Source Natural Foods & Herbal Supplements Ltd

REPORT

INDUSTRY STRUCTURE AND DEVELOPMENT

The practical tenets of Ayurveda, the sector where the Company now operates, aredivided into eight sections or branches. These sections include:

• Internal medicine, . Surgery,

• Organic medicine,

• Pediatrics,

• Toxicology,

• Rejuvenating remedy,

• Aphrodisiac remedies and

• Spiritual healing.

These eight sections are called "Astanga Ayurveda".

Ayurveda is a complete or holistic system that integrates the mind, body and spirit.For a few centuries, the tradition of Ayurveda was dimmed due to the natural and humancalamities and also by the invasion of foreign cultures into India. The sacred texts wereeither destroyed or stolen. However there were many 'Vaidyas' or doctors in India whomanaged to preserve some of the knowledge available in these Holy Scriptures. Divineplants that sustain long life and good health are now being rediscovered. Many renownedfamilies of Vaidyas, who are specialized in certain branches of Ayurveda, have startedfunctioning again in India. Today there is a revival of the ancient culture and traditionsinherent to Ayurveda, which is a true gift of the ancient civilization to the modernworld.

Current scenario of Ayurveda Industry: Figures:

Status Of Ayurveda In India

The Indian Government and Non-Government Organizations have been collecting statisticson the Ayurvedic system in India and these data about the manpower and institutionalaspects of Ayurveda have emerged:

• Number of registered medical practitioners: 366,812

• Number of dispensaries: 22,100

• Number of hospitals: 2,189

• Number of hospital beds: 33,145

• Number of teaching institutions (undergraduate): 187

• Number of upgraded postgraduate departments: 51

• Number of specialties in postgraduate medical training: 16

• Number of pharmacies manufacturing Ayurvedic medicines: 8,400

OUTLOOK AND FUTURE PLANS

The Company is currently thriving to achieve profitable and steady growth byintroducing new aspects into the Business plan by diversifying and extending its scope tomanufacturing and exporting of Ayurvedic tablets, Capsules, food supplements etc. whichcurrently have a subsisting demand in both domestic and foreign markets. The Company hasregistered with and obtained certifications from various agencies like ISO 22000 SGS HACCPCertification from SGS, GMP Certification, USDA- Organic products approval, EEC andIndian Organic Certification and has further taken required initiatives to comply with therequirements arising as a result of these certifications from the said agencies and isfurther implementing new and improved manufacturing processes which proved effective andresourceful in the Industry and has also adopted new and updated technologies that arecurrently available.

The Strategic Investors who currently comprise the Board have initiated and to someextent affected a major change in the working scenario of the Company by entering into newmarkets exploiting their benefits both domestic and international by mainly focusing onthe field of Ayurveda, which is increasingly being accepted worldwide. The Company hasplanned to enter the international market via export of Ayurvedic products and for thispurpose has formulated suitable strategies. One of these being obtaining accreditationsfrom various renown certifying authorities having world wide acceptance thereby addingimmense value our products which shall enter the International market in an Embryonicstate. As far a domestic market is concerned, Ayurvedic products are widely acceptable inour Country due to the abundant awareness about the pros of Ayurvedic products. Thestrategic investors are mainly focusing on this aspect as this holds the potential tobring a positive change on the Company's financial structure in the near future.

OPPORTUNITIES AND THREATS

The growth of middle class in the country has resulted in fast changing lifestyles inurban and to some extent rural areas. This opens a huge market for lifestyle drugs, whichhas a very low contribution in the Indian markets. Indian manufacturers are one of thelowest cost producers of drugs in the world. With a scalable labor force, Indianmanufactures can produce drugs at 40% to 50% of the cost to the rest of the world. In somecases, this cost is as low as 90%. Indian pharmaceutical industry possesses excellentchemistry and process re-engineering skills. This adds to the competitive advantage of theIndian companies. The strength in chemistry skill helps these Indian companies to developprocesses, which are more cost effective.

Strength:

• Rich and time tested Traditional Knowledge (TK) associated with sustainable useof biogenetic resources

• Side effects free medicines.

• Trust in Indian Tradition Medicine System.

• Over 82% is Ayurveda in Indian Tradition Medicine System.

Opportunities

• An ever increasing need for new drugs to handle modern day life-style relatecchronic ailments

• >60 % of people in developing countries depend on Ayurveda.

• Due to fast life style trend is moving towards "HERBAL".

• India has become a top-five global destination for investment in all phases olpharmaceutical development and growth of lower-level biotechnology (e.g. vaccines,monoclonal antibodies, etc.) progresses well, but lacks an enabling environment andincentives for investment in traditional medicines.

• Business opportunities for Ayurvedic Industries: Ayurveda is an indigenoussystem of India and nearly 70% of its population uses the traditional system of medicine.Consumers of Ayurvedic drugs are increasing day by day in India and outside India, andgrowth in the consumption of herbal medicine is significant. Presently, a numbers ofAyurvedic products are being exported as nutraceuticals and health care products.

RISKS AND CONCERNS Weaknesses:

• Lack of good institutions and teachers

• Poor marketing

• Very few good R&D centers

• Shortage of raw material

• Lack of documented validation of Products.

• Lack of documented quality control procedures.

• Lack of documented process validation.

• Batch to batch variation in product.

• Toxicity profile - not explained

• Efficacy - not scientifically proved & documented

• Quality assurance protocol - not properly designed.

• Lack of world class treatment centers.

• Lack of NABH accreditation.

• Lack of health Insurance approval.

• Lack of well trained man power.

Threats:

• Escalation in raw materials price

• Lowering of standards in the products

• Adulteration in the raw materials

• Unhealthy growth of fake massage parlors.

• Low exports due to

- Lack of proper documents and scientific data

- GMP and Quality

- Price , Packaging , Delivery schedule

• Centers opened by untrained people.

• Allopathy as it is fast in results.

INTERNAL CONTROL SYSTEM AND ITS ADEQUACY

The Company has recently modified and improved its internal control system by making itmore efficient, effective and highly fraud detention system. The Company is carrying outinternal audits at regular intervals so as to ensure NIL irregularities and operationalinefficiencies. Such Audits are carried out in accordance with the requirements of theCompany under the supervision of the Audit Committee and is being improved from time totime by including new methodologies and further polishing the existing ones. The finalreport on the Audit is submitted to the Board of Directors after being approved by theAudit Committee. The Board shall review the policies adopted and procedures followed andshall approve the same on finding them appropriate to the requirement.

The Audit Committee Comprises of the members from the Board so as to ensure totaltransparency and consists of three Independent non-executive Directors. The committeeperforms the task of review of internal control systems from time to time and unauditedfinancials every quarter before recommending them to the Board of Directors. In thisregard, the Board shall seek expert advices and reviews from statutory auditors, InternalAuditor and Consultants to the Company.

The Company's Budgetary Control system has been substantially improved to monitor,manage and regulate the Cost and Capital related aspects. The Company has alsoreconfigured the internal control system so as to keep a continuous and regular check onthe Assets of the Company and protect them from any loss or damages which occur due tounauthorized access and usage.

SHARE CAPITAL

During the year under review, there was no further issue of shares. Thus trie paid upcapital of the Company stands at Rs. 4,50,00,400/- as on 31.03.2011.

SECURED LOANS

Secured loans of the Company as on 31.03.2011 are NIL

FIXED ASSETS

New assets worth Rs.74.14 Lakhs have been acquired during the Year and added to theblock, as a result the net block of fixed assets stands at Rs.332.70Lakhs for the yearended 31.03.2011 after providing an accumulated depreciation of Rs.127.87 Lakhs

HUMAN RESOURCES AND INDUSTRIAL RELATIONS

The Company is currently emphasizing on recruiting additional personnel and work forcepossessing enough expertise and experience in the field of Ayurvedic products as it hasexpanded its operations by diversifying in to a new line of products pertaining to thesame industry. The human and industrial relations have remained peaceful and composedduring the year and the company is currently working on providing much comfortable workingenvironment to the existing personnel and new talents to motivate retain and attract thehighly contributing talents.

The Company also has good relations with other companies in the similar stream ofbusiness and it shall be useful in understanding the market behavior and phenomenon indepth and to stay updated with competitors both in growth and adoption of new technologiesfor cost effective operation.

CAUTIONARY STATEMENT

Statements made in the Management Discussion and Analysis report which describes theObjectives, projections, estimates, approximations, predictions etc., may be considered tobe forward looking statements and are stated as per the applicable laws and regulations.Actual results may defer from those expressed or speculated and are determined by manyfactors both domestic and global demand - supply conditions, processes, raw materialavailability, tax laws, government policies and other statutory obligations andimplications which may affect the actual results which may be different from what theDirectors envisaged in terms of future performance and outlook.