ADAMA Ltd.Assessment Report on Internal Control for 2022
All Shareholders of ADAMA Ltd.:
We evaluated the effectiveness of the internal control for the Company as of December 31,2022 (the base date of the internal control assessment report) in accordance with the "BasicStandards for Enterprise Internal Control", its supporting guidelines and other internal controlregulatory requirements (hereinafter referred as the internal control system of enterprises), whiletaking into consideration the internal control mechanism and assessment methods of our Company(hereinafter referred to as “ADAMA” or the “Company") and also on the basis of daily and specialsupervision.
I. Important Statement
In accordance with the internal control system of enterprises, the board of directors of acompany holds the responsibility to establish and improve the internal control, evaluate itseffectiveness and truthfully disclose the corresponding assessment report. The board of supervisorsof a company supervises the establishment and implementation of the internal control by the boardof directors. The management team is responsible for initiating and organizing daily activities ofthe enterprise internal control. The board of directors, board of supervisors and all members thereof,including directors and supervisors, as well as the senior management of the company, confirmthat the report is true, accurate and complete, does not contain any misleading statements ormaterial omissions and assume joint and several legal liability arising therefrom.
The goal of the internal control is to ensure that the business management of a company islegitimate and compliant, the company’s assets are secured and that its financial reporting andrelated reported information are true and complete. It is also aimed at improving operationalefficiency and effectiveness, and promoting the realization of development strategies. Due to theinherent limitations of an internal control, it can only provide reasonable assurance to achievethose objectives mentioned above. Moreover, changes in circumstances may cause the internalcontrol to be inappropriate, or reduce compliance with policies and procedures. Therefore, there isa risk in speculating the effectiveness of future internal controls based on these assessment results.
II. Conclusion of the Internal Control Assessment
1. Does the company have a material deficiency in the internal control of the financialreporting on the base date of the internal control assessment report?
□ Yes √ No
2. Assessment conclusion of internal control over financial reporting
√ Valid □ Invalid
According to the internal control's criteria for identification of material deficiencies in theinternal control over financial reporting, there is no such deficiency as of the base date ofthe internal control assessment report. The board of directors of the Company believes thatthe Company has managed an effective internal control of its financial report in all majoraspects in accordance with the requirements of the internal control system and relatedregulations.
3. Whether there is any material deficiency in the internal control over non-financial reporting
□ Yes √ No
According to the internal control's criteria for identification of material deficiencies in theinternal control related to non-financial reporting of the Company, no such deficiency wasfound on the base date of the assessment report.
4. Factors affecting the effectiveness of the assessment conclusion as of the base date until
the issuance date of the assessment report of the internal control
□ Applicable √ Not Applicable
There are no factors affecting the effectiveness of the assessment conclusion as of the basedate until the issuance date of the assessment report of the internal control.
5. Whether the audit opinion for the internal control is consistent with the effectiveness
assessment conclusion on the internal control over financial reporting
√ Yes □ No
6. Whether the disclosure regarding material deficiencies in the internal control audit reportis consistent with that of the assessment report of the company’s internal control
√ Yes □ No
III. Assessment of Internal Control
(I) Scope of Internal Control Assessment
The Company confirms the main units, businesses, items and highly risky areas to be includedin the assessment scope according to the risk-oriented principle.
1. Main Units within the Assessment Scope include:
Major subsidiaries for the manufacturing, formulation, R&D and marketing.
2. Proportion of units within the assessment scope
| Index | Proportion (%) |
| Total Assets of Units within the Assessment Scope Compared to Total Assets in the Consolidated Statements of the Company | 74.4 |
| Total Operating Income of Units within the Assessment Scope Compared to Total Operating Income in the Consolidated Statements of the Company | 74.0 |
3. Major businesses and items within the assessment scope
Financial Reporting, ITGC, Sales, Assets, Payroll, Purchase, Inventory, Treasury, Entity-level controls, Comprehensive Budget, Research and Development, Related Parties,Contract management.
4. Highly risky areas of major concern include:
Sales, Assets, Purchase, Treasury (including derivatives)
5. The above-mentioned units, businesses, items and highly risky areas within the assessment scopecover the main aspects of the company's operation and management. Is there any materialomission?
□ Yes √ No
6. Is there a statutory waiver?
□ Yes √ No
7. Other Matters
None
(II) Work Basis of the internal control assessment and the identification standards of deficiencies
The Company conducted the internal control evaluation based on the requirements of theinternal control system and relevant external supervision regulations.
1. Whether there is any adjustment of the specific criteria for defining the internal control deficiencycompared to previous years
□ Yes √ No
2. Identification criteria for a deficiency in the internal control of the financial report
The quantitative criteria for deficiency assessment in the internal control of the financial reports as wasdetermined by the Company are as follows:
| Index | Quantitative Criteria for a Material Deficiency | Quantitative Criteria for a Significant Deficiency | Quantitative Criteria for a General Deficiency |
| Misstatement in Financial Report | The misstatement in financial report relates to an amount that is greater than or equal to RMB 100 million. | The misstatement in financial report relates to an amount that is greater than or equal to RMB 50 million, but less than RMB 100 million. | Resulting in other misstatement related amounts. |
The qualitative criteria for deficiency assessment in the internal control of the financial reports as wasdetermined by the Company are as follows:
| Classification by Features | Qualitative Criteria |
| Material Deficiency | Resulting in an adverse opinion or disclaimer of opinion, by a CPA, on the Company’s financial statements; or resulting in a material correction of the Company’s publicly announced financial statements. |
| Significant Deficiency | Resulting in a qualified opinion, by a CPA, on the Company’s financial statements; or resulting in an adverse opinion or disclaimer of opinion, by a CPA, on the Company’s material subsidiaries’ (i.e. Solutions) financial statements; or resulting in a significant correction of the Company’s material subsidiaries’ (i.e. Solutions) publicly announced financial statements. In addition, where no internal control or no relevant compensation control is established or implemented for the accounting treatment for unusual or special transactions. |
| General Deficiency | Resulting in an unqualified opinion, with an explanatory paragraph, by a CPA, on the Company’s financial statements; or resulting in a qualified opinion, or unqualified opinion with an explanatory paragraph, by a CPA, on the Company’s subsidiaries’ financial statements. |
3. Identification criteria for a deficiency in the internal control over non-financial reporting
The quantitative criteria for a deficiency assessment in the internal control over non-financialreporting as was determined by the Company are as follows:
| Index | Quantitative Criteria of Material Deficiency | Quantitative Criteria of Significant Deficiency | Quantitative Criteria of General Deficiency |
| Asset Loss | Asset Loss ≥ RMB 150 million | RMB 80 million ≤ Asset Loss < 150 million RMB | Asset Loss < 80 million RMB |
The qualitative criteria for a deficiency assessment in the internal control over non-financialreporting as was determined by the Company are as follows:
| Classification by Features | Qualitative Criteria | ||||
| Material Deficiency | 1) Fraud committed in the Company by any of its directors, supervisors and senior management personnel; 2) The Company materially violates material laws and regulations, resulting in a material effect on the Company's business; 3) Material design deficiencies in the Company's relevant management system; 4) The Company materially violates the decision-making process thereby causing a material negative impact on the Company's business (generally related to matters that need to be approved by the shareholders meeting or the board of directors). 5) Material impact to the Company’s reputation. | ||||
| Significant Deficiency | 1) Significant fraud committed by any department head of the Company; 2) Significant fraud committed by a head of any of the Company’s material subsidiaries; 3) The Company violates significant laws and regulations, resulting in significant fines as well as a significant effect on the Company's business ; 4) Significant design deficiencies found in the Company's relevant management system; Material design deficiencies are found in the relevant management systems of subsidiaries; 5) The Company violates material decision-making procedures, resulting in a significant effect on the Company's business (generally referred to matters subject to senior management's decision); 6) Material Subsidiaries violate decision-making process, thereby causing a material negative impact on the Company's business (generally referred to matters that need to be decided by the shareholders’ meeting or the board of directors). 7) Significant impact to the Company’s reputation. | ||||
| General Deficiency | 1) Fraud committed by any other personnel in the Company; 2) Fraud committed by any other personnel in material subsidiaries; 3) The Company materially violates material internal regulations or non-materially violates material laws and regulations, resulting in negative feedback from regulatory authorities; 4) There are other violations of laws and regulations or internal regulations found in material subsidiaries. 5) There are general design deficiencies in the relevant management system of the Company; other design deficiencies exist in the relevant management system of the material subsidiaries; 6) The Company violates the decision-making process, resulting in a negative impact on the Company's business; 7) Material Subsidiaries violate decision-making process, resulting in a negative impact on the Company's business. | ||||
(III) Identification and rectification of internal control deficiencies
1. Identification and remediation of deficiencies included in the internal control deficiencies on thefinancial reporting
1.1. Material Deficiency
Whether the company has a material deficiency in the internal control of the financial reporting during thereporting period
□ Yes √ No
1.2. Significant Deficiency
Whether the company has a significant deficiency in the internal control of the financial reporting during thereporting period
√ Yes □ No
During 2022, one significant deficiency was found, due to two events occurred in subsidiaries level that havenot been reported by the subsidiaries to the group’s management in a timely manner according to the entity levelcontrol designed. The deficiency does not have any significant impact on the financial results of the Group.
The management is in a process of internal investigation in order to design and implement a rectification plan.
1.3. General Deficiency
The general internal control deficiencies identified by the Company do not affect the realization of the controlobjectives; the Company acknowledges with great importance the general deficiencies found during thereporting period and has proposed remediation opinions and actively formulated corresponding plans for theirimplementation.
1.4. After the remediation, as of the base date of the internal control assessment report, whether thecompany has a material deficiency in the internal control over financial reporting that has not beenrectified
□ Yes √ No
1.5. After the remediation, as of the base date of the internal control assessment report, whether thecompany has a significant deficiency in the internal control over financial reporting that has not beenrectified
√ Yes □ No
2. Identification and Rectification of Internal Control Deficiencies over Non-Financial Reporting
2.1. Material Deficiency
Whether the company identified any material deficiency in the internal control over non-financial reportingduring the reporting period
□ Yes √ No
2.2 Significant Deficiency
Whether the company identified any significant deficiency in the internal control over non-financial reportingduring the reporting period
□ Yes √ No
2.3. General Deficiency
The general deficiency identified by the company does not affect the realization of the control objectives; theCompany acknowledges with great importance the general deficiency found during the reporting period and hasproposed rectification opinions and actively formulated corresponding plans for implementation.
2.4. After the above rectification, as of the base date of the internal control assessment report, whetherthe company has a material deficiency in the internal control not related to financial reporting that hasnot been rectified
□ Yes √ No
2.5. After the rectification, as of the base date of the internal control assessment report, whether thecompany has a significant deficiency in the internal control not related to financial reporting that has notbeen rectified
□ Yes √ No
IV. Other important matters related to internal control
1. Rectification of internal control deficiencies in the previous year
√ Applicable □ Not Applicable
During 2021, a significant deficiency was identified in a marketing subsidiary of the Group which wasrelated to the design and operational controls over the accuracy and completeness of the rebatecalculations. During 2022, the deficiency was rectified that the management of the subsidiaryredesigned the controls regarding the rebate process including segregation of duties and building reportsin the system to ensure completeness and accuracy of the rebate provision. Additionally, themanagement has improved the estimation based on past experience and approved rebate plans.
2. Internal Control Progress of the Current and the Next Years
□ Applicable √ Not Applicable
3. Other Major Items
□ Applicable √ Not Applicable
By order of the BoardADAMA Ltd.March 19, 2023