal expenses associated with defending corporate
patents and other litigation issues. Other general and administrative expenses
increased $30,076, from $103,548 to $133,624 for the three months ended March
31, 2003 and 2004, respectively. 10




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During the three months ended March 31, 2004, marketing and advertising
expenses were $308,942, compared to $94,278 for the corresponding period in
2003. The increase of $214,664 reflects the companys strategy of marketing
its product nationwide. These efforts are necessary in order to attract large
retail customers where the company feels it has the best opportunity for
revenue growth. Research and development expenditures reflect the cost 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 March 31,
2004 and 2003, the companys R&D expenditures amounted to $90,617 and $33,974,
respectively. R&D expenditures are expected to continue to increase over the
next several years, both in absolute terms and as a percentage of all spending.
These increases are reflective of the companys commitment to market only the
best-in-breed, to advance the science of rhinology, and to stay ahead of the
competition in its field and on the leading edge in the science. Depreciation and amortization increased $19,002, from $46,350 to $65,352
for the three months ended March 31, 2003 and 2004, respectively. The Company had net income of $245,327 and a net loss of $652,220 for the
three months ended March 31, 2004 and 2003, respectively. Net income per
common share (basic) was $.02 on 13,312,263 weighted average shares for the
three months ended March 31, 2004, compared to a net loss per common share
(basic) of $.06 on 10,768,490 weighted average shares. Although the Company recognized net income during the first three months
of 2004, there are several factors that have contributed to these results and
that could also set it apart from future quarters:  1)
    
    With the emergence of several new lawsuits, management
made a conscious decision to defer certain research, development
and marketing activities during the three months ended March 31,
2004. Such activities may be accelerated in future quarters in
order to make up for lost efforts during the current period.
Furthermore, revenues in future quarters could be adversely
affected by the reduced marketing efforts during the first
quarter of 2004.  2)
    
    Revenues for the first quarter 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.  3)
    
    The first quarter of 2004 was positively affected by
seasonalities associated with the cold and flu season. Without a
significant amount of operating history, it is difficult to
predict the effect of this and other seasonal impacts on the
Companys operations. As of March 31, 2004, the company had total assets of $6.9 million,
compared to $6.7 million at December 31, 2003. Total liabilities were $1.9
million at March 31, 2004, compared to $2.0 million at December 31, 2003.
Working capital (deficit) was ($151,544) and ($596,555) as of March 31, 2004
and December 31, 2003, respectively. Stockholders equity amounted to $5.0 million at March 31, 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. 11




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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 March 31, 2004, the company had $842,418 in cash and cash
equivalents, $583,981 in accounts receivable, and $132,000 in subscriptions
receivable from equity financings. The Company is also continuing to explore 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 the clinical trials and new product
development management contemplates. 
 Item 3. Controls and Procedures The Companys Chief Executive Officer and Chief Financial Officer
evaluated the Companys disclosure controls and procedures within 90 days of
the filing date of 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. There were no significant changes in the Companys internal controls or,
to the knowledge of the management of the Company, in other factors that could
significantly affect internal controls subsequent to the evaluation date. 12




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##### Table of Contents



PART II  OTHER INFORMATION 
 Item 1. Legal Proceedings In February, 2004, a complaint was filed in federal court by two directors
of the Company, as well as other purported shareholders of the Company. The
defendants are the Company and several officers and directors of the Company.
The complaint alleges, among other things, that the CEO of SinoFresh used
corporate funds for his personal benefit and that he did not transfer patents
to the Company and two entities related through common shareholders. The
complaint also alleges that the Companys financial statements are not proper.
In April 2004, the principals of Sargon Capital, Inc. (Sargon) filed another
complaint alleging a breach of a financial consulting services agreement by
failing to pay certain fees. The complaint also alleges defamation of the
principal and a civil conspiracy to prevent Sargon from doing business in the
State of Florida. Management has investigated the complaints and believes the
allegations in both complaints to be blatantly incendiary, false and
misleading. The Company, on behalf of itself and its officers and directors,
intends to vigorously defend the suits. On March 4, 2004, the Company filed a
Motion to Dismiss the Complaint in federal court citing numerous legal
deficiencies and the failure to meet statutory procedure requirements. Management of the Company believes that the lawsuits are a backlash by
Sargon and one of its principals against the Company in connection with the
attempted removal of two board members of the Company. Sargon had been
retained by the Companys predecessor for investment banking and consulting
services. Over the course of Sargons association with the Company, current
management came to believe that it was in the best interests of the Company and
its shareholders to sever ties with Sargon and one of its principals. Since two
of the board members were designees of Sargon, the Company deemed it in its
best interests to remove them as directors and to seek substitute directors who
were independent from Sargon. The Company is currently taking the steps
necessary for the removal of these directors. Also in April 2004, a lawsuit was filed alleging that the Company breached
an agreement by failing to pay fees for a broker financing arrangement. The
complaint seeks damages of $120,000 plus interest and attorneys fees. The
company denies the allegations and intends to vigorously defend the suit. 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. Changes in
Securities. (c) TransactionDescription/
    
    Section/Rule Under
    
    Terms of ConversionType and Amount of
    
    Which Registrant
    
    or Exercise ofDate
    
    Title
    
    Amount
    
    Name
    
    Consideration
    
    Claimed Exemption
    
    Securities1/04
1/04
    
    Options
Common stock
    
    50,000
12,500
    
    Michael Gillette
Bill Wilferth
    
    Services
Services
    
    4(2)
4(2)
    
    $1.70 Exercise price
N/A
 13




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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 March 31,
2004, $189,225 and $73,082 was outstanding on each of these convertible notes,
respectively. 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 Not applicable 
 Item 6. Exhibits and Reports on Form 8-K. (a)     Exhibits. Exhibit Number
    
    Title of Document
    
    Location of DocumentExhibit 10.24
    
    Teaming Agreement with Lovelace Respiratory Research Institute
    
    Filed herewith
 (b)     Reports on Form 8-K. Form
    
    Description
    
    Filing Date8-K
    
    Results of Operations and Financial Condition
    
    4/16/048-K/A
    
    Changes in Registrants Certifying Accountant
    
    4/12/048-K
    
    Extension for Annual Report
    
    3/31/048-K/A-2
    
    Change in Control of Registrant
    
    3/25/048-K
    
    Changes in Registrants Certifying Accountant
    
    3/11/04
 14




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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.May 14, 2004
    By /s/ Charles A. FustCharles A. Fust, Chief Executive OfficerMay 14, 2004
    By /s/
Russell R. Lee IIIRussell R. Lee III , Chief Financial Officer 15