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SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549
 FORM 10-KSB (Mark One)x
    
    Annual Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended December 31, 2003oro
    
    Transition Report under Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from  to
 0-49764
(Commission File No.) SINOFRESH HEALTHCARE, INC.  FLORIDA
(State or other jurisdiction of incorporation or
organization
    
    65-1082270
(I.R.S. Employer
Identification No.)516 PAUL MORRIS DRIVE
ENGLEWOOD, FLORIDA
(Address of principal executive offices)
    
    34223
(Zip Code)
 Issuers Telephone Number, including area code: (941) 681-3100 Securities registered under Section 12(b)
of the Securities Exchange Act of 1934: NONE Securities registered under Section 12(g)
of the Securities Exchange Act of 1934: COMMON STOCK, NO PAR VALUE Check whether the issuer: (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 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 Check if disclosure of delinquent filers pursuant to Item 405 of Regulation S-B
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-KSB or any amendment to this Form 10-KSB. o Issuers revenues for its most recent fiscal year were $1,830,195. As of March 20, 2004, the aggregate market value of the voting stock held by
non-affiliates computed by reference to the price at which the stock was
recently sold was $7,206,894. Check whether the issuer has filed all documents and reports required to be
filed by Section 12, 13 or 15(d) of the Exchange Act: Yes x No o As of March 20, 2004, there were 13,314,323 shares of the issuers common stock
outstanding. Transitional Small Business Disclosure Format (check one): Yes o No x




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Table of Contents PagePART I
    
    
    
    1ITEM 1.   BUSINESS
    
    1ITEM 2.   PROPERTY
    
    8ITEM 3.   LEGAL PROCEEDINGS
    
    8ITEM 4.   SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS
    
    12PART II
    
    
    
    12ITEM 5.   MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS,COMPANY PURCHASES OF EQUITY AND SECURITIES
    
    12ITEM 6.   MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAND RESULTS OF OPERATIONS
    
    14ITEM 7.   FINANCIAL STATEMENTS
    
    27ITEM 8.   CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTINGAND FINANCIAL DISCLOSURE
    
    49PART III
    
    
    
    50ITEM 9.   DIRECTORS AND EXECUTIVE OFFICERS
    
    50ITEM 10.  EXECUTIVE COMPENSATION
    
    53ITEM 11.  SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS ANDMANAGEMENT AND RELATED STOCKHOLDER MATTERS
    
    56ITEM 12.  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
    
    57ITEM 13.  EXHIBITS LIST AND REPORTS ON FORM 8-K
    
    58ITEM 14.  CONTROLS AND PROCEDURES
    
    59ITEM 15.  PRINCIPAL ACCOUNTANT FEES AND SERVICES
    
    59Ex-4.3 Registration Rights AgreementEx-4.4 2003 Warrant AgreementEx 4.5 Cancelable Warrant AgreementEx-4.6 2004 Warrant AgreementEx-4.7 Warrant CertificateEx-10.13 April 1, 2003 LeaseEx-10.14 February 1, 2001 Invest Linc II AllongeEx-10.15 February 1, 2001 Invest Linc AllongeEx-10.16 Assumption AgreementEx-10.17 Consulting AgreementEx-10.18 11/15/02 Stock Purchase AgreementEx-10.20 AgreementEx-10.21 AgreementEx-10.22 Supplemental Letter AgreementEx-10.23: Letter AgreementEx-16.1 Salberg & Co. LetterEx-21.1: SubsidiariesEx-31.1 Section 302 CEO CertificationEx-31.2 Section 302 CFO CertificationEx-32.1 Section 906 CEO CertificationEx-32.2 Section 906 CFO Certification
  Unless otherwise indicated in this Form 10-KSB, SinoFresh, the Company
and similar terms refer to SinoFresh HealthCare, Inc. and its subsidiaries.
SinoFreshTM is a registered trademark of SinoFresh HealthCare, Inc., and the
SinoFresh name and logo are trademarks of the Company. DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS This annual report contains forward-looking statements within the meaning
of Section 21E of the Securities Exchange Act of 1934, as amended, and Section
27A of the Securities Act of 1933, as amended. When used in this annual
report, the words may, will, expect, anticipate, continue,
estimate, project or intend and similar expressions identify
forward-looking statements regarding events, conditions and financial trends in
connection with the Companys future plan of operations, business strategy,
operating results and financial position. Discussions containing such
forward-looking statements may be found in Managements Discussion and
Analysis of Financial Condition and Results of Operations, Business and
elsewhere in this report. Current shareholders and prospective investors are
cautioned that any forward-looking statements are not guarantees of future
performance. Such forward-looking statements by their nature involve
substantial risks and uncertainties, certain of which are beyond the Companys
control, and actual results for future periods could differ materially from
those discussed in this annual report, depending on a variety of important
factors, among which are the Companys ability to implement its business
strategy, its ability to compete with major established companies, the outcome
of litigation, its ability to attract and retain qualified personnel, its
ability to obtain financing, its ability to continue as a going concern, and
other risks some of which are described under Risk Factors and elsewhere in
this report and which may also be described from time to time in future filings
with the Securities and Exchange Commission. Forward-looking statements
contained in this report speak only as of the date of this report. Future
events and actual results could differ materially from the forward-looking
statements. You should read this report completely and with the understanding
that actual future results may be materially different from what the Company
expects. The Company will not update forward-looking statements even though
its situation may change in the future. i




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PART I 
 ITEM 1. BUSINESS Company History The Companys predecessor, SinoFresh HealthCare, Inc., was incorporated in
Delaware on October 15, 2002 (SinoFresh  Delaware). Effective November 15,
2002, SinoFresh  Delaware acquired certain assets (including business
information and materials, office equipment, customers, customer lists,
databases and access to facilities), of SinoFresh Laboratories, Inc., an
Alabama corporation in exchange for 808,170 shares of Series A preferred stock
of SinoFresh  Delaware. In addition, each shareholder of SinoFresh
Laboratories, Inc. received, for each share of Series A preferred stock
received, one share of common stock of two foreign entities. On September 8, 2003, the Company (known then as SinoFresh Corp. and
before that, e-Book Network, Inc.), SinoFresh Acquisition Corp., a Florida
corporation (Acquisition Sub), SinoFresh  Delaware, and Susan Parker, then
the sole director and majority shareholder of the Company, entered into a
Merger Agreement. Under the Merger Agreement, the Company acquired all of the
issued and outstanding capital stock of SinoFresh  Delaware upon its merger
into the Acquisition Sub. Subsequent to the merger, Acquisition Sub, which changed its name to
SinoFresh Corporation, remains the operating subsidiary of the Company (which
changed its name from SinoFresh Corp. to SinoFresh HealthCare, Inc.). As a
result of the merger, the former shareholders of SinoFresh  Delaware obtained
approximately 81% of the Companys common stock and additional voting control
by virtue of the voting rights of the preferred stock, providing a total voting
interest of 91%. Further, a majority of the former officers and directors of
SinoFresh  Delaware also obtained management control of the Company. Prior to the Company assuming control of SinoFresh  Delaware and pursuant
to the Merger Agreement, the Company, operating as e-Book, sold books over the
Internet through the website www.e-BooksNetwork.com. e-Book was originally a
division of e-Miracle, Inc. e-Miracle, Inc. was incorporated on July 15, 1999
and was an online service provider and Internet shopping mall developer. Due
to under-capitalization and credit problems, e-Miracle filed a Chapter 11
Bankruptcy proceeding in the United States Bankruptcy Court. The Company was a
division of e-Miracle when e-Miracle filed bankruptcy. Subsequently, the
Company incorporated as a Florida corporation pursuant to and in accordance
with the Chapter 11 Plan of Reorganization. The Companys corporate headquarters are located at 516 Paul Morris Drive,
Englewood, Florida 34223. Its website address is http://www.sinofresh.com. The Company and its Business 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 with National In-Store Marketing LLC, (NIS) 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 AccuMed, Inc. (AccuMed), an 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 1




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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. Master brokers are national organizations with many account brokers
that have direct contact with several distributors. These account brokers work
closely with buyers to ensure product delivery and also to ensure the proper
placement of the product on shelves according to the product category. Next year, the Company plans to launch SinoFresh Oral & Throat Care.
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. 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. While the Company will focus on marketing its product in the Western
Hemisphere, it intends to sell and distribute its products through joint
ventures, partnerships and strategic relationships throughout the world.
Distribution abroad may involve direct shipments, foreign-based manufacturing,
and licensing. Charles Fust, the inventor of the
SinoFreshTM products,
transferred to the Company his three U.S. patents issued by the U.S. Patent &
Trademark Office for the Companys proprietary composition for freshening the
nostrils and sinus cavities. He also holds approximately 130 foreign patents
and patent applications relating to that proprietary composition, which are in
the process of being transferred to the Company. 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. Because drugs can be dangerous, the government tightly regulates the
production and distribution of drug products. New drugs must be approved by the
FDA, which also requires and regulates pre-approval testing. Animal testing
usually precedes clinical trials: testing in humans afflicted with a particular
medical condition. Phase I (safety testing in healthy human beings), Phase II
(proof of concept), and Phase III trials (large population, pivotal) must be
successfully completed before a NDA can be filed with the FDA. The average time
from application to approval is currently more than 12 months for routine
drugs, but can extend to several years in some cases. The FDA Modernization Act
of 1997 considerably streamlined the review process for new drugs, and
allocated user fees collected from drug manufacturers to provide additional
resources for the review process. Since clinical trials may themselves last
several years, the entire drug development process may take a very long time
(while the patent protection is already being diminished), with only a small
percentage of the initial candidate drugs surviving the testing and approval
processes. On the average, the industry claims that discovering and developing
a new drug takes 12 to 15 years and costs $500 million. Most new drugs appear
first in prescription form, but some may eventually be available over the
counter, if long experience shows them to be safe to use without medical
supervision. Once a drug has been approved, the FDA requires extensive
monitoring by the manufacturers, recognizing that adverse effects may only
appear once a drug is in general use by a large number of people. 2




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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. PRODUCTS OVER-THE-COUNTER DRUG PRODUCTS SinoFresh Nasal & Sinus Care is an antiseptic, FDA registered product
specially formulated to kill mold and bacteria, and cleanse and freshen the
nose by washing away the bacteria colonizing in these membranes. SinoFresh
Oral & Throat Care (which the Company plans to launch next year) is an
antiseptic product that kills mold and bacteria colonizing in the mouth and
back of the throat. Mold and bacteria have been scientifically proven to be at
the root cause of many sinus and asthma-related conditions, and are the focus
of many sick building syndrome studies. Test marketing of the SinoFresh Nasal & Sinus Care product commenced in
June 2002 in a limited test area in southwest Florida culminating in the
national launch of that product in May 2003 when the Company began shipping
supplies to national retail drug and food chain stores across the United
States. SinoFresh Nasal & Sinus Care retails for approximately $15.99 for a
1-fluid ounce bottle (approximately a 30 day supply). The SinoFresh brand product has been formulated to provide symptomatic
relief for chronic sinusitis and other sinus-related conditions. This
formulation includes .05% Cetylpyridinium Chloride (CPC) which is the active
ingredient, aromatics, and other excipients. The product is designed to kill
bacteria on contact. CPC has a 55-year history of safety and efficacy, and is
an active ingredient in many popular drug products. ETHICAL PHARMACEUTICAL PRODUCTS In September 2003, the Company expanded its Medical Advisory Board to
include imminent professionals from the fields of medicine, medical and
clinical research, and regulatory affairs in order to better position the
Company to diversify into the OTC drug market and to ensure the safe and
effective distribution of important new products currently under development.
In addition, the Company may develop new drugs in the prescription drug
category. The Company has enlarged its strategy to seek approval as a NDA on
SinoFresh Nasal & Sinus Care product, which is currently under the FDA
monograph system and, further, to pursue NDA approval on future products. For
example, the Company is currently evaluating a prescription version of
SinoFresh Nasal & Sinus Care, intended for use as a preventative measure
against staphylococcus and streptococcus, commonly known as staph or strep
infections. Upon completion of the internal protocol, the Company plans to
obtain FDA approval guidelines for clinical studies. Assuming the efficacy of
the Companys clinical studies, management would seek FDA approval of the new
product as a NDA, which is required for prescription drugs. The Company is at the implementation stage of what is expected to be a
lengthy process to develop several of its investigative new drug activities
into commercialized NDA products. The pre-clinical development, clinical
trials, chemistry and manufacturing controls, and production and marketing of
new NDA drug products will be subject to federal and state regulation in the
United States and other countries. Obtaining FDA regulatory approval for these
pharmaceutical products will require substantial resources and may take several
years. The length of this process will depend upon the method of
administration, pharmaceutical complexity, novelty of the product, the nature
of the disease or ailment, and the indications to be treated. If the Company
is not granted regulatory approval for these new products in a timely manner,
or if the patents sought are not granted, or if the patents granted are
subsequently challenged, these events could have a material effect on the
business and financial conditions of the Company. Management believes that the
full exploits of its products potential is dependent on eventually obtaining
NDA clearance, which allows SinoFresh to make extended label claims. 3




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The strength of the Companys patent position is important to the
long-term success of the Company. There can be no assurance that these patents
and the patent applications made in the United States and abroad will
effectively protect the Companys products from infringement or from
duplication by others. RESEARCH AND DEVELOPMENT The Companys research and development costs for the year ended December
31, 2003 and from October 15, 2002 (date of inception) to December 31, 2002
were approximately $185,000 and $39,000, respectively. Substantial research
and development costs are anticipated for the development of line extensions to
the SinoFresh Nasal & Sinus Care product, including potential unrelated new
products in the health care industry, in general, and in the respiratory and
infectious disease category, in particular. New product development will be
supported by clinical studies to ensure the safety and efficaciousness of the
Companys products, as well as for line extension derivatives of current and
future products. Additionally, extensive clinical and developmental testing is
anticipated in connection with the Companys development of new OTC and ethical
drug products related to the treatment of chronic sinusitis and other
indications in the ear, nose and throat field. Many of these new products are
expected to lead to an application for new patents in the United States as well
as abroad. In addition, the Company performs extensive research and
development aimed at increasing the number of on-label claims it may include on
its OTC product and further documenting the efficacy of these products. The Company had entered into an agreement with SinoFresh Research
Laboratories, LLC (Research Labs), under which the Company had a right of
first refusal to acquire proprietary products developed by Research Labs, which
company is owned by Charles Fust and certain other employees of the Company,
and would serve as the research and development affiliate of the Company.
However, that agreement has been terminated and all research and development
has been brought into the Company. REGULATORY MATTERS The Companys business is subject to federal and state laws and
regulations adopted for the health and safety of consumers and users of its
products. The Companys SinoFreshTM Nasal & Sinus Care product is FDA
registered and subject to regulation by various federal, state and foreign
agencies, and the Company is subject to regulatory and legislative changes that
can affect the economics of both the Company and the industry by requiring
changes in operating practices and protocols or by influencing the demand for,
and the costs of, production and distribution of SinoFresh products.
Management believes that the Company is in compliance with all applicable laws,
regulations and standards currently in effect, including the Food, Drug and
Cosmetics Act of 1938 and amendments thereto. Although it is possible that the
future results of operations could be affected by the future costs of
compliance, the Companys management believes that future costs of compliance
will not have a material adverse effect on either the Companys financial
position or competitive position. The costs and length of time required to develop and obtain regulatory
(and patent) approval for future products and extensions of current products
are subject to several uncertainties and risks, among them, legal,
administrative and regulatory risks, inflation, market conditions, consumer
demand, and the Companys ability to protect its patents against infringement
and its products against duplication by others. FDA CLASSIFICATION OF DRUG PRODUCTS Products that are labeled and marketed as drug products are approved and
regulated by the FDA. Implied in this registration is the adherence to very
strict quality standards known as current Good Manufacturing Practices (cGMPs)
which govern the manufacture of these products. Entry into this category of drugs is usually accomplished by one of two
routes. The first and least burdensome process is through the OTC drug
monograph system, which is based on a pharmacology/physiology category. This
allows the Company to make only claims related to the pharmacology of the
active ingredients. 4




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The next and more arduous process is the NDA system, which is
based on the treatment/ prevention of a disease or condition. This allows the
Company to make treatment or prevention claims related to a disease or
condition. Also required for this process is the successful completion of two
controlled clinical studies. Currently, SinoFresh Nasal & Sinus Care is encompassed in the monograph
system which provides regulatory cover for marketing the product. It is the
intent of the Company to take the next step and pursue a NDA, which will secure
the product in being viewed as a stand alone drug product with the FDA. There
is no assurance that NDA classification will be achieved. PATENTS AND TRADEMARKS The Company currently owns three U.S. patents under which it has the
exclusive right to manufacture, market and distribute in the United States a
proprietary composition for freshening the nostrils and sinus cavities. United
States Patent No. 5,785,988 pertains to a composition for freshening [the]
nostrils and sinus cavities, Patent No. 6,083,525 pertains to a composition for
freshening sinus cavities including a carrier for a masking agent that conceals
and eliminates odors emanating from the sinus cavities, and further including
an anti-septic or anti-infective constituent. Patent No. 6,344,210 is a
continuation-in-part patent related to the freshening of the sinus cavities. United States Patent: No. 5,785,988 was issued July 28, 1998, No.
6,083,525 was issued July 4, 2000, and No. 6,344,210 was issued February 5,
2002 to Charles Fust, the principal of SinoFresh Laboratories, Inc., who
subsequently assigned those patents to the Company. All of the assignments of
the SinoFresh patents to the Company are recorded and filed with the United
States Patent and Trademark Office. Charles
Fust, the inventor of the SinoFreshTM product, also holds
approximately 130 foreign patents and patent applications relating to the
Companys proprietary composition, which are in the process of being
transferred to the Company. The Company currently has trademark rights and/or trademark registrations
on the SINO-FRESH and SinoFresh names in the United States and several
foreign countries. The Company is currently in the process of filing an
application under the Madrid Protocol, which will effect a trademark in 61
countries subscribing to the Madrid Protocol. PRODUCT DISTRIBUTION AND CUSTOMERS The Companys products are marketed and sold through various brokers,
distributors and independent sales representatives. The Company has a master
broker arrangement with NIS, under a three-year agreement. The Company pays
commissions based on sales volumes. The Companys first commercial product, SinoFresh Nasal & Sinus Care, was
launched nationally in May 2003 and is retailed through numerous food and chain
drug stores throughout the United States, including Albertsons, CVS, Eckerd,
Osco Drug, Publix Super Markets, Rite Aid, Sav-on Drugs and Walgreens. In
2004, through the Companys independent brokers and distributors, the Company
plans to expand its retail distribution network to mass merchandisers such as
Wal-Mart and other food and drug chain stores and independent pharmacies as
well as the chain stores the Company is currently servicing. The Companys primary customers in 2003 were CVS, Eckerd, Publix Super
Markets, Rite Aid and Walgreens of which two accounted for more than fifty
percent of the Companys annual sales volume in 2003. The same two customers
accounted for over seventy percent of net accounts receivable at December 31,
2003. The loss of any one of these chains as a customer could adversely impact
the Companys revenue. COMPETITION The Company competes in the marketplace with other suppliers of remedies
in the cold and sinus category of OTC medicines. These suppliers range in size
and financial strength from small startup companies to large, well- 5




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heeled companies such as GlaxoSmithKline, Pfizer, and Pharmacia, all of
which have significantly greater financial resources and market presence than
the Company. Nevertheless, management believes that SinoFreshs products will
be able to compete effectively in its market. The Company believes that it
offers a significant advantage over many of its competitors in the OTC cold and
sinus market, as many current products tend to provide only symptomatic relief.
Management also believes that the rapid acceptance of the
SinoFreshTM brand,
which has been accepted for distribution in more than 17,000 stores nationwide,
will continue to grow as other major food and grocery chains are contacted and
as distribution and merchandising to the 45,000 independent food and drug
stores across the United States takes hold. However, the Company believes that its ability to compete will depend upon
a number of factors including: price, quality, availability, reliability,
efficiency, brand recognition, and delivery. The price of SinoFresh Nasal &
Sinus Care sits atop its category and, in managements opinion, is a point of
distinction and differentiation for the SinoFresh brand.  A.
    
    Products offering direct competition to the current
SinoFresh Nasal & Sinus Care brand include: Afrin, Blairex
Simply Saline Nasal Spray, Entsol Nasal Spray, Neil Med Nasal
Spray, Nose Better Nasal Spray, Ocean Nasal Spray, Ponaris Nasal
Spray, SinuFree, and Zicam, among others.B.
    
    Products offering indirect competition to the present
SinoFresh Nasal & Sinus Care brand, but direct competition to
the planned NDA-approved product, include the Rx products such
as: Allegra, Beconase, Flonase, Nasalide, Nasonex and Rhinocort. The Companys advertising and promotional campaigns position the nasal
product as a root cause solution and defense against rhinitis and sinusitis in
contradistinction to antihistamines, decongestants, steroids, and surgery.
Management believes that in time and as its message takes hold, SinoFresh will
rise to the top of the category list. EMPLOYEES As of March 10, 2004, the Company has seventeen (17) full-time employees.
The Company has an employment agreement with Charles Fust, its Chief Executive
Officer (CEO). None of the Companys employees are subject to collective
bargaining agreements. Additionally, the Company engages independent contractors to fulfill
current sales and marketing needs. Over the next twelve months, the Company
plans on hiring additional employees to fulfill its staffing requirements as
the need arises due to growth and expansion of the Company and its products and
services. SUPPLIERS The Company currently uses a single manufacturer, AccuMed, a third party
(contract) manufacturer, and FDA approved manufacturing facility to manufacture
its products. The Company entered into an agreement with AccuMed, which
expires in December 2004, for the production of up to 90,000 units of product
per day. Should this relationship for any reason terminate or be discontinued,
the Company has a contingency plan for the alternative manufacturing of its
products. However, any such termination may cause a temporary delay in
production until the replacement facility can meet the Companys production
requirements. AccuMed also produces certain health care products for other
pharmaceutical companies and distributors including Walgreens and Wal-Mart. Raw
materials used in the production of the SinoFreshTM Nasal & Sinus Care
product and the SinoFreshTM Oral & Throat Care product are readily available
from numerous sources. Currently, these raw materials are being procured from
two main vendors in order to secure purchasing economies of scale. Should any
vendor be unable or unwilling to supply the Companys manufacturer with an
ingredient, other sources have been identified. However, any situation where
the vendor is not able to supply the contract manufacturer with the ingredients
may result in a temporary delay in production until replacement supplies are
obtained to meet the Companys production requirements. 6




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MARKETING The Companys comprehensive marketing plan was developed with a focus on
building brand awareness to help drive consumers to established retail partners
and to facilitate entry into new retail accounts. SinoFresh is aided in its
sales and marketing efforts through a master broker arrangement with NIS. NIS
provides the Company with sales support in retail accounts throughout the
United States and Canada and serves as the Companys exclusive master broker
within those territories. The Company pays NIS a percentage of net revenue for
all shipments that occur within the U.S. The NIS agreement commenced on March
1, 2003 and expires on March 2, 2006, unless renewed by NIS under terms agreed
to with the Company prior to the Company seeking an alternative provider of the
services provided by NIS. However, the Company retained the right to terminate
in accordance with the contract buy-out provisions contained in the agreement
with NIS. NIS provides the following services under the master broker agreement: (i)
serves as the master-broker responsible for all SinoFresh sales within the
United States and Canada, (ii) establishes and manages a national broker
network delivering sales representation within all accounts and
channels-of-distribution within the U.S., (iii) works with the operating
companys management to establish competitive compensation and incentive
packages for local brokers, (iv) works with the operating companys management
to establish a pricing structure that will meet consumer hurdle-rates for trial
and purchase intent while satisfying margin requirements, (v) works with
private labelers and (vi) provides on-going communication regarding the status
of sales initiatives across all accounts and channels-of-distribution. The Company maintains sole right to market and distribute products
exclusive of the NIS master broker agreement to the following retail outlets:
(i) Ventiv Health sales to dentists, (ii) Internet sales, (iii) catalog sales,
(iv) sales through independent pharmacies managed as house accounts (house
accounts are defined as accounts which are not represented through a broker
arrangement) and sales to U.S. Military establishments. SinoFreshs sales and marketing efforts will target the United States and
the Company will promote its products through several marketing and media
sources, including radio, television, consumer and trade print, medical
seminars, and online marketing efforts through the Companys website,
http://www.sinofresh.com. Education of pharmacists and physicians will be an
important element in introducing the Companys products to potential users.
This proved very successful in the beta-test markets, and at the time of the
national launch, approximately 400 physicians were recommending SinoFresh
Nasal & Sinus Care to their patients. The Company anticipates that drug stores will continue to provide a
significant portion of the revenue from product sales. Small, local pharmacies
have already proven a successful source of sales. However, large chain
drugstore companies, which currently account for more than 17,000 retail
outlets for the Companys product, will continue to be an integral part of the
Companys sales and marketing strategy. There are more than 45,000 pharmacies
in the U.S. of which approximately 25,000 are independents. Large grocery
store chains are also targeted as they account for more than 7,000 outlets. The resources of NIS and other independent brokers complement Company
personnel in representing its OTC product in the marketplace. Management
believes that this arrangement is cost-effective and, as such, saves valuable
resources that would otherwise be expended in its marketing and product
branding efforts. SinoFresh is currently exploring the possibility of launching the
SinoFreshTM brand in markets in Europe, Asia and elsewhere around the world
through licensing arrangements with joint ventures or partnerships. 7




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ITEM 2. PROPERTY The Companys corporate offices are located at 516 Paul Morris Drive,
Englewood, Florida 34223. This property, with an area of approximately 10,000
square feet of office and warehouse space, is leased from an entity owned by
Charles Fust, the principal shareholder and an officer and director of the
Company, and P. Robert DuPont, an officer and director of the Company. Lease
payments are $6,418 per month under the terms of a five-year renewable lease.
In addition, the Company also leases from an unrelated party 800 square feet of
office space in an adjacent facility, which houses a portion of its research
staff, at a cost of $800 a month, under the terms of a month-to-month lease. The Company believes that the existing facilities will adequately meet its
needs for now and the foreseeable future. 
 ITEM 3. LEGAL PROCEEDINGS 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. 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 has not been certified as a class
action suit. Management of the Company has investigated the complaint and
believes the allegations in the complaint to be blatantly incendiary, false and
misleading. The Company disagrees with the allegations in the complaint and
the Company, on behalf of itself and its officers and directors, intends to
vigorously defend the suit. This legal proceeding has been moved to the U.S.
District Court located in Tampa, Florida. On March 4, 2004, the Company filed
a motion to dismiss the complaint citing numerous legal deficiencies in the
amended complaint and the failure to meet statutory procedure requirements. The complaint alleges, among other things, the following: (a) that Mr. Fust has not transferred foreign patents he holds to two
foreign entities related to the Company through common ownership; (b) breach of fiduciary duty and self dealing by the individual
defendants, including (i) the payment of legal fees in connection with
litigation involving SinoFresh Laboratories, Inc. for which SinoFresh
Laboratories agreed to indemnify the Company, (ii) payment of lease obligations
on a lease entered into by SinoFresh Laboratories and Charles Fust; (iii)
failure to disclose to the directors that the Companys headquarters are owned
by an entity controlled by Charles Fust and P. Robert DuPont; (iv) the payment
of rent to Stacey Maloney-Fust for a condominium she owns; (v) the granting of
options to insiders; (vi) entering into an employment agreement with Stacey
Maloney-Fust without board approval; (vii) the objection by Mr. Lee of Messrs.
Bannon and Otto (whom the plaintiffs allege constituted the Companys audit
committee) having direct oversight over the auditor and having the auditor
report directly to Messrs. Bannon and Otto, and instead having the auditor
report to Mr. Lee; (viii) removing Messrs. Bannon and Otto as directors in
order to prevent them from bringing the foregoing to the attention of the
auditor; (c) that there were certain enumerated defects with the Schedule 14C
Information Statement filed with the SEC; (d) that the Companys financial statements and the materials provided to
the public, to the shareholders and to the SEC do not properly reflect the
Companys true financial condition, do not reflect the 8




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foreign patents are not held by two foreign entities and do not reflect a fair
statement of the interim reporting periods of January 1 through September 30,
1993 [sic]. (The plaintiffs also allege that during this time frame, the
defendants failed to file financial statements which conform to GAAP such that
the financial statements will be presumably misleading and inaccurate.) While the Company does not wish to present all of its defenses in this
report since the matters referenced above are in litigation, the Company
desires to set forth certain information addressing the above allegations. The foreign patents.Mr. Fust, who holds approximately 130 foreign
patents and patent applications, had commenced transferring some of those
patents to two foreign entities related by common ownership which were intended
at one time to distribute the Companys products in certain foreign markets.
However, Mr. Fust and certain other members of management subsequently
determined that it was in the best interests of the Company and its
shareholders to instead transfer the foreign patents to the Company with a view
to entering into joint ventures or other arrangements with independent third
parties for the distribution of the Companys products in foreign markets. The
Company believes that the investors in the foreign entities are primarily
shareholders in the Company, but certain parties may have sold interests in the
foreign entities to other investors. The Company may have exposure to these
other investors in the two foreign entities as a result of this shift in its
business plan with respect to the foreign patents and foreign distribution of
its products. Breach of fiduciary duty and self dealing.In connection with the asset
acquisition, litigation was threatened by a former employee of SinoFresh
Laboratories who objected to the consideration to which she was entitled in
connection with the asset acquisition. That was a matter of which the board
was aware and settlement was reached with the former employee with full
knowledge and approval of the full board. Another shareholder of SinoFresh Laboratories also objected to the terms
of the asset acquisition between SinoFresh Laboratories and SinoFresh-Delaware
and , accordingly filed a complaint against SinoFresh Laboratories. SinoFresh
Laboratories agreed to indemnify SinoFresh-Delaware for undisclosed/unassumed
liabilities in excess of $10,000 as part of the Asset Purchase Agreement. In
addition, under the terms of the Asset Purchase Agreement, SinoFresh-Delaware
agreed to fund up to $50,000 in defense of this matter. Because the complaint
arose out of the asset acquisition orchestrated by SinoFresh-Delaware, the
Company has incurred legal fees of approximately $76,000 in connection with the
defense by SinoFresh Laboratories through December 31, 2003. Management
believes that at all times Andrew Badolato (an officer and director of
SinoFresh  Delaware) and the other board members were aware of the litigation
costs being incurred by the Company. During 2003, the Company (and its non-public predecessor) paid
approximately $30,000 for a lease obligation entered into by SinoFresh
Laboratories and Charles Fust in Ft. Lauderdale, which lease terminated in
October 2003. Management believes that these payments benefited the Company
and prevented it from becoming sued as a result of SinoFresh-Delaware acquiring
all of the assets of SinoFresh Laboratories without leaving sufficient assets
for SinoFresh Laboratories to pay its obligations. In addition, management
believes that at all times Andrew Badolato (an officer and director of
SinoFresh-Delaware) and the other board members were aware of this lease and
the payments being made thereon. The Company leases its headquarters from an entity owned by two officers
and directors of the Company, which is disclosed in Note 13 to the Companys
financial statements that were filed by the Company on Form 8-K/A on November
17, 2003. The landlord obtained a statement from a real estate professional as
to the fair market rent for that facility, which is the rent being charged the
Company. The Company pays, on a month-to-month basis, rent of $1,250 a month to
Stacey Maloney-Fust for a condominium apartment which is not used by Ms.
Maloney-Fust, but which the Company uses as corporate housing. This is in lieu
of reimbursing the independent contractor (who is providing services to the
Company) currently living in those quarters for hotel accommodations. The Companys predecessors had committed in writing or promised to certain
employees and independent contractors options or shares in SinoFresh-Delaware
for a total of approximately 500,000 shares. Those individuals were left off
of a list of individuals to whom options were granted by written consent of the
full board dated November 13, 2003. Included in that option list were 890,000
options for SinoFresh Management, LLC, a company 9




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##### Table of Contents



controlled by Stephen Bannon and Charles Fust, but of which the full board
(including Mr. Fust) was not apprised. Subsequent to the attempted removal of
Messrs. Bannon and Otto, the remaining board members revised the option list,
deleting SinoFresh Management, LLCs option grant as void, and adding 200,000
options for Russell Lee, the Companys CFO, pursuant to an offer of employment
from the Company dated August 25, 2003, and 289,625 options for approximately
13 independent contractors and one employee (P. Robert DuPont, an officer and
director, and recipient of 21,000 of those options), who had contributed
services to SinoFresh Laboratories, without other compensation, in connection
with the development of the Companys products. The compensation committee
ratified those actions in April 2004 and management takes the position that the
LLCs options were void for reasons of non-disclosure, improper conflicts of
interest, lack of consideration and specific prohibition under the stock option
plan against awarding options to non-employee directors, and the Company
anticipates securing the further ratification of these acts by the board of
directors at its next meeting. SinoFresh  Delaware and Stacey Maloney-Fust did execute an employment
agreement dated as of September 1, 2003, pursuant to the terms of an employment
offer letter delivered to her by Mr. Andrew Badolato, at that time an officer
and a director of Sino-Fresh Delaware. That employment agreement has since
been renounced and cancelled as of September 1, 2003. However, Ms.
Maloney-Fust, an employee of the Company, is paid a salary of $48,000 per year
(which amount is the same as provided in the offer letter as well as the
cancelled employment agreement). Further, the only option she has been granted
is an option for 50,000 shares of common stock, with an exercise price of $1.00
per share, which option was approved by all board members by written consent
dated November 13, 2003, as of and effective September 1, 2003 (which option
was also provided for in the offer letter as well as the cancelled employment
agreement). Messrs. Bannon and Otto claim to comprise the audit committee. Although
SinoFresh-Delaware may have had an audit committee (comprised of just Mr. Otto
before the merger), the board of directors of the Company never appointed an
audit committee at a meeting or by written consent and thus, the board of
directors would be deemed the audit committee. On March 29, 2004, the board of
directors by majority vote appointed Messrs. Fust and DuPont and Ms.
Maloney-Fust as the audit committee. The plaintiffs in the complaint allege that Messrs. Bannon and Otto were
removed as directors to prevent them from bringing the allegations in the
complaint to the attention of the Companys auditor. Contrary to that claim,
the first time that the Company heard of any investigation by Messrs. Bannon
and Otto was after Messrs. Bannon and Otto had been informed that they had been
removed from the Board. By way of background, in October or November 2003, it
had come to the attention of Messrs. Fust, DuPont, Lee, and Ms. Maloney-Fust
that there may have been certain improprieties that occurred as a result of
actions of Sargon Capital, Inc. and Andrew Badolato. Their concerns were
presented to Messrs. Bannon and Otto at a meeting and they were asked to
investigate. At subsequent meetings and discussions with Messrs. Bannon and
Otto, it became obvious to the other members of the board and Mr. Lee that no
investigation was being made or that it was being stalled. Thus, out of
frustration with the inability to make any progress on these matters, Mr. Fust
sought removal of Messrs. Bannon and Otto from the board, who were originally
designated to be board members by Sargon. In connection with the attempted removal of Messrs. Bannon and Otto from
the board, the Company filed a preliminary Information Statement on Schedule
14C with the SEC with a view toward filing and sending a definitive Information
Statement to shareholders of record once the SEC completed its review of the
Schedule 14C. The actions of the shareholders were challenged by Messrs. Otto
and Bannon and the Company was unable to expeditiously get final clearance for
the 14C Information Statement. During the week of March 22, 2004, after
discussion with the reviewing staff at the SEC, it was determined that, under
applicable SEC rules relating to Information Statements, the corporate action
(e.g., the effectiveness of the removal of the two directors) could not occur
until the 20th day after the mailing of a definitive information statement.
Further, it was also discovered during that time that there was a technical
defect with the shareholders written consents in that they were short
sufficient votes to clearly constitute a majority of the issued and outstanding
voting stock. As a result, it was decided to retroactively reinstate Messrs.
Bannon and Otto to the board (until the next annual meeting of shareholders, or
their earlier removal or resignation). The Companys management believes that
the above-referenced technical defects can easily be cured and Mr. Fust intends
to restart the written consent process removing Messrs. Otto and Bannon. 10




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With respect to the allegations made in the complaint regarding the
Companys financial statements, the Company believes that the Form 8-K/A
(containing audited financial statements) and the Form 10-QSB (containing
unaudited financial statements) (prepared by the Companys former CFO, Steves
Rodriguez, and which were reviewed by David Otto, the Companys counsel at the
time, and the other members of the board of directors) accurately reflect the
financial position of the Company at the time. Management of the Company believes that the lawsuit is a backlash by
Andrew Badolato and/or Sargon Capital, Inc. against the Company in connection
with the attempted removal of Stephen Bannon and David Otto as board members
and as officers of the Company. Mr. Badolatos company, Sargon Capital, Inc.,
had been retained by the Companys predecessor for investment
banking and consulting services.
Over the course of Mr. Badolatos and 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 Mr. Badolato and Sargon. Since
Messrs. Bannon and Otto were Sargons designees to the Companys board of
directors, the Company deemed it in its best interests to attempt to remove
them as directors and to seek substitute directors who were truly independent
from Sargon Capital.1 Management of the Company believes that it has been wrongfully maligned by
Mr. Andrew Badolato and the plaintiffs who have waged a campaign of slander
through the press, propounded misleading communications to shareholders and
launched malicious attacks upon management and its advisors. The Company,
management and other aggrieved parties are considering several legal actions
designed to recoup damages suffered. Other Legal Proceedings A shareholder of the Companys predecessor commenced two actions against
the Company. The first action is an arbitration seeking recovery of his
investment of $150,000. The second action is a lawsuit against the Company,
its officers and directors seeking unspecified damages due to non-performance
by the Company of a consulting agreement entered into January 2000 with the
predecessor. The agreement was for five years at $24,000 annually, of which
$23,000 was paid. The Company is in the process of vigorously defending these
actions, but no outcome or resolution of the arbitration or lawsuit is
definitive or ascertainable at this time. Crown IV Holding, Inc., a Belize company, has threatened litigation
(including a claim for civil theft) against Charles Fust, the Company and its
counsel over the ownership of 1,000,000 shares of common stock to which Charles
Fust claims beneficial ownership. The Company believes this is a matter
between Charles Fust and Crown IV Holding, but if the Company is involved in
the suit, it intends to vigorously defend against it. See also the related
discussion under footnote 10 to the beneficial ownership table at Item 11 of
this report. In March 2004, the Company declared null and void two contracts entered
into with Sargon Capital, Inc., a shareholder and an affiliate of a former
director and officer, to-wit: an Investment Banking Services Agreement dated
October 24, 2002, and a Financial Consulting Services Agreement originally
dated in November 2002 which monthly payments under this consulting agreement
approximate $8,000 with $96,000 due for the years 2003 and 2004, and $80,000
due for 2005. The consulting agreement was revised September 8, 2003 extending
the term of September 2006 and increasing compensation to include 0.5% of gross
revenue and 0.6% of net income before taxes, interest and amortization. Sargon
claims that the Company owes approximately $173,000 for these services.
Whether or not these contracts are subject to termination will likely be the
subject of a lawsuit. The Company believes that the agreements were improperly
approved, were breached by Sargon, and are illegal because of the lack of
appropriate licensure of Sargon. From time to time, the Company is subjected to other litigation or
proceedings in connection with its business, as either a plaintiff or
defendant. There are no such pending legal proceedings to which the Company is
a party that, in the opinion of management, is likely to have a material
adverse effect on the Companys business, financial condition or results of
operations.   1
    
    Although the Company believes this paragraph is accurate, Messrs. Bannon and
Otto requested its removal from this report. 11




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ITEM 4. SUBMISSION OF MATTERS TO A VOTE BY SECURITY HOLDERS Not applicable. 
 PART II 
  ITEM 5.
    MARKET FOR COMMON EQUITY, RELATED STOCKHOLDER MATTERS, COMPANY
PURCHASES OF EQUITY AND SECURITIES Market Information The Companys common stock is traded in the Over-the-Counter market and is
quoted on the Electronic Bulletin Board (OTCBB) under the symbol SFSH. The
following table represents the range of the high and the low closing bid
prices, as quoted on the OTCBB, for each fiscal quarter for the last two fiscal
years ended December 31, 2003 and 2002. These quotations represent prices
between dealers, and may not include retail mark-ups, markdowns or commissions,
and may not necessarily represent actual transactions. On September 9, 2003,
the Company announced the acquisition of SinoFresh Health Care, Inc. by merger.
Prior to that date, the Company had been known as e-Book Network, Inc. Fiscal Quarter Ended
    
    Low
    
    HighMarch 31, 2003
    
    $
    0.01
    
    
    $
    0.01June 30, 2003
    
    $
    0.01
    
    
    $
    0.01September 30, 2003
    
    $
    0.01
    
    
    $
    7.15December 31, 2003
    
    $
    1.70
    
    
    $
    4.50March 31, 2002
    
    
    N/A
    
    
    
    N/AJune 30, 2002
    
    
    N/A
    
    
    
    N/ASeptember 30, 2002
    
    
    N/A
    
    
    
    N/ADecember 31, 2002
    
    $
    0.04
    
    
    $
    0.03
 On March 20, 2004, the Company estimates that there were approximately 650
record holders of the Companys common stock. Dividends and Dividend Policy The Company has not paid any cash dividends on its common or preferred
stock during the last two fiscal years and it does not anticipate paying any
cash dividends in the foreseeable future. The Company currently intends to
retain any future earnings for reinvestment in the business. Any future
determination to pay cash dividends will be at the discretion of the Board of
Directors and will be dependent on the Companys financial condition, results
of operations, capital requirements and other relevant factors. Recent Sales of Unregistered Securities During the quarter ended December 31, 2003, the Company issued to a former
officer and his attorney 50,000 shares of common stock, relying on an exemption
pursuant to Section 4(2) of the Securities Act as a transaction by an issuer
not involving a public offering. The investors acquired the securities for
investment only, not with a view to distribution, and received or had access to
adequate information about the registrant and were given an opportunity to ask
questions of management about the information received or made available. The
certificates for the stock bear a restrictive legend. 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 respect of the acquisition of
SinoFresh  Delaware in September 2003. The Company has been unable to obtain
from either former counsel to the Company or former counsel to SinoFresh 
Delaware (Mr. David Otto, a director of the Company), who were counsel to the
Company and SinoFresh  Delaware, respectively, at the time of the merger, 12




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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. See Risk Factors  The Company may have certain
financial exposure if there was not an exemption from registration for the
issuance of securities in connection with the merger.2 Equity Compensation Plan Information The following table summarizes share information about the Companys
equity compensation plans, including the Companys 2002 Stock Option Plan (the
Plan) and non-plan equity compensation agreements as of December 31, 2003. Number of Securities to
    
    
    
    
    
    Number of Securitiesbe Issued Upon
    
    Weighted-Average
    
    Remaining AvailableExercise of
    
    Exercise Price of
    
    For Future IssuanceOutstanding Options,
    
    Outstanding Options,
    
    Under EquityPlan Category
    
    Warrants and Rights
    
    Warrants and Rights
    
    Compensation PlansEquity Compensation Plans to
Employees Not Approved By
Shareholders
    
    
    831,000
    (1)
    
    $
    1.00
    
    
    
    2,169,000
    (2)Equity Compensation Plans
Not Approved by
Shareholders
    
    
    2,340,095
    (3)
    
    $
    3.69
    
    
    
    N/ATotal
    
    
    3,171,095
    
    
    $
    2.98
    
    
    
    2,169,000
   (1)
    
    Represents shares subject to outstanding options under the Plan.(2)
    
    Represents shares available for option grants under the Plan.(3)
    
    Represents non-plan options and warrants. Equity Compensation Plans Not Approved by Shareholders The Companys Compensation Committee currently administers the Plan. The
Plan provides for the grant of options (incentive and non-statutory) to
officers, directors, employees, and independent contractors capable of
contributing to the Companys performance. The Company has reserved an
aggregate of 3,000,000 shares of common stock for grants under the Plan.
Incentive stock options may be granted only to employees eligible to receive
them under the Internal Revenue Code of 1986, as amended. As of December 31,
2003, the Company had outstanding non-statutory options for 831,000 shares of
the Companys common stock. Options have a term of ten years, unless earlier
terminated in accordance with the provisions of the Plan and applicable stock
option agreements. The exercise prices of all of the options granted as of
December 31, 2003 are $1.00 per share, and generally have scheduled vesting
except for options for 126,000 shares which vested immediately upon grant.
Upon expiration of unexercised options, the unpurchased shares subject to such
options will again be available for purposes of the Plan. The 831,000 options shown in the table above include 200,000 options the
Company had committed to issue to Russell Lee, the Companys Chief Financial
Officer, in connection with his employment in August 2003, and 21,000 options
the Company had committed to issue to P. Robert DuPont, an officer and director
of the Company, in connection with work he had performed for one of the
Companys predecessors. Mr. Lees option vests over three years and Mr.
DuPonts option vested immediately. Mr. Lees and Mr. DuPonts options were   2Mr. Otto has indicated to the Company that he did not represent the issuer of
the securities in the merger, but only SinoFresh-Delaware and therefore he will
not render an opinion regarding applicable exemptions. Although the Company
believes this paragraph is accurate, Messrs. Bannon and Otto have requested its
removal from this report. 13




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approved in April 2004 by the Boards Compensation Committee comprised of
Charles Fust, Stacey-Maloney Fust and P. Robert DuPont, with Mr. DuPont
abstaining as to his option. Also in April 2004, the Compensation Committee approved common stock
options for independent consultants for a total of 268,625 shares, vesting
immediately. The Company had previously promised these options to the
independent consultants in connection with services they provided to the
Companys predecessors in the development of the Companys product. The
options have a five year term and an exercise price of $1.00. The Executive Committee (including Mr. Fust) declared void in April 2004
an option for 890,000 shares of common stock that was granted by written
consent of all of the members of the board of directors on November 13, 2003 to
Sino Fresh Management LLC. At the time of the grant, not all directors were
informed of the interest of Stephen Bannon and Charles Fust in SinoFresh
Management LLC. The Company issued warrants to consultants and service providers for a
total of 500,000 shares of common stock, of which 450,000 are exercisable for
$1.00 per share and 50,000 are exercisable at $5.00 per share. The warrants
have terms of four years (except for one warrant for 100,000 shares which has a
two year term). The Company awarded warrants to its Medical Advisory Board for a total of
87,500 shares of common stock, which become fully exercisable on September 1,
2004. The warrants have a 5 year term from September 1, 2003. The warrant
holders have certain piggyback registration rights for the shares underlying
the warrants. The Company issued 1,333,970 warrants in connection with capital raises in
September 2003, exercisable at $5.00 per share and 100,000 warrants to a
consultant for service provided, with an exercise price of $7.00 per share. The Company issued a warrant in November 2003 for 50,000 shares of common
stock to a former consultant, which warrant is excisable at $4.00 per share
until its termination date in November 2013. The warrant holder has certain
piggyback registration rights under the terms of the agreement. 
  ITEM 6.
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS The following discussion and analysis of the Companys financial condition
and results of operations for the fiscal years ended December 31, 2003 and
December 31, 2002 should be read in conjunction with the consolidated financial
statements included elsewhere in this annual report. When used in conjunction in the following discussions, the words
believes, anticipates, intends, expects, and similar expressions are
intended to identify forward-looking statements. Such statements are subject
to certain risks and uncertainties, which could cause results to differ
materially from those projected, including, but not limited to, those set forth
below under Risk Factors and elsewhere in this report. Results of Operations SinoFresh was incorporated on October 15, 2002. Effective November 15,
2002, SinoFresh acquired certain assets (including business information and
materials, equipment, customers, customer lists, databases, access to
facilities and rights to patents) of SinoFresh Laboratories, Inc. Prior to
November 15, 2002, SinoFresh had no operations. Accordingly, the following
discussion and analysis of operations is not indicative of future comparisons
as the Company was only in operation for six weeks of 2002. Revenues for the year ended December 31, 2003 amounted to approximately
$1,830,000 as compared to approximately $27,000 from the date of inception to
December 31, 2002. These significant increases, amounting to $1,803,000,
resulted from the commencement of alpha and beta testing in southwest Florida
of the Companys product in 2003 and the nationwide expansion which started in
May 2003 through numerous food and chain drug stores throughout the United
States. For the ten years prior to 2003, the Company and its predecessor had
focused its efforts almost exclusively on the research and development work
that gave rise to its patented and patent-pending formulations, and two
commercial products, SinoFresh Nasal & Sinus Care and SinoFresh Oral & Throat
Care. 14




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Gross profits for the year ended December 31, 2003 were approximately
$1,222,000 (or 67%) compared to approximately $23,000 (or 86%) for the
corresponding period in 2002. These margins are the result of the favorable
costs of the ingredients in the end product and to efficient production
methods. The decrease in gross margin as a percentage of sales is due to
increased coupon usage, free trial offers and start up incentives given to
national accounts, including cooperative fees. In 2003, the Company invested significantly in building the SinoFresh
brand and infrastructure. Management believes that spending in these two
categories will pay significant dividends to the Company and its shareholders
over the next several years in the form of sales and profits, as well as in the
quality of its management team. Marketing expenditures for the year ended
December 31, 2003 were approximately $1,197,000 in comparison to $119,000 for
2002. Marketing expenditures for the year represented 24% of total operating
spending for the year ended December 31, 2003 as compared to 23% in 2002. The
increase in marketing expenditures of approximately $1,078,000 for the year
ended December 31, 2003 over 2002 reflect in great part the spending related to
the national product launch in the second quarter of 2003 and the marketing and
promotional costs associated with branding the SinoFresh name. Salaries and other compensation expenses were approximately $852,000 for
the year ended December 31, 2003 compared to approximately $72,000 for 2002.
This increase is due to increased headcount and is expected to continue to
increase in 2004 as the Company establishes a broadened infrastructure.
Professional fees amounted to approximately $1,869,000 for the year ended
December 31, 2003 as compared to approximately $220,000 during 2002.
Professional fees in 2003 were 38% of total operating expenses. This
significant amount was primarily due to legal, accounting and consulting
expenses attributable to becoming a public company. General and administrative
expenses, consisting of rent and occupancy costs, communications and other
expenses related to operations amounted to approximately $561,000 for the year
ended December 31, 2003. General and administrative expenses for 2002 amounted
to approximately $62,000. The significant increase for 2003 over 2002 reflect
several factors, among them: higher regulatory expenses attributable directly
to the Companys becoming listed on the OTCBB, the one time costs associated
with the Companys relocation from Venice to its new offices in Englewood,
Florida and the cost and expense of building an infrastructure as the basis for
future growth. General and administrative expenses also reflect certain other
costs associated with the relocation of the Companys offices, certain
write-downs and write-offs, and other expenses related to the Companys
fund-raising efforts in 2003. Research and development (R&D) 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 the Companys current product line. For the year ended
December 31, 2003, the Companys R&D expenditures amounted to approximately
$185,000, compared to approximately $39,000 in 2002. R&D expenditures are
expected to increase significantly over the next several years, both in
absolute terms and as a percentage of overall spending. These increases are
reflective of the Companys commitment to market only the best-in-breed of
products, to advance the science of rhinology, and to stay ahead of the
competition in its field and on the leading edge in the science. For the year ended December 31, 2003, the Company reported operating
losses of approximately $3,692,000 and overall losses of approximately
$3,769,000, compared to operating losses of approximately $505,000 and overall
losses of $512,000 for the year ended December 31, 2002. Losses per common share were $0.33 for the year ended December 31, 2003,
as compared with $0.10 for the year ended December 31, 2002 as a result of the
foregoing discussion. Taxes At December 31, 2003, SinoFresh had a net operating loss carry forward
(NOL) for federal income tax purposes of approximately $4,300,000. The NOL
expires at various dates through the year 2023. Utilization of SinoFreshs net
operating loss may be subject to substantial annual limitation due to the
ownership change limitations provided by the Internal Revenue Code and similar
state provisions. Such annual limitation could result in the expiration of the
net operating loss before full utilization. 15




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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 December 31, 2003, the company had approximately
$368,000 in cash on hand and approximately $646,000 in accounts receivable,
net. The Company has been in discussion with banks and other financial
institutions during the period, and anticipates that it will be able to secure
short term, asset-based financing under favorable and acceptable terms in the
coming months. Any such financing will more than likely be secured by accounts
receivable and inventories on hand. The Company had outstanding two convertible notes payable to
non-affiliates (who are also shareholders in the Company) with outstanding
principal balances owing of $189,225 and $73,025 as of December 31, 2003.
These notes are secured by substantially all of the assets of the Company,
including its U.S. patents. The notes are convertible into Series C preferred
stock, contain anti-dilution provisions and prohibit the Company from incurring
other indebtedness in excess of $1,000,000 until the notes are paid in full.
The maturity date of the notes is the earlier of June 30, 2004 or when the
Company raises an amount in excess of a specified threshold (at which time the
notes must be paid in full). The Company is in default with certain provisions
of the loans and is in the process of negotiating the final terms of paying the
loans off with the lenders. There is no assurance that the Company will be
able to successfully negotiate terms favorable to the Company and the lenders
may elect to accelerate the payment terms and may exercise their rights against
the Companys collateral, including its U.S. patents, which would have
materially adverse consequences to the Company and its business. 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. Critical Accounting Policies Revenue Recognition: The Company recognized revenue on its products in
accordance with the Securities Exchange Commission (SEC) Staff Accounting
Bulletin No. 101, Revenue Recognition in Financial Statements. Under these
guidelines, SinoFresh deferred revenue recognition on transactions if any of
the following existed: persuasive evidence of an arrangement did not exist,
title had not transferred, product payment was contingent, the price was not
fixed or determinable, or payment was not reasonably assured. The Company
accrued a provision for estimated returns concurrent with revenue recognition. SinoFresh has adopted Emerging Issues Task Force Issue 01-9, Accounting
for Consideration Given by a Vendor to a Customer (Including a Reseller of the
Vendors Products) (EITF 01-9), which became effective for fiscal years
beginning after December 15, 2001. Management has concluded that EITF 01-9 is
applicable to the accounting for its cooperative agreements with certain
customers, as the benefits received from consideration given to those customers
are not sufficiently separable from the revenue derived. Accordingly, all such
cooperative expenses are recorded as reductions to revenues. Asset Impairments: The Company has adopted Statement of Financial
Accounting Standards No. 141, Business Combinations, (FAS 141) and Statement
of Accounting Standards No. 142, Goodwill and Other Intangible Assets (FAS
142). FAS 141 requires business combinations completed after June 30, 2001 to
be accounted for using the purchase method of accounting. It also specifies the
types of acquired intangible assets that are required to be recognized and
reported separately from goodwill. Under FAS 142, goodwill and other intangible
assets (with indefinite lives) will not be amortized but will be tested for
impairment at least annually. The Company 16




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completed its transitional impairment test of existing goodwill and
patents as of December 31, 2003. This test was preformed by an independent
valuation specialist and involved the use of estimates related to the fair
value of the patents as well as the business in which the goodwill had been
allocated. There were no impairment losses as a result of this test. Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Standards (SFAS) No. 149, Amendment of Statement 133 on
Derivative Instruments and Hedging Activities. The statement amends and
clarifies accounting and reporting for derivative instruments, including
certain derivative instruments embedded in other contracts, and hedging
activities. This statement is designed to improve financial reporting such
that contracts with comparable characteristics are accounted for similarly.
The statement, which is generally effective for contracts entered into or
modified after June 30, 2003, is not anticipated to have a significant effect
on SinoFreshs financial position or results of operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and
Equity.
This statement establishes standards for how an issuer classifies and measures
certain financial instruments with characteristics of both liabilities and
equity. This statement is effective for financial instruments entered into or
modified after May 31, 2003, and is otherwise effective at the beginning of the
first interim period beginning after June 15, 2003. The statement is not
anticipated to have a significant effect on SinoFreshs financial position or
results of operations. In December 2003, the FASB issued FASB Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities. This interpretation clarifies
rules relating to consolidation where entities are controlled by means other
than a majority voting interest and instances in which equity investors do not
bear the residual economic risks. SinoFresh currently has no ownership in
variable interest entities and therefore adoption of this standard currently
has no financial reporting implications. Subsequent Events Attempted Removal of David Otto and Stephen Bannon as Directors Between January 30, 2004 and February 10, 2004, the Company received
written consents from shareholders whom the Company believed held a majority of
the outstanding voting stock, which written consents provided for the removal
of David Otto and Stephen Bannon as directors and officers of the Company. The
Company believed that such consents would be effective February 10, 2004, but
would be subject to the filing with the SEC of a definitive Information
Statement on Schedule 14C. The removal of Messrs. Bannon and Otto from the
Board was sought by Mr. Fust and certain other shareholders based on their
belief that Messrs. Bannon and Otto, although claiming to be independent, were
not actually independent  as discussed elsewhere in this report. The Company filed a preliminary Information Statement on Schedule 14C with
the SEC with a view toward filing and sending a definitive Information
Statement to shareholders of record once the SEC completed its review of the
Schedule 14C. The actions of the shareholders were challenged by Messrs. Otto
and Bannon and the Company was unable to expeditiously get final clearance for
the 14C Information Statement. During the week of March 22, 2004, after
discussion with the reviewing staff at the SEC, it was determined that, under
applicable SEC rules relating to Information Statements, the corporate action
(e.g., the effectiveness of the removal of the two directors) could not occur
until the 20th day after the mailing to shareholders of a definitive
information statement. Further, it was also discovered during that time that
there was a technical defect with the shareholders written consents in that
they were short sufficient votes to clearly constitute a majority of the issued
and outstanding voting stock. As a result, it was decided to retroactively
reinstate Messrs. Bannon and Otto to the board (until the next annual meeting
of shareholders, or their earlier removal or resignation). The Companys
management believes that the technical defect can easily be cured and Mr. Fust
intends to restart the written consent process removing Messrs. Otto and
Bannon. 17




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Board Actions since January 30, 2004. Under the assumption that Messrs. Otto and Bannon had been removed from
the Board of Directors, the remaining members of the board, Charles Fust,
Stacey Maloney-Fust and P. Robert DuPont, took certain actions at board
meetings and by written consent, which they believe were and are in the best
interests of the Company. At a board meeting of the five directors held on
March 29, 2004, attended telephonically by Messrs. Bannon, Otto, Fust and
DuPont and Ms. Maloney-Fust, the following prior actions of the board and/or
its officers were ratified by majority vote of Messrs. Fust and DuPont and Ms.
Maloney-Fust over the objections of Messrs Otto and Bannon:  
    
    termination of Salberg & Co. as the Companys auditors
and the engagement of Moore Stephens Lovelace, P.A. as the new
auditors, effective March 4, 2004;
    
    appointment of American Stock Transfer & Co. (New York,
NY), as the Companys new transfer agent (the former transfer
agent being Interwest Transfer Co., Inc. (Nevada);
    
    removal of Stephen Bannon and David Otto from any offices they held in the Company;
    
    appointment of Russell Lee as CFO and Secretary;
    
    declaring null and void the two contracts for
investment banking and consulting services with Sargon Capital,
Inc., an affiliate of Andrew Badolatos, a former board member
and officer of the predecessor company;
    
    the appointment of an executive committee of the
Companys board of directors, the formation of which is
authorized in the Companys bylaws and which committee has and
may exercise all of the power and authority of the Companys
board of directors, subject to the committee not performing
certain actions prohibited under Florida statutes; and the
appointment of Messrs. Fust and DuPont and Ms. Maloney-Fust as
the members of the executive committee;
    
    the appointment of Michael Gillette as the Companys
Director of Marketing effective January 5, 2004, and the granting
to Mr. Gillette of a 5-year option to purchase 50,000 shares of
common stock at an exercise price of $1.70 per share and vesting
ratably over three years;
    
    in consideration for marketing services rendered by One
Source Marketing, inc., the grant to Tim Kepler of a common stock
purchase warrant for 50,000 shares with an exercise price of
$4.00 per share, immediately exercisable and subject to piggyback
registration rights, and expiring on December 31, 2013. In addition, the following actions (that had been discussed and approved
by the five member board prior to January 30, 2004, but for which all board
members had not signed a written consent memorializing such resolutions), were
ratified by majority approval of the board, again over the objections of
Messrs. Bannon and Otto:  
    
    acceptance of the resignation of the former Controller
effective September 15, 2003, and his severance agreement and
package effective December 9, 2003;
    
    changing the title of Ms. Maloney-Fust from VP 
Business Development to Sr. Vice President;
    
    adoption of a policy regarding federal securities law
compliance (previously prepared by Mr. Ottos firm);
    
    acceptance of the resignation of the former CFO
effective January 2, 2004, and the appointment of Russell Lee as
the new CFO as of that date;
    
    ratification of the prior authorization given to the
former CFO to obtain director and officer liability insurance on
behalf of the Company;
    
    approval of the settlement and release agreement with
Chelmsford Group, Inc. effective December 16, 2003; In addition, at the March 29, 2004 board meeting, the following new
matters of business were acted upon by majority approval of the board, over the
objections of Messrs. Bannon and Otto:  
    
    an amendment to the bylaws to provide that only the
Chairman or the President of the Company may call meetings of the
board of directors (instead of meetings being called by the
Chairman, the President or any two directors); 18




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
    
    the appointment of the following persons to an audit
committee, a compensation committee and a nominating committee:
Charles Fust, P. Robert DuPont and Stacey Maloney-Fust. Committee Actions Since March 29, 2004 The compensation committee, comprised of Charles Fust, P. Robert DuPont
and Stacey Maloney-Fust, approved the grant to R. Russell Lee, the Companys
CFO, of an option for 200,000 shares of common stock at an exercise price of
$1.00 and vesting ratably over three years. The Company, in its employment
offer letter dated August 25, 2003, committed to issue to Mr. Lee an option for
200,000 shares of common stock (after giving effect to the merger), exercisable
at $1.00 per share (after giving effect to the merger). These options should
have been awarded to Mr. Lee by the Companys predecessor as of September 1,
2003, along with other options awarded as of that date. Mr. Lees options were
booked in 2003 since the Companys commitment to issue them arose in 2003. The compensation committee also approved the grant of additional options
for a total of 289,625 shares of common stock to 13 independent contractors and
P. Robert DuPont, an officer and director of the Company, (with Mr. DuPont
abstaining as to his option grant), pursuant to the prior commitments of the
Companys predecessors arising prior to the merger to issue options in
connection with services rendered to the Companys predecessors in the
development of the Companys product. The options have an exercise price of
$1.00 per share and vested immediately upon grant. Included in these options
is an option for 21,000 shares granted to P. Robert DuPont, an officer and
director of the Company. These options were booked in 2003 since the Companys
commitment to issue them arose in or before 2003. The Executive Committee also declared void an option for 890,000 shares of
common stock granted to SinoFresh Management, LLC, a company owned by Stephen
Bannon, a director of the Company, and Charles Fust, an officer and director of
the Company. At the time of the grant, not all board members were aware of the
interests of the two directors in that company, there were improper conflicts
of interest, lack of consideration, and there is a specific prohibition in the
Companys stock option plan against awarding options to non-employee directors. With respect to the granting of the above options and the voiding of the
option granted to SinoFresh Management, LLC, Messrs. Bannon and Otto dispute
the granting and voiding of those respective options and the Company
anticipates securing the further ratification of these acts by the board of
directors at its next meeting. The Executive Committee (including Mr. Fust) also ratified earlier actions
of the three-member board taken after January 30, 2004, deferring the
registration of certain percentages of restricted common stock held by certain
shareholders and common stock underlying the Companys outstanding preferred
stock. The Company has the right to defer such registration if such delay is
determined to be in the best interests of the Company. Messrs. Otto and Bannon have challenged the above board and committee
actions as being invalid, but the Company believes the same to be valid. 19




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Risk Factors The Company operates in a rapidly changing environment that involves
numerous risks, some of which are beyond the Companys control. The following
discussion highlights some of these risks. Risks Related to the Business The Company has incurred substantial losses and negative cash flow and has
a working capital deficit.The Company has incurred substantial losses since
inception, it has a working capital deficit as of December 31, 2003 and it has
incurred negative cash flow from operations. As a result, the Companys
auditors have qualified their report on the Companys financial statements with
respect to the Companys ability to continue as a going concern. The Companys
financial statements do not include any adjustments that might result from this
uncertainty. In order for the Company to sustain its operations and meet its
obligations on a timely basis, the Company is dependent upon its ability to
generate sufficient cash flow from operations or to obtain sufficient external
financing. There can be no assurance that any additional financing will be
available, or if available, that it will be on terms and conditions favorable
to the Company. The Companys operations could be adversely affected if it is
unable to generate sufficient cash or obtain additional financing. SinoFresh has a limited relevant operating history, its operating company
has a history of significant losses and SinoFresh may not become profitable.
The Company has historically had losses. The Companys needs for continued
expenditures for product research and development and marketing, among other
things, will make it difficult for SinoFresh to reduce its operating expenses
in order to deal with lack of sales growth or unanticipated reductions in
existing sales. The Companys failure to balance expenditures in any period
with sales could have an adverse effect on results of operations. The Company has no relevant operating history upon which an evaluation of
its prospects can be made. Such prospects must be considered in light of the
risks, expenses and difficulties frequently encountered in the establishment of
a new company and the development of new products in established and crowded
markets in a highly-competitive consumer industry, such as the U.S.
pharmaceutical industry, as well as the risks, expenses and difficulties
encountered in the shift from development to commercialization of new products.
There can be no assurance that SinoFresh will be able to implement
successfully its development, manufacturing, and marketing strategies, generate
meaningful revenues, or ever achieve profitable operations. The possibility of
the Companys future success must be considered relative to the problems,
challenges, complications and delays frequently encountered in connection with
the development and operation of a new business, and the development and
marketing of relatively new health care products such as the SinoFresh
products. SinoFresh will need significant additional financing to implement its
business plan.As of December 31, 2003, the Company had approximately
$368,000 in cash available for operations. However, the Company anticipates
that it will need additional financing, through debt or the issuance of
additional equity securities or a combination of both, to implement business
objectives such as marketing, research and development on new products,
conducting focus group studies for the oral product, and obtaining regulatory
approval for and commercializing the NDA products. There is no assurance that
the Company will succeed in obtaining additional financing or if additional
financing is available, that it will be on terms favorable to SinoFresh. The
Companys opportunities would be severely diminished in the event that
additional financing is not obtained in a timely manner. If the Company is
unable to obtain additional funding, the Company will have to thwart the
timeliness of certain planned developments in its business plan. The Company and certain of its management are involved in litigation
instituted by certain shareholders and two directors of the Company, which will
involve significant financial and personnel resources of the Company.On
February 20, 2004, a lawsuit was filed styled Hawkins, et al. vs. Charles Fust,
et al., and an amended complaint was filed on March 3, 2004 changing
allegations directed toward the location where the action may be heard and
noted that the Company is a Florida corporation. 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 the Company. The
complaint alleges, among other things, that Charles Fust used corporate funds
for his personal benefit and that he did 20




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not transfer patents to the Company and two related foreign entities
through common stock ownership. On March 4, 2004, the Company filed a motion
to dismiss the complaint citing numerous legal deficiencies in the amended
complaint and the failure to meet statutory procedure requirements. Although
management strongly believes that the allegations in the complaint are without
merit, if for whatever reason the motion to dismiss is not granted and the
legal proceeding continues, the continuing defense of the lawsuit will be
costly financially and will demand significant attention of management  all
of which could have an adverse effect on the Company and its operations. Two non-employee directors have raised other issues concerning legal
exposure to the Company. They believe that the Company may have exposure in
connection with the Companys decision to have the foreign patents transferred
to the Company instead of two foreign entities and to incur costs to maintain
and/or transfer the foreign patents; and, in connection with the Companys
decision to technically modify its original operating focus. Substantially all of the Companys assets, including U.S. patents, are
collateral for loans to the Company by third parties.The Company had
outstanding two convertible notes payable to unrelated parties with outstanding
principle balances owing of $189,225 and $73,025 as of December 31, 2003. The
notes are convertible into Series C preferred stock, contain anti-dilution
provisions and prohibit the Company from incurring other indebtedness in excess
of $1,000,000 until the notes are paid in full. The maturity date of the notes
is the earlier of June 30, 2004 or when the Company raises an amount in excess
of a specified threshold (at which time the notes must be paid in full). The
Company is in default with certain provisions of the loans and is in the
process of negotiating the final terms of paying the loans off with lenders.
There is no assurance that the Company will be able to successfully negotiate
the terms favorable to the Company and the lenders may elect to accelerate the
payment terms and may exercise their right against the Companys collateral,
including its U.S. patents, which would have materially adverse consequences to
the Company and its business. The Company may not be able to off-set all of its net operating loss
carry-forwards against future income. At December 31, 2003, net operating
losses available to be carried forward for federal income tax purposes are
approximately $4,300,000 expiring in various amounts through 2023. Utilization
of the Companys net operating losses may be subject to substantial annual
limitation due to the ownership change limitations provided by the Internal
Revenue Code and similar state provisions. Such annual limitation could result
in the expiration of the net operating loss before utilization, which would
subject the Company to have more tax liability than if it had been able to
off-set the net operating losses against income. The Companys ability to implement its business plan depends on the
Companys ability to attract and retain key personnel.The Companys future
success will depend to a significant extent on the continued services of the
current officers and other necessary personnel, particularly Mr. Fust, the
Chairman of the Board of Directors and CEO, and Mr. DuPont, the Vice President
of Research & Development, and a member of the Board of Directors. The loss of
either of these officers or directors would likely have a significantly
detrimental effect on SinoFreshs business. The Company has obtained key man
life insurance policies on the life of Mr. Fust in the amount of $925,000. SinoFreshs prospects will also depend on its ability to attract and
retain highly qualified sales, marketing, and managerial personnel.
Competition for such personnel is intense, and there can be no assurance that
the Company will be able to employ or retain such personnel. If the SinoFresh products do not gain widespread market acceptance,
anticipated sales and results of operations will suffer.Although studies
have indicated that the SinoFresh products can significantly reduce the
symptoms of sinusitis and upper respiratory distress, management cannot be
certain that the product will achieve widespread acceptance by the market. If
any unanticipated problem arises concerning the efficacy of SinoFresh Nasal &
Sinus Care or SinoFresh Oral & Throat Care or any of the other new products the
Company may bring to market, or if one or more of these products fails to
achieve widespread market acceptance for any other reason, the Companys
operating results and prospects would be materially adversely affected. 21




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Unanticipated problems associated with product development and
commercialization could adversely affect the Companys operating results.The
Companys successful development of existing and new products is subject to the
risks of failure and delay inherent in the development and commercialization of
products based on innovative technologies. These risks include the
possibilities that:  
    
    the Company may experience unanticipated or otherwise
negative research and development results;
    
    existing or proposed products may be found to be ineffective or unsafe,
or may otherwise fail to receive required regulatory clearances or
approvals;
    
    the Company may find that existing or proposed products, while
effective, are uneconomical to commercialize or market;
    
    existing or proposed products may not achieve broad market acceptance;
or
    
    proprietary rights held by third parties preclude the Company
from developing or marketing existing or proposed products. The Companys inability to develop and commercialize its existing products
or any new products on a timely basis and within the Companys financial
budgets could have a material adverse effect on operating results and future
prospects. The Companys inability to provide scientific proof for product claims may
adversely affect sales.The marketing of SinoFresh products involves claims
that these products kill the mold and bacteria that can cause sinusitis and
related sinus disorders. Under the FDA and Federal Trade Commission (FTC)
rules, the Company is required to obtain scientific data to support any health
claims the Company makes concerning these products. Although SinoFresh has
conducted independent clinical tests and provided scientific data to the FDA in
support of claims regarding these products, the Company may be required to
provide additional data in the future. In such an event, SinoFresh cannot be
certain that the scientific data the Company has obtained or will obtain in
support of its claims will be deemed acceptable to the FDA or FTC. If the FDA
or the FTC requests any supporting information, and the Company is unable to
provide support that is acceptable to the FDA or the FTC, either agency could
force the Company to stop making the claims in question or restrict SinoFresh
from selling the affected products. FDA and other government regulation may restrict the Companys ability to
sell its products.SinoFresh is subject to various federal, state and local
laws and regulations affecting its business. SinoFresh products are subject to
regulation by the FDA, including regulations with respect to labeling of
products, approval of ingredients in products, claims made regarding the
products, and disclosure of product ingredients. If the Company does not
comply with these regulations, the FDA could force the Company to stop selling
the affected products or require the Company to incur substantial costs in
adopting measures to maintain compliance with these regulations. SinoFreshs
advertising claims regarding its products are subject to the jurisdiction of
the FTC as well as the FDA. In both cases the Company is required to obtain
scientific data to support any advertising or labeling health claims the
Company makes concerning its products. If SinoFresh is unable to provide the
required support for such claims, the FTC may stop the Company from making such
claims or require the Company to stop selling the affected products. SinoFresh may fail to compete effectively, particularly against larger,
more established pharmaceutical and health products companies, causing its
business and operating results to suffer.The consumer health products
industry is highly competitive. SinoFresh competes with companies in the
United States and abroad that are engaged in the development of both
traditional and innovative health care products, including sinus products.
Many of these companies have much greater financial and technical resources and
production and marketing capabilities than the Company does. As well, many of
these companies have already achieved significant product acceptance and brand
recognition with respect to products that compete directly with the SinoFresh
products. The Companys competitors may successfully develop and market
superior or less expensive products, which could render the current SinoFresh
product, and other future products less valuable or unmarketable. 22




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If the Company is unable to protect its intellectual property or if the
Company infringes the intellectual property of others, its financial condition
and future prospects could be materially harmed.SinoFresh relies
significantly on the protections afforded by patent and trademark registrations
that the Company routinely seeks from the U.S. Patent and Trademark Office
(USPTO) and from similar agencies in foreign countries. The Company cannot be
certain that any patent or trademark application that is filed will be approved
by the USPTO or other foreign agencies. In addition, SinoFresh cannot be
certain that it will be able to successfully defend any trademark, trade name
or patent that it holds against claims from, or use by, competitors or other
third parties. No consistent policy has emerged from the USPTO or the courts
regarding the breadth of claims allowed or the degree of protection afforded
under biotechnology and similar patents. The Companys future success will
depend on its ability to prevent others from infringing on its proprietary
rights, as well as its ability to operate without infringing upon the
proprietary rights of others. SinoFresh may be required at times to take
legal action to protect its proprietary rights and, despite the Companys best
efforts, it may be sued for infringing on the patent rights of others. Patent
litigation is costly and, even if the Company prevails, the cost of such
litigation could adversely affect the Companys financial condition. If
SinoFresh does not prevail, in addition to any damages the Company might have
to pay, the Company could be required to stop the infringing activity or obtain
a license. SinoFresh cannot be certain that any required license would be
available to the Company on acceptable terms, or at all. If SinoFresh fails to
obtain a license, its business might be materially adversely affected. In
addition to seeking patent protection, the Company relies upon a combination of
non-disclosure agreements, other contractual restrictions and trade secrecy
laws to protect proprietary information. There can be no assurance that these
steps will be adequate to prevent misappropriation of the Companys proprietary
information or that the Companys competitors will not independently develop
technology or trade secrets that compete with its proprietary information. The Company may incur significant costs resulting from product liability
claims.SinoFresh would be subject to significant liability should use or
consumption of the Companys products cause injury, illness or death. Although
SinoFresh carries product liability insurance, there can be no assurance that
its insurance will be adequate to protect the Company against product liability
claims or that insurance coverage will continue to be available on reasonable
terms. A product liability claim, even one without merit or for which the
Company has substantial coverage, could result in significant legal defense
costs, thereby increasing the Companys expenses and lowering earnings. Such a
claim, whether or not proven to be valid, could have a material adverse effect
on product branding and goodwill, resulting in reduced market acceptance of the
Companys product. This in turn could materially adversely affect the
Companys results of operations and financial condition. SinoFresh does not have manufacturing capabilities of its own.The
Company currently does not have the physical or human resources to
independently manufacture its SinoFresh product or any other products that the
Company may develop. SinoFresh currently outsources all of its product
manufacturing and packaging operations and intends to continue this outsourcing
for the foreseeable future. If the Company is unable to enter into suitable
arrangements for manufacturing of its SinoFresh product or any other products,
or if the Companys third party contractors fail to adequately perform their
manufacturing operations, SinoFreshs sales and related financial results could
be materially adversely affected. If, in the future, the Company decides to
establish its own manufacturing facilities, the Company will require
substantial additional funds and significant additional personnel to undertake
such operations. SinoFresh cannot be certain that such funding or a
sufficient number of such qualified persons will be available. Return of a significant amount of product could harm the Companys
business.SinoFreshs product has a thirty (30) day, unconditional, money
back guarantee. Any consumer, who is not satisfied with a Company product
within this time period for any reason, or no reason at all, may return it or
any unused portion for a full refund. Most large retail chains have their own
established policies for product returns and SinoFresh intends to fully comply
with these policies as well. Management believes product returns will be less than one percent (1%),
but there can be no assurance that actual levels of returns will not
significantly exceed amounts anticipated by the Company. Should an adverse
reaction to any of the Companys products occur affecting a significant number
of customers, a product recall could occur which could materially impact the
Companys financial condition and its ability to successfully re-enter the
market following the recall. Additionally, although the Company will not
directly engage in the manufacture of any product it markets and sells, the
Company could be exposed to product liability claims. 23




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##### Table of Contents



SinoFresh may be required to indemnify its directors and officers.The
Company has authority under Section 607.0850 of the Florida Business
Corporation Act to indemnify its directors and officers to the extent provided
in such statute. The Articles of Incorporation provide for the Company to
indemnify each of its directors and officers against liabilities imposed upon
them (including reasonable amounts paid in settlement) and expenses incurred by
them in connection with any claim made against them or any action, suit or
proceeding to which they may be a party by reason of their being or having been
a director or officer of the Company. There can be no assurance that such
insurance will be available in the future, or that if available, it will be
available on terms that are acceptable to the Company. Furthermore, there can
be no assurance that the insurance coverage provided will be sufficient to
cover the amount of any judgment awarded against an officer or director (either
individually or in the aggregate). Consequently, if such judgment exceeds the
coverage under the policy, the Company may be forced to pay such difference.
SinoFreshs directors and officers liability insurance coverage have Limits
of Liability of $4,000,000 excess of the first $1,000,000 Limit of Liability. The Company intends to enter into indemnification agreements with each of
its officers and directors containing provisions that may require the Company,
among other things, to indemnify its officers and directors against certain
liabilities that may arise by reason of their status or service as officers or
directors (other than liabilities arising from willful misconduct of a culpable
nature) and to advance their expenses incurred as a result of any proceeding
against them as to which they could be indemnified. Management believes that
such indemnification provisions and agreements are necessary to attract and
retain qualified persons as directors and executive officers. The Company may have certain financial exposure if there was not an
exemption from registration for the issuance of securities in connection with
the merger.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 respect of the
acquisition of SinoFresh  Delaware in September 2003. The Company has been
unable to obtain from either former counsel to the Company or former counsel to
SinoFresh  Delaware (Mr. David Otto, a director of the Company), who were
counsel to the Company and SinoFresh  Delaware, 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 they
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.3 Risks Related to the Companys Common Stock The large number of shares eligible for immediate and future sales may
depress the price of the Companys stock.The Articles of Incorporation
authorize the issuance of 500,000,000, shares of common stock, no par value per
share, and 200,000,000 shares of preferred stock, no par value per share. The
Board of Directors has the authority to issue additional shares up to the
authorized amount stated in the Certificate of Incorporation. The Board of
Directors may choose to issue some or all of such shares to acquire one or more
businesses or other types of property, or to provide additional financing in
the future. The issuance of any such shares may result in a reduction of the
book value or market price of the outstanding shares of the Companys common
stock. If SinoFresh does issue any such additional shares, such issuance also
will cause a reduction in the proportionate ownership and voting power of all
other shareholders. Further, any such issuance may result in a change of
control of the corporation. Further, the Company has outstanding options and warrants for an aggregate
of 3,171,095 shares of common stock, which options and warrants bear exercise
prices ranging from $1.00 to $7.00 per share. In addition, substantially all
of the Companys outstanding restricted shares and stock underlying warrants
have certain registration rights. If those shares are registered for future
resale, or are sold subject to Rule 144 limitations, such   3
    
    Messers. Bannon and Otto requested that this risk factor be removed from
this report. 24




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##### Table of Contents



sales of substantial amounts of the Companys common stock in the open
market or the availability of a large number of additional shares for sale
could adversely affect the market price of the Companys common stock. The price of the Companys common stock may continue to be volatile.The
market price of SinoFresh common stock, which is quoted for trading on the
Over-the-Counter Bulletin Board, has been highly volatile and may continue to
be volatile in the future. Any or a combination of the following factors could
cause the market value of the Companys common stock to decline quickly:
operating results that differ from market expectations, negative or other
unanticipated results of clinical trials or other testing, delays in product
development, technological innovations or commercial product introductions by
the Companys competitors, changes in government regulations, developments
concerning proprietary rights, including pending or threatened patent
litigation, public concerns regarding the safety of any of the Companys
products and general economic and stock market conditions. Since the inception
of trading activities in September 2003 the stock market has experienced, and
it may continue to experience, significant price and volume fluctuations.
These fluctuations have particularly affected the market prices of equity
securities of many small capitalization companies that are not yet profitable
or that experience low or inconsistent earnings. Often, the effect on the
price of such securities is disproportionate to the operating performance of
such companies. In SinoFreshs case, such broad market fluctuations may
adversely affect your ability to dispose of your shares at a price equal to or
above the price at which you purchased such shares. The Company does not expect to pay dividends to its shareholders for the
foreseeable future.For the foreseeable future, the Company intends to retain
any earnings to finance the development and expansion of its business, and the
Company does not anticipate paying any cash dividends on its common stock. Any
future determination to pay dividends will be at the discretion of the Board of
Directors and will be dependent upon then existing conditions, including the
Companys financial condition and results of operations, capital requirements,
contractual restrictions, business prospects, and other factors that the Board
of Directors considers relevant. The Companys common stock may be subject to penny stock regulation, which
may make it difficult for investors to sell its common stock.The SEC has
adopted rules that regulate broker/dealer practices in connection with
transactions in penny stocks. Penny stocks generally are equity securities
with a price of less than $5.00 per share (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ Stock Market,
provided that current price and volume information with respect to transactions
in such securities is provided by the exchange system). The penny stock rules
require a broker/dealer, prior to completing a transaction in a penny stock not
otherwise exempt from the rules, to deliver a standardized risk disclosure
document prepared by the SEC that provides information about penny stocks and
the nature and level of risks in the penny stock market. The broker/dealer
also must provide the customer with bid and offer quotations for the penny
stock, the compensation of the broker/dealer and its salesperson in the
transaction, and monthly account statements showing the market value of each
penny stock held in the customers account. In addition, the penny stock rules
require that prior to a transaction in a penny stock not otherwise exempt from
such rules the broker/dealer must make a special written determination that a
penny stock is a suitable investment for the purchaser and receive the
purchasers written agreement to the transaction. SinoFresh common stock will
likely be subject to the penny stock rules. These disclosure requirements may
have the effect of reducing the level of trading activity in any secondary
market for the Companys common stock, and accordingly, holders of SinoFresh
common stock may find it difficult to sell their common stock, if they are able
to do so at all. The Companys preferred stock may cause dilution.The Articles of
Incorporation authorize the issuance of up to 200,000,000 shares of blank
check preferred stock with such rights and preferences as the Board of
Directors, without further shareholder approval, may determine from time to
time. Currently, the Company has 858,170 shares of outstanding Series A
preferred stock, 1,500,000 shares of outstanding Series B preferred stock, and
1,218,711 outstanding shares of Series C preferred stock. Except for Series A
preferred stock, which has conversion into common and voting rights with the
common on a one-for one basis, the Series B and Series C preferred stock are
convertible into common stock and have voting rights with the common stock on a
one for two basis. Furthermore, each share of Series A, Series B and Series C
preferred stock has a liquidation preference of $2.00 per share on an as
converted basis before any holders of common would be entitled to receive
payment for their shares or dividends upon a liquidation of the Company.
There remain 196,423,119 shares of authorized but undesignated and unissued
shares of preferred stock that may be sold in the future and that can, at the
discretion of the Board of Directors, be designated as another series of
preferred stock with dividend and liquidation preferences that are senior, and
not available, to the holders of the Companys common stock. Thus, holders of
SinoFresh 25




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common stock could realize less than the amount of dividends and/or
distributions to which they would otherwise be entitled. [Remainder of Page Intentionally Left Blank] 26




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ITEM 7. FINANCIAL STATEMENTS REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS Board of Directors
SinoFresh HealthCare, Inc.
Englewood, Florida We have audited the accompanying consolidated balance sheet of SinoFresh
HealthCare, Inc. as of December 31, 2003 and the related consolidated
statements of operations, changes in stockholders equity and cash flow for the
year then ended. These consolidated financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of SinoFresh
HealthCare, Inc. at December 31, 2003, and the results of its consolidated
operations and its cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America. The accompanying consolidated financial statements have been prepared assuming
the Company will continue as a going concern. As discussed in Note 1, the
Company has incurred substantial losses since its inception, has a working
capital deficiency at December 31, 2003, and has incurred negative cash flow
from operations. These factors, among others, raise substantial doubt about
its ability to continue as a going concern. Managements plans related to
these matters are also described in Note 1. The financial statements do not
include any adjustments that might result from the outcome of this uncertainty. /s/ Moore Stephens Lovelace, P.A.
Certified Public Accountants
Orlando, Florida
March 29, 2004, except for
Notes 1, 8, 9 and 10 as to which the
Date is April 12, 2004 27




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##### Table of Contents



Independent Auditors Report  To
    the Shareholders and Board of Directors of:
SinoFresh Healthcare, Inc.: We have audited the accompanying balance sheet of SinoFresh Healthcare, Inc. as
of December 31, 2002, and the related statement of operations, changes in
stockholders equity and cash flows for the period from October 15, 2002 (date
of inception) to December 31, 2002. These financial statements are the
responsibility of the Companys management. Our responsibility is to express
an opinion on these financial statements based on our audit. We conducted our audit in accordance with auditing standards generally accepted
in the United States of America. Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on
a test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used
and significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly in
all material respects, the financial position of SinoFresh Healthcare, Inc. as
of December 31, 2002, and the results of its operations and its cash flows for
the period from October 15, 2002 (date of inception) to December 31, 2002, in
conformity with accounting principles generally accepted in the United States
of America. /s/ SALBERG & COMPANY, P.A.
Boca Raton, Florida
October 17, 2003 28




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##### Table of Contents



SINOFRESH HEALTHCARE, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS December 31,
    
    December 31,2003
    
    2002CURRENT ASSETS:Cash and cash equivalents
    
    $
    368,394
    
    
    $
    245,685Accounts receivable, net of allowances of $15,000 ($1,000 in 2002)
    
    
    645,969
    
    
    
    18,144Inventory
    
    
    172,007
    
    
    
    93,645Other current assets
    
    
    174,283
    
    
    
    11,935TOTAL CURRENT ASSETS
    
    
    1,360,653
    
    
    
    369,409FURNITURE AND EQUIPMENT, NET
    
    
    138,191
    
    
    
    25,875PATENTS, NET
    
    
    2,750,010
    
    
    
    2,985,300GOODWILL
    
    
    2,409,401
    
    
    
    2,336,796OTHER ASSETS
    
    
    7,218
    
    
    
    20,675TOTAL ASSETS
    
    $
    6,665,473
    
    
    $
    5,738,055LIABILITIES AND STOCKHOLDERS EQUITYCURRENT LIABILITIESCurrent portion of notes payable and capital leases
    
    $
    584,826
    
    
    $
    443,367Accounts payable, including $102,866 due to related parties (none in 2002)
    
    
    693,258
    
    
    
    233,120Accrued expenses, including $245,889 due to related parties (none in 2002)
    
    
    679,124
    
    
    
    249,570Deferred revenue
    
    
    
    
    
    
    17,678TOTAL CURRENT LIABILITIES
    
    
    1,957,208
    
    
    
    943,735NOTES PAYABLE, NET OF CURRENT MATURITIES
    
    
    
    
    
    
    75,000CAPITAL LEASES, NET OF CURRENT MATURITIES
    
    
    83,851
    
    
    
    3,977TOTAL LIABILITIES
    
    
    2,041,059
    
    
    
    1,022,712COMMITMENTS AND CONTINGENCIESSTOCKHOLDERS EQUITY:Common stock, no par value; 500,000,000 shares authorized; 10,280,083
shares issued and outstanding and 3,021,740 shares issuable at December
31, 2003; 4,000,000 shares issued and outstanding and 6,768,490 shares
issuable at December 31, 2002
    
    
    2,251,991
    
    
    
    2,154Series A convertible preferred stock, voting; 858,170 shares authorized;
858,170 and 808,170 shares issued and outstanding at December 31,
2003 and 2002, respectively (aggregate liquidation value of $1,716,340
at December 31, 2003)
    
    
    1,716,339
    
    
    
    1,616,339Series B convertible preferred stock, voting; 1,500,000 shares
authorized, issued and outstanding (aggregate liquidation value of
$3,000,000 at December 31, 2003)
    
    
    3,000,000
    
    
    
    3,000,000Series C convertible preferred stock, voting; 1,250,000 shares
authorized; 1,218,711 and 337,500 shares issued and outstanding at
December 31, 2003 and 2002, respectively (aggregate liquidation value of
$2,437,422 at December 31, 2003)
    
    
    2,189,261
    
    
    
    608,712Accumulated deficit
    
    
    (4,281,177
    )
    
    
    (511,862
    )Warrant subscriptions receivable
    
    
    (252,000
    )
    
    
    TOTAL STOCKHOLDERS EQUITY
    
    
    4,624,414
    
    
    
    4,715,343TOTAL LIABILITIES AND STOCKHOLDERS EQUITY
    
    $
    6,665,473
    
    
    $
    5,738,055
 See notes to consolidated financial statements. 29




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##### Table of Contents



SINOFRESH HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS October 15, 2002 (DateYear Ended
    
    of inception) toDecember 31, 2003
    
    December 31, 2002Revenue, net
    
    $
    1,830,195
    
    
    $
    27,001Cost of revenue
    
    
    607,766
    
    
    
    3,671GROSS PROFIT
    
    
    1,222,429
    
    
    
    23,330OPERATING EXPENSESSalaries and other compensation expenses
    
    
    852,312
    
    
    
    72,102Professional fees
    
    
    1,869,103
    
    
    
    220,183Other general and administrative expenses
    
    
    560,657
    
    
    
    62,038Marketing and advertising expenses
    
    
    1,196,939
    
    
    
    119,000Research and development expenses
    
    
    184,772
    
    
    
    38,961Depreciation and amortization
    
    
    250,834
    
    
    
    15,825TOTAL OPERATING EXPENSES
    
    
    4,914,617
    
    
    
    528,109LOSS FROM OPERATIONS
    
    
    (3,692,188
    )
    
    
    (504,779
    )OTHER EXPENSES/INCOMEInterest expense
    
    
    (85,185
    )
    
    
    (7,040
    )Other income, net
    
    
    8,058
    
    
    
    (43
    )TOTAL OTHER EXPENSE
    
    
    (77,127
    )
    
    
    (7,083
    )NET LOSS
    
    $
    (3,769,315
    )
    
    $
    (511,862
    )NET LOSS PER COMMON SHARE-Basic and diluted
    
    $
    (0.33
    )
    
    $
    (0.10
    )WEIGHTED AVERAGE COMMON SHARES OUTSTANDING-Basic and diluted
    
    
    11,547,120
    
    
    
    5,318,537
 See notes to consolidated financial statements. 30




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SINOFRESH HEALTHCARE,
INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY(Continued)  Preferred StockCommon Stock
    
    Series A
    
    Series B
    
    Series CNumber
    
    
    
    
    
    Number
    
    
    
    
    
    Number
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totalof
    
    
    
    
    
    of
    
    
    
    
    
    of
    
    
    
    
    
    of
    
    
    
    
    
    Subscriptions
    
    Accumulated
    
    Stockholders'Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Receivable
    
    Deficit
    
    EquityCommon stock issued to
founder
    
    
    4,000,000
    
    
    $
    800
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    800Common stock issued as
settlement
    
    
    768,490
    
    
    
    154
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    154Series A preferred stock
issued pursuant to
purchase agreement
    
    
    
    
    
    
    
    
    
    
    808,170
    
    
    $
    1,616,339
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,616,339Series B preferred stock
issued for patents
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,500,000
    
    
    $
    3,000,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,000,000Series C preferred stock
issued under private
placement offering, net
of $66,288 offering costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    337,500
    
    
    $
    608,712
    
    
    
    
    
    
    
    
    
    
    
    608,712Common stock issuable as
compensation
    
    
    6,000,000
    
    
    
    1,200
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,200Net loss, October 15,
2002 (inception) to
December 31, 2002
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (511,862
    )
    
    
    (511,862
    )Balance at December 31,
2002
    
    
    10,768,490
    
    
    
    2,154
    
    
    
    808,170
    
    
    
    1,616,339
    
    
    
    1,500,000
    
    
    
    3,000,000
    
    
    
    337,500
    
    
    
    608,712
    
    
    
    
    
    
    
    (511,862
    )
    
    
    4,715,343Effect reverse merger
    
    
    2,483,333
    
    
    
    (3,238
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,238
    )Stock issued as settlement
    
    
    
    
    
    
    
    
    
    
    50,000
    
    
    
    100,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    100,000 31




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SINOFRESH HEALTHCARE,
INC.CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS
EQUITY  Preferred StockCommon Stock
    
    Series A
    
    Series B
    
    Series CNumber
    
    
    
    
    
    Number
    
    
    
    
    
    Number
    
    
    
    
    
    Number
    
    
    
    
    
    
    
    
    
    
    
    
    
    Totalof
    
    
    
    
    
    of
    
    
    
    
    
    of
    
    
    
    
    
    of
    
    
    
    
    
    Subscriptions
    
    Accumulated
    
    Stockholders'Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Shares
    
    Amount
    
    Receivable
    
    Deficit
    
    EquitySeries C preferred stock
issued under private
placement offering, net
of $181,873 offering
costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    881,211
    
    
    
    1,580,549
    
    
    
    
    
    
    
    
    
    
    
    1,580,549Common stock issued to
consultant
    
    
    50,000
    
    
    
    123,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    123,000Issuance of options and
warrants to consultants
    
    
    
    
    
    
    706,125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    706,125Proceeds from sales of
warrants, net of $176,050
costs
    
    
    
    
    
    
    1,423,950
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    (652,000
    )
    
    
    
    
    
    
    771,950Payments received on
subscriptions
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    400,000
    
    
    
    
    
    
    
    400,000Net loss, year ended
December 31, 2003
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,769,315
    )
    
    
    (3,769,315
    )Balance at December 31,
2003
    
    
    13,301,823
    
    
    $
    2,251,991
    
    
    
    858,170
    
    
    $
    1,716,339
    
    
    
    1,500,000
    
    
    $
    3,000,000
    
    
    
    1,218,711
    
    
    $
    2,189,261
    
    
    $
    (252,000
    )
    
    $
    (4,281,177
    )
    
    $
    4,624,414 See notes to consolidated financial statements. 32




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SINOFRESH HEALTHCARE, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS October 15, 2002Year Ended
    
    (Date of inception)December 31,
    
    to December 31,2003
    
    2002CASH FLOWS FROM OPERATING ACTIVITIES:Net loss
    
    $
    (3,769,315
    )
    
    $
    (511,862
    )Adjustments to reconcile net loss to net cash
used in operations:Stock options and warrants issued for services
    
    
    706,125
    
    
    
    Amortization and depreciation
    
    
    250,834
    
    
    
    15,825Stock issued as settlement cost and to consultant
    
    
    223,000
    
    
    
    154Bad debt expense
    
    
    17,081
    
    
    
    Provision for affiliate uncollectibles
    
    
    
    
    
    
    71,703Other
    
    
    (3,238
    )
    
    
    Changes in assets and liabilities net of effects from acquisition:Accounts receivable
    
    
    (644,906
    )
    
    
    (5,453
    )Inventory
    
    
    (78,362
    )
    
    
    (50,339
    )Other current assets
    
    
    (162,348
    )
    
    
    (5,752
    )Other assets
    
    
    13,457
    
    
    
    (10,001
    )Accounts payable
    
    
    460,138
    
    
    
    198,568Accrued expenses
    
    
    279,876
    
    
    
    116,790NET CASH USED IN OPERATING ACTIVITIES
    
    
    (2,707,658
    )
    
    
    (180,367
    )INVESTING ACTIVITIES:Acquisition of SinoFresh Laboratories, Inc., net of cash
    
    
    (72,605
    )
    
    
    (55,240
    )Advance to affiliates
    
    
    
    
    
    
    (71,703
    )Payments for purchases of property and equipment
    
    
    (35,073
    )
    
    
    NET CASH USED IN INVESTING ACTIVITIES
    
    
    (107,678
    )
    
    
    (126,943
    )FINANCING ACTIVITIES:Net proceeds from issuance of stock and warrants
    
    
    2,484,499
    
    
    
    560,710Payments received on subscriptions receivable
    
    
    400,000
    
    
    
    Proceeds from long-term debt
    
    
    300,000
    
    
    
    Payments on long-term debt and capital leases
    
    
    (246,454
    )
    
    
    (7,715
    )NET CASH PROVIDED BY FINANCING ACTIVITIES
    
    
    2,938,045
    
    
    
    552,995NET INCREASE IN CASH AND CASH EQUIVALENTS
    
    
    122,709
    
    
    
    245,685CASH AND CASH EQUIVALENTS  beginning of period
    
    
    245,685
    
    
    
    CASH AND CASH EQUIVALENTS  end of period
    
    $
    368,394
    
    
    $
    245,685SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the period for interest
    
    $
    141,685
    
    
    $
    Debt settled for capital stock
    
    $
    
    
    
    $
    50,000Net assets acquired
    
    $
    
    
    
    $
    4,616,339
 See notes to consolidated financial statements. 33




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SINOFRESH HEALTHCARE, INC.
Notes to Consolidated Financial Statements
For the year ended December 31, 2003 and for the period October 15, 2002 (date of inception) through December 31, 2002 NOTE 1: Nature of Business and Summary of Significant Accounting Policies ORGANIZATION: The Companys predecessor, SinoFresh HealthCare, Inc.
(SinoFresh  Delaware) was incorporated in the state of Delaware on October 15,
2002. In November 2002 SinoFresh  Delaware entered into an asset purchase
agreement (the Asset Purchase Agreement) whereby it received certain assets
and liabilities of SinoFresh Laboratories, Inc. effective at the close of
business on November 15, 2002 in exchange for 808,170 shares of its Series A
preferred stock (see notes 2 and 8). On September 8, 2003, (the Merger Date) SinoFresh   Delaware; SinoFresh
Acquisition Corp. (Acquisition), SinoFresh Corp., formerly known as e-Book
Network, Inc., a Florida corporation, and the sole director and majority
shareholder of SinoFresh Corp. entered into a Merger Agreement. In addition,
SinoFresh Corp. changed its name to SinoFresh HealthCare, Inc. (SinoFresh 
Florida or SinoFresh or Company) and amended its Articles of Incorporation
authorizing the issuance of up to 700,000,000 shares of no par value capital
stock, consisting of 500,000,000 shares of common stock and 200,000,000 shares
of preferred stock. The amended Articles also designated 858,170 shares of the
preferred stock as Series A preferred stock with each share convertible into
one common share and possessing one vote. In addition, 1,500,000 shares of the
preferred stock were designated as Series B preferred stock with each share
convertible into two shares of common stock and possessing two votes. Another
1,250,000 shares of preferred stock was designated as Series C preferred stock
with each share convertible into two shares of common stock and possessing two
votes. Under the Merger Agreement, SinoFresh Corp. acquired all of the
outstanding capital stock of SinoFresh  Delaware consisting of 21,536,980
shares of common stock, 1,716,399 shares of Series A preferred stock; 6,000,000
shares of Series B preferred stock and 4,874,843 shares of Series C preferred
stock in exchange for 10,768,490 shares of SinoFresh Corp. common stock,
858,170 shares of SinoFresh Corp. Series A preferred stock; 1,500,000 shares of
SinoFresh Corp. Series B preferred stock and 1,218,711 shares of SinoFresh
Corp. Series C preferred stock. In connection with the Merger Agreement, the
sole director and majority shareholder of SinoFresh Corp. agreed to tender
19,616,667 shares in SinoFresh Corp. back to SinoFresh Corp. for cancellation.
In addition, SinoFresh  Delaware was to exchange options to purchase 3,000,000
common shares, warrants to purchase 900,000 common shares for $1.00 per share,
warrants to purchase 1,350,000 common shares for $5.00 per share and warrants
to purchase 100,000 common shares for $7.00 per share for SinoFresh Corp.
options to purchase 1,500,000 common shares, warrants to purchase 450,000
common shares for $1.00 per share, warrants to purchase 1,350,000 common shares
for $5.00 per share and warrants to purchase 100,000 common shares for $7.00
per share. Prior to the issuance of the options for 3,000,000 common shares, the
Company amended the grant list. The number of options granted under the
amended grant before the merger was 2,199,250, which amounted to 1,099,625 post
merger. In addition, the number of warrants exchanged at $5.00 per share was
ultimately 1,383,970. Subsequent to the merger, Acquisition, which changed its name to SinoFresh
Corporation, remains the operating subsidiary of the Company. The shareholders
of SinoFresh  Delaware obtained approximately 81% of the common stock and
additional voting control by virtue of the voting rights of the preferred
stock, providing a total voting interest of 91%. Since the shareholders of
SinoFresh  Delaware also obtained management control, the merger transaction
was treated as a recapitalization of the Company, with SinoFresh  Delaware as
the acquirer for financial accounting purposes. Accordingly the shareholders of
SinoFresh Corp. were deemed to be issued approximately 2,483,000 common shares. The financial information presented herein for the period prior to the
Merger Date is that of SinoFresh  Delaware, and as such, the date of inception
presented is that of SinoFresh  Delaware. The amended Articles of Incorporation stipulate that the Company will
register approximately 3,122,000 shares of common stock with the Securities and
Exchange Commission (SEC). Series A and Series C preferred 34




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shareholders will have the right to register 70% of their common shares
obtained upon conversion. Also holders of Series B preferred stock and holders
of common stock have registration rights for a nominal percentage of their
holdings. The Company may defer these registration rights if it is determined
that such registration is not in the best interests of the Company at the time,
which the Company has elected to do. All share and per share data in the accompanying consolidated financial
statements have been retroactively changed to reflect this transaction. NATURE OF BUSINESS: The Company is engaged in the research, development,
and marketing of proprietary products for the prevention and treatment of
sinusitis and related disorders. SinoFresh Nasal and Sinus Care and
SinoFresh Oral and Throat Care are products which were being distributed by
the Company in a limited geographical area in Florida until May 2003 at which
time the Company entered into a master broker agreement with a national company
to obtain national distribution of its nasal products through various national
drugstores and grocery store chains. As of December 31, 2003 the Company has
distribution agreements, which enable it to place its product in 17,000 retail
locations across the country. The Companys business is subject to various risks and uncertainties and
the Companys ability to continue as a going concern is dependant on its
ability to market and distribute its products and utilize the technology
underlying its patents. While the Company has a working capital deficit at
December 31, 2003 of approximately $597,000, incurred a net loss of
approximately $3,769,000 and has consumed approximately $2,708,000 of cash in
operations for the year then ended, management believes that these risks are
mitigated by the growth in revenues, recent capital funding and possible future
capital funding and/or borrowings. The rate of the Companys future growth and
success will be dependant on its ability to generate the necessary resources
through product sales and/or through borrowings or equity sales. The
accompanying statements do not include any adjustments that might be necessary
if the Company is unable to generate these revenues and implement its business
plan. ACCOUNTING ESTIMATES: 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 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. CONCENTRATION OF RISK: Financial instruments that potentially subject the
Company to significant concentrations of credit risk consist primarily of cash
and cash equivalents and accounts receivable. The Companys investment policy
is to invest in low risk, highly liquid investments. At December 31, 2003,
seventy six percent (76%) of net accounts receivable were due from four
customers. Additionally, approximately fifty three percent (53%) of the
Companys revenues during 2003 were derived from two customers. In addition, the Companys business is dependent on its ability to utilize
the underlying patents and a third party manufacturer provides all of the
Companys manufacturing capacity. CASH AND CASH EQUIVALENTS: The Company considers all highly liquid
investments with maturity of three months or less when purchased to be cash
equivalents. FAIR VALUE OF FINANCIAL INSTRUMENTS: All financial instruments are carried
at amounts that approximate fair value. ACCOUNTS RECEIVABLE AND ALLOWANCE FOR DOUBTFUL ACCOUNTS: Accounts
receivable result from the sale of the Companys products at sales prices, net
of estimated sales returns and other allowances. The Company estimates an
allowance for doubtful accounts based on a specific identification basis and
additional allowances based on historical collections experience. 35




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INVENTORIES: Inventories are valued at the lower of cost (determined on a
first-in, first-out basis) or market and are evaluated for product obsolescence
on a periodic basis (see note 3). PROPERTY AND EQUIPMENT: Property and equipment are stated at cost.
Equipment is depreciated using the straight-line method over five to seven
years (see note 5). PATENTS: Patents are stated at cost and are amortized over thirteen years
(the approximate life of the patents on the date of purchase) using the
straight-line method. GOODWILL: The Companys goodwill was established as a result of the asset
acquisition (see note 2). Goodwill is carried at lower of cost or market and is
subject to annual impairment evaluation, or interim impairment evaluation if an
interim triggering event occurs which indicates that the carrying amount of
goodwill may not be recoverable. LONG-LIVED ASSETS: The Company reviews long-lived assets, including
intangible assets, 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 is measured by comparison of its carrying
amount to the undiscounted cash flows that the asset or asset group is expected
to generate. If such assets are considered to be impaired, the impairment to be
recognized is measured by the amount by which the carrying amount of the
property, if any, exceeds its fair market value. The Company completed its
transitional impairment test of existing goodwill and patents as of December
31, 2003. This test was preformed by an independent valuation specialist and
involved the use of estimates related to the fair value of the patents as well
as the business in which the goodwill had been allocated. There were no
impairment losses as a result of this test. REVENUE RECOGNITION: In general, revenue from sales is recognized at the
time products are shipped less estimated sales returns, certain vendor
cooperative promotional costs and other allowances. Occasionally, new customers require the Company to initially ship product
on a consignment basis. Those verbal arrangements generally expire in one year
or less depending on the product sell through attained by the new customers.
Consignment sales are not recognized until the customer sells the product. RESEARCH AND DEVELOPMENT COSTS: SinoFreshs policy is to expense all
research and development expenses as incurred. Research and development
expenses during the year ended December 31, 2003 and from October 15, 2002
(date of inception) to December 31, 2002 totaled approximately $185,000 and
$39,000, respectively. Substantial research and development costs are
anticipated for the development of line extensions to the SinoFresh Nasal &
Sinus Care product, including potential unrelated new products in the health
care industry, in general, and in the respiratory and infectious disease
category, in particular. New product development will be supported by clinical
studies to ensure the safety and efficaciousness of the Companys products, as
well as for line extension derivatives of current and future products.
Additionally, extensive clinical and developmental testing is anticipated in
connection with the Companys development of new over-the-counter (OTC) and
ethical drug products related to the treatment of chronic sinusitis and other
indications in the ear, nose and throat field. In addition, the Company
performs extensive research and development aimed at increasing the number of
on-label claims it may include on its OTC product and further documenting the
efficacy of these products. SALES INCENTIVES AND CONSIDERATION PAID TO RETAILERS: The Company accounts
for certain promotional costs such as sales incentives, promotional funds,
cooperative advertising and consumer coupon redemptions as a reduction of net
sales. For the year ended December 31, 2003, the Company had recorded
approximately $350,000 as a reduction of revenue related to these costs. SHIPPING AND HANDLING COSTS: Shipping and handling costs are classified as
a cost of sales and those billed to customers are recorded as revenue on the
consolidated statements of operations. 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 36




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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 (see note 8). 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. Expenses recognized for such issuances were approximately $706,000
for the year ending December 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. 2003
    
    2002Net loss, as reported
    
    $
    (3,769,315
    )
    
    $
    (511,862
    )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
    
    
    (415,500
    )
    
    
    Unaudited pro forma net loss, as if the fair
value method had been applied to all awards
    
    $
    (4,184,815
    )
    
    $
    (511,862
    )Net loss per common share, as reported
    
    $
    (0.33
    )
    
    $
    (0.10
    )Unaudited pro forma net loss per common
share, as if the fair value method had been
applied to all awards
    
    $
    (0.36
    )
    
    $
    (0.10
    )
 INCOME TAXES: Deferred tax assets and liabilities and the resultant
provision for income taxes are determined based on the difference between the
financial statements and tax basis of assets and liabilities using enacted tax
rates in effect for the year in which the differences are expected to reverse.
Deferred tax assets are recognized when management determines that it is more
likely than not that the asset will be realized (see note 11). NET INCOME (LOSS) PER SHARE: Basic net income (loss) per share and diluted
net income (loss) per share have been computed based upon the weighted average
number of common shares outstanding during the year. Assumed common stock
equivalents were excluded from the net loss per share computations, as their
effect is anti-dilutive. Common stock equivalents could potentially dilute
basic earnings per share in future periods if the Company generates net income.
At December 31, 2003 and 2002, there were 2,071,470 and 50,000 warrants issued,
respectively to purchase common stock. At December 31 2003 there were
1,099,625 options issued to purchase common stock. At December 31, 2003 and
2002 there were 3,576,881 and 2,645,670 preferred shares, respectively
convertible to 6,295,592 and 4,483,170 common shares which may dilute future
EPS. PRINCIPLES OF CONSOLIDATION: The consolidated financial statements
include the accounts of the Company and its wholly owned operating subsidiary,
SinoFresh Corporation. All inter-company balances and transactions have been
eliminated in consolidation. RECLASSIFICATIONS: Certain amounts in the 2002 financial statements have
been reclassified to conform to the 2003 presentation. Recent Accounting Pronouncements In April 2003, the Financial Accounting Standards Board (FASB) issued SFAS
No. 149, Amendment of Statement 133 on Derivative Instruments and Hedging
Activities. The statement amends and clarifies accounting and reporting for
derivative instruments, including certain derivative instruments embedded in
other contracts, and hedging activities. This statement is designed to improve
financial reporting such that contracts with comparable characteristics are
accounted for similarly. The statement, which is generally effective for
contracts entered into or modified after June 30, 2003, is not anticipated to
have a significant effect on SinoFreshs financial position or results of
operations. In May 2003, the FASB issued SFAS No. 150, Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity.
This statement establishes standards for how an issuer classifies and 37




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measures certain financial instruments with characteristics of both
liabilities and equity. This statement is effective for financial instruments
entered into or modified after May 31, 2003, and is otherwise effective at the
beginning of the first interim period beginning after June 15, 2003. The
statement is not anticipated to have a significant effect on SinoFreshs
financial position or results of operations. In December 2003, the FASB issued FASB Interpretation No. 46 (Revised),
Consolidation of Variable Interest Entities. This interpretation clarifies
rules relating to consolidation where entities are controlled by means other
than a majority voting interest and instances in which equity investors do not
bear the residual economic risks. SinoFresh currently has no ownership in
variable interest entities and therefore adoption of this standard currently
has no financial reporting implications. NOTE 2: Asset and Business Acquisition On November 16, 2002 (Acquisition Date) SinoFresh  Delaware acquired the
business and substantially all of the assets of SinoFresh Laboratories, Inc.
(the Seller) and assumed certain liabilities in exchange for 808,170 shares of
Series A preferred stock valued at $2.00 per share based on
SinoFresh 
Delawares most recent private placements of preferred stock. During the year
ended December 31, 2003, additional acquisition costs related to legal expenses
of approximately $73,000 were capitalized to goodwill. At the Acquisition
Date, SinoFresh Laboratories, Inc. was a research and development company
engaged in the development of sinus related products for the health and beauty
aid market. Over the prior two years, SinoFresh Laboratories, Inc. had
developed a test market for its two main products, SinoFresh Nasal & Sinus
Care and SinoFresh Oral and Throat Care. At the time of the acquisition,
SinoFresh Laboratories, Inc. operated a single 10,000 square foot facility in
Venice, Florida and was controlled by its lender under a note agreement. As of the Acquisition Date, the Seller was in default of certain notes
and, as a result, the note holder was in control of the Seller. In order to
induce the note holder to approve the acquisition of the Sellers net assets,
the Company issued 768,490 shares of its common stock to the note holder under
a Stock Purchase Agreement. Under a Registration Rights Agreement, the Company
offered the note holder the right to piggyback registration of those shares on
any registration of shares with the SEC initiated by the Company. In addition,
the note holder has the right to demand, six months after an initial public
offering of the Companys shares, the registration of some or all of the note
holders common shares with the SEC. In connection with the acquisition in November 2002, the Company entered
into an agreement with the founder of SinoFresh Laboratories, Inc., whereby,
the Company was assigned the three U.S. patents covering the formulations for
solutions related to freshening the nose and throat with an antiseptic spray in
exchange for 1,500,000 shares of Series B preferred stock valued at $2.00 per
share. The aggregate $3,000,000 fair value of the intangible assets acquired
was based on the contemporaneous cash sales price of Series C preferred stock. The Company accounted for these acquisitions using the purchase method of
accounting in accordance with SFAS No. 141 Business Combinations. The
combined purchase price of $4,616,339 and acquisition costs of $107,777
exceeded the fair value of net assets acquired by $2,336,796. The excess has
been allocated to goodwill. The results of operations of the acquired business
are included in the results of operations of the Company from the Acquisition
Date. 38




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The fair market value of the assets acquired and liabilities assumed were
as follows: Cash
    
    $
    52,537Other current assets
    
    
    62,180Patents
    
    
    3,000,000Goodwill
    
    
    2,336,796Other non-current assets
    
    
    37,674Total assets
    
    $
    5,489,187Accounts payable and accrued expenses
    
    $
    167,334Other current liabilities
    
    
    17,678Capital lease obligation
    
    
    14,686Notes payable
    
    
    565,373Total liabilities
    
    $
    765,071Purchase price and acquisition costs of assets, patents and liabilities
    
    $
    4,724,116
 The following unaudited pro forma results of operations have been prepared
as if these acquisitions had occurred as of the inception date of SinoFresh
HealthCare, Inc., which was October 15, 2002: From October 15, 2002 (date of inception) to December 31, 2002 Revenues
    
    $
    50,534Net loss
    
    
    (573,913
    )Net loss per share from continuing operations
    
    
    ($0.10
    )
 Pro forma data does not purport to be indicative of the results that would
have been obtained had these events actually occurred at the beginning of the
periods presented and is not intended to be a projection of future results. NOTE 3: Inventories Inventories at December 31, 2003 and 2002 consisted of the following: 2003
    
    2002Raw Materials
    
    
    
    
    
    $
    77,057Finished Product
    
    $
    172,007
    
    
    
    16,588Total
    
    $
    172,007
    
    
    $
    93,645
 As of December 31, 2003, approximately $116,000 of finished products was
held on consignment by customers of the Company. On February 4, 2003 the Company entered into an agreement to have a third
party, who is a registered Federal Drug Administration and a cGMP (current Good
Manufacturing Practices) qualified manufacturer, to manufacture its products.
This agreement, which expires in December 2004, provides for minimum annual
purchases by the Company of approximately $73,500 and provides the manufacturer
with a security interest in all products and proceeds thereof for which the
manufacturer has not been paid. NOTE 4: Advertising and Public Relations The Company entered into an agreement, effective February 1, 2003, with a
company to provide certain telephone sales and marketing services to
periodontists and dentists on a national basis. The agreement called for a
per-call charge and a percentage of gross sales to the targeted customers
during the contract. The Company incurred approximately $103,000 in costs
during the year ended December 31, 2003, which were the total costs incurred
prior 39




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to the contract having been mutually terminated in September 2003. The
Company also entered into a six-month agreement with an unrelated public
relations firm, effective February 19, 2003. Under this agreement, which
automatically renews on a monthly basis, the public relations firm agreed to
publicize the Company and its activities and provide public relations advice
and guidance. The Company incurred fees of approximately $127,000 for the year
ended December 31, 2003 in connection with those services. This contract was
terminated in 2003. Effective March 1, 2003, the Company has entered into a three year master
broker agreement with a national company. Under this contract the master
broker became the Companys exclusive broker, with minor exception, to all
retail accounts in the United States. The master broker is entitled to a
percentage of net revenues generated under this agreement. In addition, the
master broker agreed to develop a marketing plan and provide certain other
services. The Company incurred approximately $258,000 and $100,000 of fees for
those services for the year ended December 31, 2003 and during the period
October 15 to December 31, 2002, respectively and are included in marketing
expenses in the accompanying consolidated statements of operations. Advertising and public relations expense was approximately $641,000 and
$19,000 for the year ended December 31, 2003 and for the period October 15
(date of inception) to December 31, 2002, respectively and are included in
marketing expenses in the accompanying consolidated statements of operations. NOTE 5: Furniture and Equipment Furniture and equipment at December 31, 2003 and 2002 are summarized by
major classification as follows: 2003
    
    2002Furniture and Fixtures
    
    $
    75,485
    
    
    $
    27,000Computer Equipment
    
    
    70,108
    
    
    
    Warehouse Equipment
    
    
    9,267
    
    
    
    Less: Accumulated Depreciation
    
    
    (16,669
    )
    
    
    (1,125
    )$
    138,191
    
    
    $
    25,875
 Furniture and equipment included computer and warehouse equipment of
approximately $119,000 acquired under capital lease arrangements at December
31, 2003. Depreciation expense for capitalized furniture and equipment was
approximately $16,000 and $1,000 for the year ended December 31, 2003 and for
the period October 15 (date of inception) through December 31, 2002,
respectively. NOTE 6: Patents Patents as of December 31, 2003 and 2002 consist of the following: 2003
    
    2002Patents
    
    $
    3,000,000
    
    
    $
    3,000,000Less: Accumulated Amortization
    
    
    (249,990
    )
    
    
    (14,700
    )$
    2,750,010
    
    
    $
    2,985,300
 Patents are being amortized over 13 years based on the estimated remaining
legal life as of the date of the acquisition of such patents. Amortization
expense was approximately $235,000 and $15,000 for the years ended December 31,
2003 and 2002, respectively. 40




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The estimated aggregate amortization expense for patents for each of the
succeeding five calendar years is approximately as follows: 2004
    
    $
    231,0002005
    
    $
    231,0002006
    
    $
    231,0002007
    
    $
    231,0002008
    
    $
    231,000
 The Company completed its transitional impairment test of existing patents
as of December 31, 2003. This test was preformed by an independent valuation
specialist and involved the use of estimates related to the fair value of the
patents. There were no impairment losses as a result of this test. NOTE 7: Notes Payable and Capital Leases On June 13, 2003, the Company obtained a $300,000 inventory-financing
loan. The loan bears interest at 10%. Originally, the Company was required
repay the principal and accrued interest with 30% of the revenues received from
the sale of inventory and all unpaid principal and accrued interest within 120
days from the advancement date of June 30, 2003. During 2003, the maturity date
was extended to January 16, 2004. The loan is collateralized by accounts
receivable, inventory and future proceeds from the sale of inventory
subordinated to the first lien on such assets held by the creditor of the
$360,000 and $140,000 notes discussed below. This note was paid in 2004. In connection with the asset purchase from SinoFresh Laboratories, Inc.,
in 2002 the Company entered into an agreement to assume responsibility for a
$360,000 secured convertible note and a $140,000 secured convertible note. The
two notes are collateralized by substantially all assets of the Company,
including its U.S. patents, were due February 2, 2002 and had an interest rate
of 10%. As of December 31, 2003, $189,225 and $73,082 was outstanding on each
of these convertible notes, respectively. The note holder is also a
shareholder of the Company. As of the Acquisition Date, the Company executed two amendments (Allonges)
modifying certain terms and conditions of the $360,000 and $140,000 convertible
notes. As a result, the maturity of the notes was extended and the repayment
schedules were modified. The Allonges provide for additional principal
reductions to the extent that twenty percent (20%) of any cash raised in equity
offerings subsequent to the assumption exceeds the then outstanding principal
balances. The Company has not complied with these principal reduction
requirements and, as a result, is technically in default. The Company is
currently negotiating the final payoff of these loans with the lender. Under
the modified terms, the notes are convertible into Series C preferred stock at
the lowest cash price paid by other Series C preferred shareholders, as
adjusted for a recapitalization, which was $2.00 as of December 31, 2003. The covenants, as modified, provide that, among other things, (1) the
Company may not dilute the note holders equity position until the notes
principal and interest are paid off and (2) that the Company not incur any
other indebtedness in excess of $1,000,000. 41




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The Company also assumed notes payable of $10,500 to an employee of the
Company. The $10,500 note was paid in May 2003. At December 31, 2003 and 2002
long-term debt consists of the following: 2003
    
    200210% convertible note, principal and interest payable,
$72,000 on execution of Allonge, $72,000 on February
15, 2003 and $54,000 quarterly thereafter, with final
maturity on June 30, 2004
    
    $
    189,225
    
    
    $
    360,00010% convertible note, principal and interest payable,
$28,000 on execution of Allonge, $28,000 on February
15, 2003 and $21,000 quarterly thereafter, with final
maturity on June 30, 2004
    
    
    73,082
    
    
    
    140,0007% note, principal and interest due on May 23, 2003
    
    
    
    
    
    
    10,50010% amended inventory financing loan due January 16, 2004
    
    
    300,000
    
    
    
    Capital lease obligations
    
    
    106,370
    
    
    
    11,844$
    668,677
    
    
    $
    522,344Less current portion
    
    
    (584,826
    )
    
    
    (443,367
    )$
    83,851
    
    
    $
    78,977
 Future minimum maturities of notes payable are as follows: Year Ended2004
    
    $
    584,8262005
    
    $
    22,0742006
    
    $
    23,7442007
    
    $
    23,3972008
    
    $
    14,636
 NOTE 8: Stockholders Equity Common Stock At inception, the Company issued 4,000,000 common shares to the founding
group of shareholders for $800. In connection with an acquisition, the Company
also issued 768,490 shares of common stock to induce its senior lenders to
allow it to assume certain obligations of the predecessor company. A settlement
expense of $154 was recognized based on the recent nominal value assigned to
the common stock. In addition, in connection with the employment arrangements offered to the
Chief Executive Officer in December 2002, the Company issued 6,000,000 shares
of common stock. The stock was valued at par value at the issuance date. In connection with the merger, the shareholders of SinoFresh  Delaware
obtained approximately 81% of the common stock and additional voting control by
virtue of the voting rights of the preferred stock, providing a total voting
interest of 91%. The merger transaction was treated as a recapitalization of
the Company, with SinoFresh  Delaware as the acquirer for financial accounting
purposes. Accordingly the shareholders of SinoFresh were deemed to be issued
2,483,333 common shares. The net tangible liabilities acquired were $3,238. In November 2003, the Company settled in arbitration an action brought
against the Company by a former employee of the Company related to his
employment for $30,000 in cash and 50,000 shares of common stock. The Company
recorded an expense of $153,000 in the accompanying consolidated financial
statements related to this settlement agreement (see note 10). 42




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Convertible Preferred Stock The Company has authorized 858,170 Series A preferred stock, 1,500,000
Series B preferred stock, and 1,250,000 Series C preferred stock. All preferred
stock ranked senior to common stock as to payment of dividends and distribution
of assets and is automatically convertible upon registration of any class of
equity securities with the SEC or a vote of 66.67% of the holders of such
Series. The Series A and B ranked junior to Series C and Series A ranks junior
to Series B as to payment of dividends and distribution of assets. All three
Series of preferred stock have a liquidation value of $2.00 per share. Series A
shares, as amended, are convertible to common stock at a one-for-one basis,
while Series B and C are convertible on a two-for-one basis and all have voting
rights equivalent to the common stock into which they are convertible. On November 15, 2002 the Company issued 808,170 shares of Series A
preferred stock to affect an asset purchase. In December 2002, the Company issued 1,500,000 shares of Series B
preferred stock to the predecessors founder in exchange for certain patent
assignments. During the period October 15, 2002 (date of inception) to December 31,
2002, the Company issued 337,500 shares of Series C preferred stock for $2.00
per share or $558,712 cash and settlement of a $50,000 promissory note payable,
net of offering costs of $66,288. During the year ended December 31, 2003, the
Company sold 881,211 shares of Series C preferred stock for $1,580,549, net of
offering costs of $181,873. On July 31, 2003, the Company entered into a settlement agreement with a
former employee and shareholder in a predecessor company to resolve certain
alleged claims. Under the agreement, the Company agreed to pay $84,000 in cash,
$16,000 upon execution and $2,000 per month for thirty four months thereafter
and to issue 50,000 shares of Series A preferred stock to the former
employee/shareholder. In exchange, the former employee/shareholder agreed to
drop all claims against the Company and return all shares previously issued in
the Company, its predecessor and affiliated companies. At December 31, 2003 the
remaining balance was $60,000 and is included in accrued expenses. The Company
recognized a settlement expense of $100,000 based on the estimated $2.00 per
share value of the Series A preferred stock issued. Stock Options and Warrants The fair value for options and warrants issued prior to the Merger
Agreement was estimated based on private financings that the Company entered
into during the same time period that the options and warrants were issued.
Subsequent to the Merger Agreement, SinoFresh estimates the fair market value
for options and warrants using the Black-Scholes option pricing model. Warrants Under a consulting agreement during 2002, the Company secured certain
consulting services in exchange for issuing the note holder a warrant to
purchase 50,000 common shares at $1.00 per share. The warrant expires on
February 1, 2005. During 2003, the Company issued warrants to purchase 350,000 common shares
at an exercise price $1.00. These warrants were issued in connection with
capital raises. Accordingly, no expense was recorded. Effective September 1, 2003, the Company sold 5-year callable warrants to
purchase 1,333,970 shares of the Companys common stock at $5.00 per share. The
investors paid $1.20 for each warrant for a total of $1,423,950, net of
offering costs of $176,050. As of December 31, 2003, there was $252,000 of
subscriptions receivable related to these sales and are represented by 60-day,
4% promissory notes. The Company may call, based upon a stipulated schedule, up
to 25% of the warrants at one time and require the holders to exercise 25% of
their warrants, if the trading price of the Companys stock is maintained at or
above a level of $7.50 for 20 consecutive days. Upon expiration of 90 days
after such call, the Company may again call and require exercise of another 25%
based upon the same criteria. This continues until all warrants have been
called. The holder has 30 days to exercise upon which if not exercised, a
designee or principal stockholder may purchase such warrants from the holder
for 43




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$0.10 per warrant. However, such calls are not permitted unless the
underlying common stock has been registered under the Securities Act of 1933.
For one investor who purchased 667,000 warrants for cash of $400,000 and a
60-day, 4%, $400,000 promissory note, the warrant life is one year. If no
warrants are exercised prior to August 31, 2004 the Company will cancel such
warrants and issue to the investor new warrants exercisable at $0.001 per share
or an aggregate of $667 for 667,000 shares. During 2003, the Company issued warrants to purchase 137,500 shares of
common stock to its Medical Advisory Board and other outside independent
consultants at $1.00 per share. An expense of $137,500 was recognized in
connection with the issuance of these warrants. During 2003, the Company issued warrants to purchase 50,000 common shares
at an exercise price of $5.00 to a financing organization for consulting and
placement costs. An expense of $50,000 was recognized in connection with the
issuance of these warrants. During 2003, the Company issued warrants to purchase 100,000 shares of
common stock to an outside consultant at $7.00 per share. An expense of $50,000
was recognized in connection with the issuance of these warrants. During 2003, the Company issued warrants to purchase 50,000 common shares
at an exercise price of $4.00 to an independent consultant. An expense of
$200,000 was recognized in connection with the issuance of these warrants. Stock Options The Company issued, effective in 2003, options to purchase 268,625 shares
of common stock to outside independent consultants at $1.00 per share pursuant
to commitments previously made by the Companys predecessors. An expense of
$268,625 was recognized in connection with the issuance of these warrants. Employee Stock Options In December 2002, the Company adopted a stock option plan, which
authorized granting of options for the issuance of 3,000,000 shares of common
stock. The plan provides the issuance of incentive stock options and
nonqualified stock options. Employee stock option activity was as follows during the year ended
December 31, 2003. The Company did not issue any options to employees through
December 31, 2002. 2003Weighted AverageOptions
    
    Exercise PriceOutstandingBeginning of
year
    
    
    
    
    
    
    Granted at market price
    
    
    831,000
    
    
    $
    1.00Exercised
    
    
    
    
    
    
    Expired or cancelled
    
    
    
    
    
    
    Outstanding
 end of year
    
    
    831,000
    
    
    $
    1.00126,000
    
    
    $
    1.00
 The exercise price of all outstanding options at December 31, 2003 is
$1.00. The weighted average remaining contractual life of the options as of
December 31, 2003 is 9.67 years. Options for 1,500,000 shares were approved by the board of directors in
November 2003. However, it was subsequently discovered that two of the board
members were parties in interest to one of the option grants for 890,000 shares
which had not been disclosed to all board members at the time the board action
was taken. Also, the Companys predecessor, SinoFresh  Delaware, had
committed to certain employees and independent contractors options or shares in
the predecessor for a total of approximately 500,000 shares. These individuals
were not 44




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included in the option list approved by the board of directors in November
2003. In April 2004, the compensation committee corrected the list of grants
by adding the individuals to whom the predecessor had made commitments and who
were errantly not included on the list, and also declared null and void the
option for 890,000 shares. These actions are being contested by the two
non-employee directors. The accompanying option schedule reflects the revised
option issuance approved by the compensation committee in April 2004. NOTE 9: 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 $37,000 and $102,000 for the year ended
December 31, 2003 and during the period from October 15 (date of inception)
through December 31, 2002, respectively. As of December 31, 2003, the Company
had $46,467 recorded in accounts payable due to this firm. 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
$277,000 and $22,000 for the year ended December 31, 2003 and during the period
from October 15 (date of inception) through December 31, 2002, respectively.
As of December 31, 2003, the Company had $126,448 recorded in accounts payable
and accrued liabilities due to this firm. A former director of the Company provided consulting services to the
Company directly and through his affiliate. Consulting expenses for this
consultant were $89,000 and $9,000 for the year ended December 31, 2003 and
during the period from October 15 (date of inception) through December 31,
2002, respectively. The Company incurred consulting fees to an entity affiliated with a former
director/principal stockholder. Expenses incurred totaled $227,000 and $76,000
for the year ended December 31, 2003 and during the period from October 15
(date of inception) through December 31, 2002, respectively. As of December
31, 2003, the Company had $175,840 recorded in accounts payable and accrued
liabilities due to this firm. 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 (see note 10). 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 in 2003 was $7,500. During 2003, consulting fees paid to this
individual prior to her becoming an officer and a director approximated
$10,000. During the year ended December 31, 2003, the Company expensed
approximately $131,000 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 Company is in the process of having the foreign patents assigned to it.
(See Note 10.) NOTE 10: Commitments and Contingencies The Company leased its main facility for $4,815 per month on a
month-to-month basis until August 2003. The Company entered into a five-year
agreement to lease a new headquarters facility for $6,418 per month, effective
April 2003, but did not move in or incur expenses until August 2003. The
property is leased from a company owned by two officers/shareholders of the
Company. The lease provides for two additional five-year terms with the
Company. The Company paid approximately $32,000 during the year ended December
31, 2003 related to this lease. In 2003, the Company paid approximately $30,000 in lease payments for
vacated office space that had been leased by an officer and director for a
predecessor company. Rental expense under operating leases amounted to approximately $97,000
and $11,000 for the year ended December 31, 2003 and for the period October 15,
2002 (date of inception) to December 31, 2002, respectively. 45




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Future noncancellable lease payments under operating leases for each year
ended December 31 are as follows: 2004$88,000; 2005$88,000; 2006$84,000; and
2007$45,000. The Company has an employment agreement with its Chief Executive Officer
(CEO), which provides, among other things, that if the Company issues
additional shares, the CEO shall receive options for the purchase of shares of
the Company such that the CEO shall maintain no less than 15% ownership of the
Company. The Company has entered into a consulting agreement beginning in November
2002 with an entity affiliated with a former board member and shareholder for a
term of three years. Monthly payments under this agreement approximate $8,000
with $96,000 due for years 2003 and 2004, and $80,000 due for 2005. The
consulting agreement was revised September 8, 2003 extending the term to
September 2006 and increasing compensation to include 0.5% of gross revenue and
0.67% of net income before taxes, interest and amortization. The board of
directors declared this contact and an investment banking contract with the
same party null and void in March 2004. Whether or not the contracts are
subject to termination will likely be the subject of a lawsuit. The Company has also made certain warrantees to a customer who requested
such warranty of merchantability and proprietary ownership. Neither the Company
nor its counsel believes that the Company will incur any claims under this
warranty. On February 20, 2004, a lawsuit was filed in the U.S. District Court,
Middle District of Florida, Ft. Myers Division 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. The plaintiffs include 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 that it
is a class action suit for securities violations and other matters 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 has
not been certified as a class action suit. The complaint alleges, among other
things, that the CEO of SinoFresh used corporate funds for his personal
benefit, that he did not transfer patents to the Company and two entities
related through common shareholders. Management has investigated the complaint
and believes the allegations in the federal Complaint to be blatantly
incendiary, false and misleading. The Company, on behalf of itself and its
officers and directors, intends to vigorously defend the suit. On March 4,
2004, the Company filed a Motion to Dismiss the Complaint citing numerous legal
deficiencies in the Amended Complaint and the failure to meet statutory
procedure requirements. Management of the Company believes that the lawsuit is a backlash by
Sargon Capital, Inc. and one of its principals against the Company in
connection with the attempted removal of two board members and as officers of
the Company. Sargon Capital, Inc. had been retained by the Companys
predecessor for investment banking and consulting services. Over the course of
Sargon Capital, Inc.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 Capital, Inc. and one of its principals. Since two
of the board members were designees of Sargon Capital, Inc., the Company deemed
it in its best interests to attempt to remove them as directors and to seek
substitute directors who were independent from Sargon Capital, Inc. In addition, two non-employee directors have raised other issues
concerning potential legal exposure to the Company as follows: (1) the
Companys decision to incur costs to maintain and/or transfer certain foreign
patents to the Company instead of to two foreign entities (since the two
foreign entities had no funding to adequately protect the Companys interests
in these patents); and (2) the Companys decision to technically modify its
original operating focus. The consolidated financial statements include no adjustment or provision
related to the foregoing matters, the ultimate outcome of which cannot
presently be determined. A shareholder of the Companys predecessor commenced two actions against
the Company. The first action is an arbitration seeking recovery of his
investment of $150,000. The second lawsuit against the Company, its officers
and directors seeks unspecified damages due to non-performance by the Company
of a consulting agreement entered into January 2000 with the predecessor. The
agreement was for five periods at $24,000 annually, 46




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##### Table of Contents



of which $23,000 was paid. The Company is in the process of vigorously
defending these actions, but no outcome or resolution of the arbitration or
lawsuit is definitive or ascertainable at this time. The Company has incurred
approximately $76,000 in legal costs related to this lawsuit to date which is
in excess of the $50,000 originally agreed to be funded by the Company under
the Asset Purchase Agreement. The Company has been unable to obtain from either former counsel to the
Company or former counsel to SinoFresh  Delaware, who were counsel of the
Company and SinoFresh  Delaware at the time of the merger, information the
Company believes is sufficient to indisputably support one or more exemptions
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. In November 2003, the Company settled in arbitration an action brought
against the Company by a former employee of the Company related to his
employment for $30,000 in cash and 50,000 shares of common stock. The Company
recorded an expense of $153,000 in the accompanying consolidated financial
statements related to this settlement agreement. From time to time, the Company is subjected to other litigation or
proceedings in connection with its business, as either a plaintiff or
defendant. There are no such pending legal proceedings to which the Company is
a party that, in the opinion of management, is likely to have a material
adverse effect on the Companys business, financial condition or results of
operations. NOTE 11: Income Taxes At December 31, 2003, net operating losses available to be carried forward
for federal income tax purposes are approximately $4,300,000 expiring in
various amounts through 2023. Utilization of SinoFreshs net operating losses
may be subject to substantial annual limitation due to the ownership change
limitations provided by the Internal Revenue Code and similar state provisions.
Such annual limitation could result in the expiration of the net operating
loss before utilization. A valuation allowance is provided when it is more likely than not that
some portion or all of the deferred tax assets will not be realized. The
Company has established a valuation allowance for the entire deferred tax asset
due to recurring losses since the Companys inception. The Companys tax expense (benefit) differs from the expected tax
expense (benefit) as follows: 2003
    
    2002Computed expected tax expense (benefit)
    
    $
    (1,281,567
    )
    
    $
    (174,033
    )Change in valuation allowance
    
    
    1,278,206
    
    
    
    173,599Non-deductible
    
    
    3,361
    
    
    
    434$
    
    
    
    $
    
 47




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##### Table of Contents



The tax effects of temporary differences that give rise to significant
portions of deferred tax assets and liabilities are as follows: 2003
    
    2002Deferred tax assets:Net operating loss carry forwards
    
    $
    1,513,039
    
    
    $
    180,220Less: valuation allowance
    
    
    (1,451,805
    )
    
    
    (173,599
    )Net deferred tax asset
    
    $
    61,234
    
    
    $
    6,621Deferred tax liabilities:Goodwill
    
    
    (61,234
    )
    
    
    (6,621
    )Deferred taxes, net
    
    $
    
    
    
    $
    
 48




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ITEM 8. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE Effective March 4, 2004, SinoFresh dismissed Salberg & Company, P.A.
(Salberg) as the independent auditors of the Companys consolidated financial
statements. The Company appointed Moore Stephens and Lovelace, P.A., effective
March 4, 2004, as its independent auditors. The decision to change auditors was
approved by the Companys Board of Directors on March 4, 2004 at which time the
Company believed that two of the formerly five board members had been
previously removed by shareholder written consents. Subsequent to such date,
it was determined that there was a technical deficiency in the written consents
and as a result, two of the five Board members had not been removed and
therefore were still on the board. However, on March 29, 2004, at a meeting of
the full Board of Directors, a majority of the Board of Directors ratified and
approved the termination of Salberg and the appointment of Moore Stephens and
Lovelace, P.A. as the Companys independent auditors effective March 4, 2004. In September 2003, the Company acquired SinoFresh HealthCare, Inc., a
Delaware corporation (the Delaware Company) by merger of that Delaware Company
into SinoFresh Acquisition Sub, Inc., a Florida corporation and wholly-owned
subsidiary of the Company. SinoFresh Acquisition Sub remained the surviving
entity, changed its name to SinoFresh Corporation and is the operating
subsidiary of the Company. Post-merger, the Company filed a Form 8-K/A which
included the financial statements of the Delaware Company for its fiscal year
ended December 31, 2002, as audited by Salberg (which at the time of the merger
became the Companys independent auditors), together with unaudited financial
statements for the six months ended June 30, 2003. The consolidated financial
statements of the Delaware Company are deemed the financial statements of the
Company post-merger. No report of Salberg on the Companys consolidated
financial statements for the fiscal year ended December 31, 2002 contained an
adverse opinion or disclaimer of opinion, nor was any such report qualified or
modified as to uncertainty, audit scope, or accounting principles. During
Salbergs engagement and through the date of its letter, there were no
disagreement(s) with Salberg on any matter of accounting principles or
practices, financial statement disclosure, or auditing scope or procedure,
which disagreement(s), if not resolved to the satisfaction of Salberg, would
have caused it to make reference to the subject matter of the disagreement(s)
in connection with its report. During Salbergs engagement and through the date of its letter, Salberg
did not advise the Company of any matters listed in paragraphs (1) through (3)
of Item 304(a)(1)(iv)(B) of Regulation S-B, except as follows: On February 26,
2004, Salberg requested, as an expanded audit procedure, the engagement of an
outside specialist to review accounting matters relating to a recently filed
lawsuit against the Company and its management. The Company did not disagree
with Salbergs request. However, the Company decided to instead replace
Salberg with a larger accounting firm that has more resources and personnel to
complete the Companys audit of its 2003 consolidated financial statements and
also perform any expanded audit procedures the new accounting firm deems
appropriate. The Company authorized Salberg to respond fully to any inquiries
about the foregoing made by Moore Stephens and Lovelace, P.A. The Company furnished Salberg with a copy of its above statements, filed
with the SEC on an amended Form 8-K on April 12, 2004 and which are duplicated
herein, in response to Item 304(a)(1) Regulation S-B and requested that Salberg
furnish the Company with a letter addressed to the Securities and Exchange
Commissions (SEC), stating whether or not it agrees with such statements. A
copy of Salbergs letter, dated March 30, 2004 is included as an exhibit to
this report. 49




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PART III 
 ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS The Companys directors, executive officers, and significant employees are
as follows as of March 29, 2004: Name
    
    Position
    
    AppointmentCharles Fust
    
    Chairman, Chief Executive Officer, Director
    
    November, 2002P. Robert DuPont
    
    Vice President, Research and Development, Director
    
    November, 2002Russell R. Lee III
    
    Chief Financial Officer, Secretary
    
    January, 2004Stephen Bannon (1)
    
    Director
    
    September, 2003David Otto, Esq. (1)
    
    Director
    
    October, 2002Stacey Maloney-Fust
    
    Senior Vice President, Assistant Secretary, Director
    
    September, 2003
 (1) Shareholders holding what was believed to be over a majority of the
voting capital stock of the Company voted by written consent to remove Messrs.
Bannon and Otto as directors and officers of the Company, effective February
10, 2004. However, it was recently discovered that there was a technical
defect in the written consents. Therefore, Messrs. Bannon and Otto were not
removed from the board and continue as directors of the Company until the next
annual meeting of shareholders or their earlier removal or resignation.
Messers. Bannon and Otto were removed as officers of the Company by majority
vote of the Board of Directors at a meeting of the board held on March 29,
2004. Charles Fust, Chief Financial Officer (CEO) and Chairman of the Board of Directors Mr. Fust is a chemical engineer, whose research has resulted in
approximately 130 domestic and international patents, including the patents
underlying the SinoFresh products. Mr. Fust began the development of the
Companys products in 1989. His expertise in the health care community has
provided him with the opportunity to chair various health care boards, mainly
Otorhinolaryngology related. Mr. Fusts business background covers ownership
and management in international companies. Mr. Fust has been the Chief
Executive Officer and Chairman of SinoFresh Lab LLC from 1999 to the present
and the Chief Executive Officer and Chairman of SinoFresh HealthCare, Inc. from
2002 to the present. He holds a bachelor degree in Chemical Engineering from
Auburn University and has a professional affiliation with the American
Association of Pharmaceutical Scientists. P. Robert DuPont, Vice President of Research & Development and Director Mr. DuPont has over twenty years of experience in the bio-pharmaceutical
and life sciences industries. Prior to joining SinoFresh in June of 2001, Mr.
DuPont founded and acted in the capacity of CEO of UltraPure Group Limited.
UltraPure Group Limited provided integrated services to multi-national
pharmaceutical companies, which included design services, regulatory
consultation, and contract staffing. He founded the company in 1993 and sold
his interest in the company in 2001. He is a member of the International
Society of Pharmaceutical Engineers and has presented various lectures on the
topic of pharmaceutical process design. Mr. DuPont is also a member of the
American Association of Pharmaceutical Scientists. Russell R. Lee III, Chief Financial Officer and Secretary Mr. Lee has thirty years experience in business and finance, as a
financial executive in private industry and with a Big 4 public accounting
firm. Mr. Lee joined SinoFresh HealthCare, Inc. in August 2003 as its
Vice-President of Finance and Administration. In January 2004 Mr. Lee was
appointed as the Companys Chief Financial Officer. Previously, Mr. Lee served as Executive Vice President of Finance and
Operations for Esprix Technologies, LLP that he joined in 1999. Esprix is a
privately-held, international fine and specialty chemical
company that supplies high technology materials into the automotive,
pharmaceutical, electronic and digital imaging 50




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industries. From 1990 to 1998,
Mr. Lee served as Corporate Controller, and then Treasurer/Chief Financial
Officer, of Gencor Industries, Inc. (Gencor), a publicly-held, international
manufacturer of processing equipment. Mr. Lee left Gencor Industries, Inc. in
December 1998, and twenty-two months later in September 2000, Gencor filed a
voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. On December
31, 2001, Gencor and its subsidiaries successfully emerged from Chapter 11
intact. Mr. Lee was appointed to the Board of Directors of Gencor in 2004 and
serves as Chairman of the companys audit committee. Prior to his private industry experience, Mr. Lee was a Senior Audit
Manager in the Ernst & Young organization in both Ohio and Florida. Mr. Lee is
a Certified Public Accountant and is licensed in Florida and Ohio. Mr. Lee
graduated from the University of Toledo as an Accounting major with a bachelor
degree in Business Administration. Stephen Bannon, Director Mr. Bannon has been a director of the Company since September 2003. He is
currently associated with American Vantage Media. Prior to his affiliation
with American Vantage Media, Mr. Bannon was employed at Jeffries & Company,
Inc. during the period July 2000 to April 2002 and with The Firm from May
2002 to March 2003. Prior to this, Mr. Bannon was employed by SG Cowan
Securities Corporation from July 1998 to March 2000. Mr. Bannon received his
MBA from Harvard University. He received his undergraduate degree from
Virginia Polytechnical Institutes College of Architecture and has a graduate
degree in Government from Georgetown University. David Otto, Esq., Director Mr. Otto has been a director of the Company since September 2003 and was
formerly an officer and director of SinoFresh  Delaware from October 2002. He
was Secretary to the Company until March 29, 2004. In July of 1999, Mr. Otto
founded The Otto Law Group, PLLC, in Seattle, Washington. Prior to this, Mr.
Otto was employed at Hughes, Hubbard and Reed. Mr. Otto is currently chairman
of the board of directors of Dtomi, Inc., and a member of the board of
directors of Excalibur USA Custom Window Fashions, Inc., and Saratoga Capital
Partners, Inc. Mr. Otto is admitted to practice law in New York and Washington.
Mr. Otto graduated from Harvard University in 1981 with his A.B. in Government
and his J.D. from Fordham University School of Law in 1987. Stacey Maloney-Fust, Senior Vice President, Assistant Secretary, Director Stacey Maloney-Fust has 14 years experience in the financial industry.
For several years in New York City she worked as an Executive Assistant for the
President of AIG Global Investors, Inc., as an Executive Assistant for the
General Partner of Sandler Capital Management in 1999 and 2000 and then as the
Executive Assistant for Merit Capital Associates, Inc. in the first quarter of
2001. After attending New York University, Ms. Maloney-Fust obtained her
Series 7, 63 and 65 securities licenses and became a Financial Advisor for
Salomon Smith Barney in 2001 and the first half of 2002 and for UBS in the
second half of 2002 and 2003 before starting with SinoFresh in the second half
of 2003. Ms. Maloney-Fust is currently enrolled in Jones International
University and is the wife of Charles Fust. The Companys directors are elected at the annual meeting of the
shareholders and serve until their successors are elected and qualified, or
their earlier resignation or removal. Officers are appointed by the Board of
Directors and serve at the discretion of the Board of Directors or until their
earlier resignation or removal. On February 10, 2004, Charles Fust executed SinoFresh HealthCare, Inc.
Written Actions in Lieu of Meeting of the Shareholders, pertaining to the
removal of David Otto and Stephen Bannon as directors and officers of the
Company. It was recently determined that the written consents were technically
deficient and therefore not effective and Messrs. Otto and Bannon continue on
the board until otherwise determined at an annual meeting of shareholders or
their earlier removal or resignation. 51




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Directors Compensation The directors do not receive any stated salary for their services as
directors or members of committees of the Board of Directors, but by resolution
of the board, a fixed fee may be allowed for attendance at each meeting.
Directors may also serve the Company in other capacities as an officer, agent
or otherwise, and may receive compensation for their services in such other
capacity. Upon their election to the board, non-employee directors are paid
$1,500 per day on days board meetings are held, with an annual limit of $4,000.
Reasonable travel expenses are reimbursed. Section 16(a) Beneficial Ownership Reporting Compliance Section 16(a) of the Securities Exchange Act of 1934 requires directors
and executive officers, and persons who own 10% or more of SinoFresh common
stock, to file reports of ownership and changes in ownership with the SEC.
Officers, directors and greater than 10% stockholders are required to furnish
the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies of such forms furnished to the
Company, SinoFresh believes that with respect to 2003 Mr. Bannon has not filed
the required Form 3 Initial Statement of Beneficial Ownership in connection
with his becoming a director of the Company in September 2003, and Mr. Otto did
not file a Form 3 Statement of Beneficial Ownership in connection with his
becoming a director, but instead filed a Form 5 Annual Statement of Beneficial
Statement of Ownership, which form was not timely filed. Further, the Form 3
Initial Statement of Beneficial Ownership for each of Mr. Fust and the Charles
Fust Family Limited Partnership, Mr. DuPont and Ms. Stacey Maloney-Fust were
filed in March 2004, which filing was not timely. Code of Ethics for Chief Executive Officer and Senior Financial Officers The Company has adopted a code of ethics for the CEO and Senior Financial
Officers (Code of Ethics) which is required to be signed by each such officer,
and is maintained on file by the Company. A copy of the Code of Ethics will be
provided to you, free of charge, upon your written request to the Company sent
to the attention of Investor Relations, SinoFresh HealthCare, Inc., 516 Paul
Morris Drive, Englewood, Florida 34223. If the Company makes any substantive amendments to the Code of Ethics, or
grants any waiver, including any implicit waiver, from a provision of the Code
of Ethics to the Chief Executive Officer or the Chief Financial Officer, the
Company will disclose the nature of such amendment or wavier in a report on
Form 8-K. Audit Committee and Audit Committee Financial Expert Three members of the Companys Board of Directors, Charles Fust, P. Robert
DuPont and Stacey Maloney-Fust, currently serve as the audit committee until
the Company is able to recruit independent directors with the appropriate
financial experience and/or background to serve on such committee and who are
truly independent from internal and external influences, and independent under
NASDAQ or AMEX rules. The Audit Committee does not currently have a financial
expert. 52




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ITEM 10. EXECUTIVE COMPENSATION The following table sets forth all the compensation earned by the person
serving as the Chief Executive Officer (Named Executive Officer) during the
fiscal years ended December 31, 2003 and 2002. None of the other officers
earned greater than $100,000 in total salary and bonuses during fiscal 2003. SUMMARY COMPENSATION TABLE AnnualCompensation(1)
    
    Long-TermCompensationAwardsName And PrincipalPosition
    
    FiscalYear
    
    Salary
    
    Bonus
    
    SecuritiesUnderlying Options
    
    All OtherCompensationCharles Fust
Chairman and
Chief
Executive
    
    
    12/31/03
    
    
    $
    150,388
    
    
    
    
    
    
    
    -0-
    
    
    $
    14,744Officer
    
    
    12/31/02
    
    
    $
    28,362
    
    
    
    
    
    
    
    -0-
    
    
    $
    1,000
   (1)
    
    The amounts reflected in the above table do not include any amounts for
perquisites and other personal benefits extended to the Named Executive
Officer. The aggregate amount of such compensation for the Named
Executive Officer is less than 10% of the total annual salary and bonus.
Compensation for 2002 is from October 15, 2002 (date of inception) through
December 31, 2002. Stock Options Granted in Fiscal 2003 The following table sets forth certain information concerning grants of
options made during fiscal 2003 to the Named Executive Officer. PercentNumber of
    
    of TotalSecurities
    
    Options
    
    Exercise
    
    Fair MarketUnderlying
    
    Granted to
    
    or Base
    
    ValueOptions
    
    Employees in
    
    Price
    
    on Date of
    
    ExpirationName
    
    Grated(#)(1)
    
    2003
    
    ($/Sh)
    
    Grant
    
    DateCharles Fust
    
    
    -0-
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
    
    
    
    N/A
   (1)
    
    Excludes an option for 890,000 shares granted to SinoFresh Management, LLC
(owned 50/50 by Mr. Fust and Stephen Bannon, a director) which option was
voided by the Executive Committee (including Mr. Fust) in April 2004. 53




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Aggregate Stock Option Exercises and Year-End Option Value Table The following table sets forth certain information concerning option
exercises in fiscal 2003, the number of stock options held by the Named
Executive Officer as of December 31, 2003 and the value (based on the fair
market value of a share of stock at fiscal year-end) of in-the-money options
outstanding as of such date. Number ofShares Acquiredon Exercise
    
    
    ValueRealized($)
    
    
    Number of UnexercisedOptions Held atFiscal Year-End(#)
    
    
    
    Value of UnexercisedIn-the-Money Optionsat Fiscal Year-End(1)Name
    
    (#)
    
    
    (1)
    
    
    Exercisable
    
    Unexercisable
    
    
    
    Exercisable
    
    UnexercisableCharles Fust
    
    -0-
    
    
    N/A
    
    
    N/A
    
    N/A
    
    
    
    N/A
    
    N/A  (1)
    
    Options are in-the-money if the fair market value of the common stock
exceeds the exercise price of the option. The closing sale price for the
Companys common stock as reported by the NASDAQ Trading and Market
Services on December 31, 2003 was $2.20 per share. Employment Agreement As a result of the merger, the Company assumed the employment agreement
between Charles Fust and SinoFresh  Delaware dated December 1, 2002. The
employment agreement has a term of five years and is renewable upon mutual
agreement of the parties. Under that agreement, he is entitled to a base
salary, as adjusted, of $180,000 annually and 5.0% of net earnings before
taxes. In addition, Mr. Fust is entitled to receive $1,000 per month car
allowance. The agreement also provides that the Company and Mr. Fust enter
into a stock option agreement under which he would be provided anti-dilution
rights so that Mr. Fusts equity ownership of the Company, on a fully diluted
basis, will be no less than 15% so long as the total outstanding shares on a
fully diluted basis are less than 100,000,000. The agreement also prohibits
Mr. Fust from competing with the Company for a period of three years upon
cancellation of the employment agreement. Messrs. Bannon and Otto have
indicated that the board never approved the employment agreement. However, the
employment agreement is executed by Andrew Badolato, the then President of
SinoFresh  Delaware, and all of the members of the board at that time approved
the employment agreement by written consent. Stock Option Plan The Companys compensation committee currently administers the 2002 Stock
Option Plan (Plan). The Plan provides for the grant of options (incentive and
non-statutory), to officers, employees and independent contractors capable of
contributing to the Companys performance. The Company has reserved an
aggregate of 3,000,000 shares of common stock for grants under the Plan.
Incentive stock options may be granted only to employees eligible to receive
them under the Internal Revenue Code of 1986, as amended. As of December 31,
2003, the Company had outstanding non-statutory options for 831,000 shares of
the Companys common stock. These options have a term of ten years, unless
earlier terminated in accordance with the provisions of the Plan and applicable
stock option agreements. The exercise prices of all of the options granted as
of December 31, 2003 are $1.00 per share, and generally have scheduled vesting
except for options for 126,000 shares, which vested immediately upon grant.
Upon expiration of unexercised options, the unpurchased shares subject to such
options will again be available for purposes of the Plan. Non Plan Options and Warrants The Company issued warrants to consultants and service providers for a
total of 500,000 shares of common stock, of which 450,000 are exercisable for
$1.00 per share and 50,000 are exercisable at $5.00 per share. The warrants
have terms of four years (except for one option for 100,000 shares which has a
two year term). The Company awarded common stock warrants to its Medical Advisory Board
for a total of 87,500 shares of common stock, which become fully exercisable on
September 1, 2004 and awarded common stock options to 54




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independent consultants for a total of 268,625 shares of common stock,
which vested immediately. The warrants and options have a 5 year term from
September 1, 2003 and an exercise price of $1.00. The warrant and option
holders have certain piggyback registration rights for the shares underlying
the options. The Company issued 1,333,970 warrants in connection with capital raises in
September 2003, exercisable at $5.00 per share and 100,000 warrants to a
consultant for services provided, with an exercise price of $7.00 per share. The Company issued a warrant in 2003 for 50,000 shares of common stock to
a former consultant, which warrant is exercisable at $4.00 per share until its
termination date in November 2013. The warrant holder has certain piggyback
registration rights under the terms of the agreement. REPORT OF THE COMPENSATION COMMITTEE OF THE
BOARD OF DIRECTORS ON EXECUTIVE COMPENSATION General The Board of Directors served as the compensation committee during fiscal
year 2003 and currently Charles Fust, P. Robert DuPont and Stacey Maloney-Fust
constitute the Compensation Committee. Each Compensation Committee member is
an employee-director of the Company. The board intends to appoint a
Compensation Committee of non-employee directors when individuals join the
board who are independent of internal and external influences and who are
independent as defined under NASDAQ or AMEX rules. The board currently administers the Companys executive compensation
program, monitors corporate performance and its relationship to compensation
for executive officers, and makes appropriate recommendations concerning
matters of executive compensation. Compensation Philosophy The Company has developed and implemented a compensation program that is
designed to attract, motivate, reward and retain the broad-based management
talent required to achieve the Companys business objectives and increase
shareholder value. There are two major components of the Companys
compensation program: base salary and incentives, each of which is intended to
serve the overall compensation philosophy. Base Salary The Companys salary levels for executive officers, including its Chief
Executive Officer, are intended to be consistent with competitive pay practices
of similarly-sized companies within the industry. In determining executive
officers salaries, the board considers level of responsibility, competitive
trends, the financial performance and resources of the Company, general
economic conditions, as well as factors relating to the particular individual,
including overall job performance, level of experience and prior service,
ability, and knowledge of the job. Incentives Incentives consist of stock options and performance bonuses paid in cash.
The board strongly believes that the compensation program should provide
employees with an opportunity to increase their ownership and potential for
financial gain from increases in the Companys stock price. This approach
closely aligns the best interests of shareholders and, executives and
employees. Therefore, executives and other employees are eligible to receive
stock options, giving them the right to purchase shares of the Companys common
stock at a specified price in the future. The Companys compensation committee
currently determines stock option grants. The grant of options is based
primarily on an individuals potential contribution to the Companys growth and
profitability, as measured by the market value of the Companys common stock. Respectfully submitted,THE COMPENSATION COMMITTEECharles FustP. Robert DuPontStacey Maloney-Fust
 55




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ITEM 11.
    
    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
 The following table sets forth certain information regarding the
beneficial ownership of the Companys shares of voting stock as of March 15,
2004 by: (i) each person who is known by the Company to beneficially own more
than 5% of the issued and outstanding shares of common stock; (ii) the Chairman
and Chief Executive Officer; (iii) the directors; and (iv) all of the executive
officers and directors as a group. For purposes of the beneficial ownership
calculations below, the Series A preferred stock, which is convertible into
common stock on a 1-for-1 basis, the Series B preferred stock, which is
convertible into common stock on a 2-for-1 basis, and Series C preferred stock,
which is convertible into common stock on a 2-for-1 basis are included on an as
converted basis, such that the total issued and outstanding voting stock
becomes 19,609,915. Unless otherwise indicated, the persons named below have
sole voting and investment power with respect to all shares beneficially owned
by them, subject to community property laws where applicable. Name of Beneficial Owner(1)(2)
    
    No. of shares
    
    PercentageCharles Fust, Chairman and Chief Executive Officer
    
    
    8,361,400
    (3)(10)
    
    
    42.77
    %P. Robert DuPont, Vice President and a Director
    
    
    260,000
    (4)
    
    
    1.33
    %Russell Lee III, Chief Financial Officer, Secretary
    
    
    5,000
    (5)
    
    
    *David Otto, Director(6)
    
    
    50,000
    
    
    
    *Stephen Bannon, Director(7)
    
    
    375,000
    (8)
    
    
    2.9
    %Moty Hermon
    
    
    1,229,723
    (9)
    
    
    6.27
    %Stacey Maloney-Fust, Senior Vice President and a Director
    
    
    5,000
    
    
    
    *All officers and directors as a group (6 persons)
    
    
    9,072,400
    
    
    
    46.20
    %
   *
    
    Represents less than 1% of all issued and outstanding voting stock of the Company.  (1)
    
    Unless otherwise noted, the address of each person or entity listed is
c/o SinoFresh HealthCare, Inc., 516 Paul Morris Drive, Englewood, FL
34223.(2)
    
    Beneficial ownership is determined in accordance with the rules of the
SEC and generally includes voting or investment power with respect to
securities. Shares of common stock subject to options, warrants or
convertible securities that are currently exercisable or exercisable
within 60 days of March 15, 2004, are deemed outstanding for computing the
percentage of the person holding such options, warrants or convertible
securities but are not deemed outstanding for computing the percentage of
any other person. Except as indicated by footnote and subject to
community property laws where applicable, the persons named in the table
have sole voting and investment power with respect to all shares of common
stock shown as beneficially owned by them.(3)
    
    Represents 5,356,400 shares of common stock owned by the Charles Fust
Family Limited Partnership for which a corporation Mr. Fust controls is
the general partner; 1,500,000 shares of Series B preferred stock held by
the Charles Fust Family Limited Partnership, which is entitled to two
votes per share; and, 5,000 shares owned by his spouse, Stacey
Maloney-Fust. Excludes 890,000 options granted in November 2003 to
SinoFresh Management, LLC which is owned 50/50 by Mr. Fust and Stephen
Bannon. This option was declared invalid by the Executive Committee
(including Mr. Fust) in April 2004. See, also, footnote 10 below. 56




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(4)
    
    Represents 250,000 shares of common stock held directly, 10,000 shares of
Series A preferred stock held directly and 21,000 shares of common stock
issuable pursuant to options exercisable within the next 60 days.(5)
    
    Represents 5,000 shares of common stock issuable pursuant to options
exercisable within the next 60 days.(6)
    
    Mr. Ottos address is 900 Fourth Avenue, Suite 3140, Seattle, WA 98164.(7)
    
    Mr. Bannons address is 1547 18th Street, Santa Monica, CA 90404.(8)
    
    Excludes 890,000 options granted in November 2003 to SinoFresh
Management, LLC which is owned 50/50 by Mr. Bannon and Charles Fust. Of
these options, approximately 500,000 options were allocated to Mr. Bannon
in the operating agreement for SinoFresh Management. This option was
declared invalid by the Companys Executive Committee (including Mr. Fust)
in April 2004.(9)
    
    Represents 1,229,723 shares of common stock Mr. Moty Hermon has a right
to acquire from Mr. Fust pursuant to a put option, which shares of stock
have been deposited into escrow by Mr. Fust for the benefit of Mr. Hermon.
Mr. Fust holds a proxy to vote the escrowed shares.(10)
    
    Crown IV Holding, Inc., a Belize corporation (Crown IV) has indicated
to the Company and Charles Fust that it is the owner of 1,000,000 shares
of common stock to which Mr. Fust claims beneficial ownership. In 2002,
the Companys predecessors had retained Sargon Capital, Inc. (a company
affiliated with Andrew Badolato) to provide financial advice. At that
time, Sargon Capital/Andrew Badolato advised Mr. Fust to put his assets
into various off-shore entities, including some of his stock in SinoFresh
 Delaware. In connection with the acquisition of the assets of SinoFresh
Laboratories by SinoFresh  Delaware, a company formed by Sargon
Capital/Andrew Badolato, Mr. Fust was to be issued 6,000,000 (post-merger)
shares of common stock for joining SinoFresh  Delaware. Mr. Fust
designated some of those shares for employees and, pursuant to
recommendations of Sargon Capital/Andrew Badolato, 1,000,000 (post-merger)
shares were to be put into an off-shore entity, Crown IV, that Mr. Fust
understood to have been created for his benefit and as such, he was the
beneficial owner of those shares. A share certificate for 1,000,000
(post-merger) shares was issued in the name Crown IV by SinoFresh

Delaware which Mr. Fust held and did not deliver to Crown IV since he had
not been provided any paperwork or other information about Crown IV and he
had not yet consulted with his legal advisors regarding same. Later, upon
seeking the advice of his personal attorney, it was recommended that he
not transfer any property to any off-shore entities but instead transfer
property only to his family limited partnership, which he did. Thus, he
did not release the share certificate to Crown IV, but instead voided the
certificate that was in the name of Crown IV and requested the Companys
transfer agent to issue a certificate for the shares in the name of the
Charles Fust Family Limited Partnership; however, he subsequently
requested the transfer agent instead to issue the certificate in the name
of the escrow agent who is holding 1,229,723 shares in escrow for the
benefit of Moty Hermon pursuant to an agreement between Mr. Fust and Mr.
Hermon. Mr. Fust holds a proxy to vote the escrowed shares. Since the
attempted removal of Messrs. Bannon and Otto from the board, Crown IV has
made demands for the 1,000,000 (post-merger) shares and a representative
of Crown IV has threatened to file a suit against Charles Fust, the Company
and its counsel in connection with these shares. 
 ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Charles Fust, the CEO and Chairman of the Board of Directors of the
Company, contracted with SinoFresh  Delaware for the assignment of the United
States rights to the SinoFresh product patents in exchange for 1,500,000 shares
of Series B preferred stock. By virtue of the Merger Agreement, the United
States rights to the SinoFresh product patents formerly held by Charles Fust
have become the property of SinoFresh. A fairness opinion has been issued to
SinoFresh  Delaware verifying that this transaction is fair and was conducted
at arms-length. The Company contracted with Sargon Capital, Inc. (Sargon) for certain
investment banking and consulting services to be provided pursuant to two
agreements between the Company and Sargon. Sargon is affiliated with Andrew
Badolato both of whom are shareholders of the Company. The Company has
terminated the agreements with Sargon. If Sargon pursues a claim against the
Company for any further compensation under those agreements, the Company will
vigorously defend against any such claim. The Companys office facility at 516 Paul Morris Drive, Englewood,
Florida, is owned by P. Robert DuPont, the Vice President of Research &
Development and a member of the Companys Board of Directors, and Charles Fust,
the Chairman and CEO. Mr. DuPont and Mr. Fust each own a fifty percent (50%)
interest in the 57




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facility. A fairness opinion has been issued to the Company
verifying that this transaction is fair and was conducted at arms-length. The Otto Law Group, PLLC, Seattle, Washington, represented the Company and
SinoFresh  Delaware on legal matters and billed the Company for legal services
pursuant to an engagement agreement. David Otto of The Otto Law Group, PLLC,
is a shareholder and a member of the Board of Directors of the Company and was
formerly the Companys General Counsel and Secretary. In fiscal 2003, The Otto
Law Group, PLLC billed the Company approximately $277,000 for legal fees and
expenses. The
Company pays to Stacey Maloney-Fust the sum of $1,250 per month as
rent for a condominium apartment owned by Ms. Maloney-Fust in Sarasota,
Florida. The condominium is used as corporate housing for an independent
contractor working for the Company whose residence is located elsewhere. Also,
during 2003, consulting fees paid to Ms. Maloney-Fust prior to her becoming an
officer and a director approximated $10,000. The Company paid approximately $30,000 in lease payments for office space
in Ft. Lauderdale, Florida that had been leased by Charles Fust d/b/a SinoFresh
Laboratories, Inc. At the time of the acquisition of the assets of SinoFresh Laboratories,
Inc. (SinoFresh Labs), the Company agreed to advance funds up to $50,000 in
connection with litigation of SinoFresh Labs pending at the time of the
acquisition. The litigation has not been resolved and to date the Company has
expensed approximately $76,000 for this litigation. At the time of the acquisition of SinoFresh Labs, the Company issued to
Charles Fust 1,500,000 (post-merger) shares of Series B Preferred Stock for the
transfer of his U.S. patents to the Company, and issued 6,000,000 (post-merger)
shares of common stock to Charles Fust and certain of his designees in
connection with Mr. Fusts employment with the Company. The Company also
expensed approximately $131,000 on behalf of two entities related through
common ownership and Charles Fust in connection with the registration and
maintenance of certain foreign patents. The Company is currently in the
process of having all such foreign patents assigned to the Company. In November 2003, the board of directors, by unanimous written consent,
granted an option for 890,000 shares of stock to SinoFresh Management, LLC, a
company owned by Stephen Bannon and Charles Fust. The LLC agreement provided,
among other things, that Bannon was entitled to approximately 500,000 shares
under this option. At the time of the grant, not all board members were aware
of the interest of the two directors in that company. In April 2004 the
Executive Committee (including Mr. Fust) declared that option invalid. 
 ITEM 13. EXHIBITS LIST AND REPORTS ON FORM 8-K A. Exhibits The exhibits in the accompanying Exhibit Index are filed as part of
this Report on Form 10-KSB. B. Reports on Form 8-K The Company filed a Current Report on Form 8-K on September 23, 2003
pertaining to the acquisition of SinoFresh HealthCare, Inc., a Delaware
corporation, on September 8, 2003. The Company filed an amendment to the Current Report on Form 8-K on
November 17, 2003, which included the required financial statements in
connection with the acquisition of SinoFresh HealthCare, Inc., a Delaware
corporation. 58




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ITEM 14. CONTROLS AND PROCEDURES As required by Rule 13a-15 under the Securities Exchange Act of 1934, as
amended, as of the end of the period covered by this report, SinoFresh carried
out an evaluation of the effectiveness of the design and operation of
SinoFreshs disclosure controls and procedures. This evaluation was carried
out under the supervision and with the participation of SinoFreshs management,
including SinoFreshs Chief Executive Officer and Chief Financial Officer, who
concluded that SinoFreshs disclosure controls and procedures are effective.
There have been no significant changes in SinoFreshs internal controls or in
other factors, which could significantly affect internal controls subsequent to
the date SinoFresh carried out its evaluation. Disclosure controls and procedures are controls and other procedures that
are designed to ensure that information required to be disclosed in SinoFreshs
reports filed or submitted under the Exchange Act is recorded, processed,
summarized and reported, within the time periods specified in the SECs rules
and forms. Disclosure controls and procedures include, without limitation,
controls and procedures designed to ensure that information required to be
disclosed in SinoFreshs reports filed under the Exchange Act is accumulated
and communicated to management, including SinoFreshs Chief Executive Officer
and Chief Financial Officer, to allow timely decisions regarding required
disclosure. 
 ITEM 15. PRINCIPAL ACCOUNTANT FEES AND SERVICES Audit Fees The former principal accountants billed the Company approximately of
$38,000 and $91,000 in fees and expenses for professional services rendered in
connection with the audits of the consolidated financial statements for the
calendar years ended December 31, 2003 and 2002, respectively, and reviews of
the consolidated financial statements included in the quarterly reports on Form
10-QSB during such calendar years. Audit-Related Fees The former principal accountants did not bill the Company any additional
fees that are not disclosed under audit fees in each of the last two calendar
years for assurance and related services that are reasonably related to the
performance of the audit or review of the Companys consolidated financial
statements. Tax Fees The former principal accountants did not bill the Company any additional
fees for tax compliance, tax advice and tax planning during calendar years
ended December 31, 2003 and 2002, respectively. All Other Fees The former principal accountants did not bill the Company during calendar
years ended December 31, 2003 and 2002 for products and services other than
those products and services described above. Audit Committee
Pre-Approval Process, Policies and Procedures The appointment of Moore Stephens Lovelace, P.A. was approved by the Board
of Directors as the principal auditors for the Company. Three members of the
Companys Board of Directors, Charles Fust, P. Robert Dupont and Stacey
Maloney-Fust, currently serve as the audit committee until the Company is able
to recruit independent directors with the appropriate financial experience
and/or background to serve on such committee and
who are truly independent from internal and external influences, as well
as independent under NASDAQ or AMEX rules. Although two directors of SinoFresh
 Florida, Messrs. Stephen Bannon and David Otto, were non-employee directors,
the Board of Directors of the Company did not formally appoint by resolution or
otherwise an audit committee until March 29, 2004. When independent directors
join the board, the board plans to establish a new audit committee, which will
then adopt an appropriate charter and pre-approval policies and procedures in
connection with services to be rendered by the independent auditors. The
principal auditors have informed the Board of Directors of the scope and nature
of each service provided. 59




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SIGNATURES Pursuant to the requirements of the Securities and Exchange Act of 1934,
as amended, SinoFresh HealthCare, Inc. has duly caused this annual report to be
signed on its behalf by the undersigned thereunto duly authorized. SINOFRESH HEALTHCARE, INC./s/ Charles Fust
Charles FustChairman of the Board and Chief Executive Officer
(principal executive officer)Date:  April 13, 2004
 Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, this report has been signed by the following persons on its behalf of
SinoFresh HealthCare, Inc. And in the capacities indicated. Signature
    
    Title
    
    Date/s/ Charles Fust

Charles Fust
    
    Chairman of the Board and Chief Executive Officer
(principal executive officer)
    
    April 13, 2004/s/ Russell R. Lee III

Russell R. Lee III
    
    Chief Financial Officer and Secretary
(principal financial officer)
    
    April 13, 2004/s/ P. Robert DuPont

P. Robert DuPont
    
    Vice President, Research & Development; Director
    
    April 13, 2004/s/ Stacey Maloney-Fust

Stacey Maloney-Fust
    
    Senior Vice President; Assistant Secretary; Director
    
    April 13, 2004Stephen Bannon
    
    Director
    
    April , 2004David Otto
    
    Director
    
    April , 2004
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Exhibit Index Exhibits Number
    
    Description2.1
    
    Merger Agreement dated September 8, 2003 (1)3.1
    
    Articles of Incorporation (2)3.1.1
    
    Amendment to Articles of Incorporation (3)3.2
    
    Bylaws (2)4.1
    
    Form of Common Stock Registration Rights Agreement (3)4.2
    
    Common Stock Registration Rights Agreement with DJ Properties (3)4.3
    
    Registration Rights Agreement with InvestLinc Equity Fund II, LP,
InvestLinc Emerging Growth Equity Fund I, LLC and The Invest Line
Group, Inc. dated November 15, 2002*4.4
    
    Form of 2003 Warrant Agreement*4.5
    
    Cancelable Warrant Agreement with Dave Macrae Trust dated September 8, 2003*4.6
    
    2004 Warrant Agreement with Dave Macrae Trust dated as of September 1, 2004*4.7
    
    Warrant Certificate dated November 15, 2002 in favor of The InvestLinc Group*10.1
    
    Contract Manufacturing Agreement between SinoFresh HealthCare, Inc. and AccuMed, Inc. (3)10.2
    
    Agreement with Bristol Investment Group, Inc. dated February 7, 2003 (3)10.3
    
    Employment Agreement with Charles Fust dated December 1, 2002 (3)10.5
    
    Proprietary Development, Right of First Refusal and Acquisition Agreement with SinoFresh Research Laboratories, LLC (3)10.6
    
    Investment Banking Services Agreement with Sargon Capital, Inc. dated October 24, 2002 (3)10.7
    
    Financial Consulting Services Agreement with Sargon Capital, Inc., dated September 8, 2003 (3)10.8
    
    National In-Store Agreement dated November 21, 2002 (3)10.9
    
    National In-Store Sales and Broker Agreement dated March 27, 2003 (3)10.10
    
    Agreement with David Farr dated October 9, 2003 (3)10.11
    
    Accounts Receivable Financing Agreement with Alliance Financial Capital, Inc. (3)10.12
    
    Agreement with Rubenstein Communications, Inc., dated March 18, 2003 (3)10.13
    
    Lease Agreement with DuPont & Fust Real Estate Ventures, LLC dated April 1, 2003*10.14
    
    Allonge to Promissory Note dated February 1, 2001, in favor of Invest Linc Equity Fund II*10.15
    
    Allonge to Promissory Note dated February 1, 2001, in favor of Invest Linc Emerging Growth Equity Fund I, LLC*10.16
    
    Assumption Agreement dated November 15, 2002 in favor of Invest Linc Equity Fund II, Invest Linc Emerging Growth Equity Fund I, LLC*10.17
    
    Consulting Agreement with The Invest Linc Group, LLC dated November 15, 2002*10.18
    
    Stock Purchase Agreement dated November 15, 2002 with Invest Linc Equity Fund
II, Invest Linc Emerging Growth Equity Fund I, and The Invest Linc Group*10.19
    
    SinoFresh HealthCare, Inc. 2002 Stock Option Plan (3)10.20
    
    Agreement with Moty Herman dated
October 21, 2003.*10.21
    
    Agreement between Charles Fust and
Moty Herman dated October 22, 2003.*10.22
    
    Supplemental Letter Agreement with
Moty Herman dated October 28, 2003.*10.23
    
    Letter Agreement from Charles Fust
dated April 12, 2004 re Moty Herman Agreements*16.1
    
    Letter from Salberg & Co. dated March 30, 2004*21.1
    
    Subsidiaries of the Registrant*31.1
    
    Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*31.2
    
    Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.*32.1
    
    Certification of Chief Executive Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*32.2
    
    Certification of Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.*
 61




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*
    
    Filed herewith.(1)
    
    Incorporated by reference from the Registrants Form 8-K filed on September 23, 2003.(2)
    
    Incorporated by reference from the Registrants Form 10-SB filed on April 29, 2002,
File No. 0-49764.(3)
    
    Incorporated by reference to the Registrants Form 10-QSB for the fiscal quarter ended
September 30, 2003 filed on November 17, 2003. 62