Clarke Inc.

Management’s Discussion & Analysis

December 31, 2020 and 2019

MANAGEMENT’S DISCUSSION & ANALYSIS

Management’s Discussion & Analysis (“MD&A”) presents management’s view of the financial position and performance of Clarke Inc. (“Clarke” or the “Company”) for the year ended December 31, 2020 compared with the year ended December 31, 2019. The following information is derived from the Company’s consolidated financial statements which are prepared in accordance with International Financial Reporting Standards (“IFRS”). This MD&A should be read in conjunction with the information disclosed within the consolidated financial statements and notes thereto for the year ended December 31, 2020 and the Company’s Annual Information Form (“AIF”), including the risk factors described therein, available on SEDAR at www.sedar.com. This MD&A provides an overall discussion, followed by analyses of the performance of the Company’s major investments. The MD&A is prepared as at March 2, 2021 (unless otherwise stated). All dollar amounts are shown in millions of Canadian dollars unless otherwise indicated.

OVERVIEW & STRATEGY

Clarke is an investment company. Our objective is to maximize shareholder value. While not the perfect metric, we believe that Clarke’s book value per share, together with the dividends paid to shareholders, is an appropriate measure of our success in maximizing shareholder value over time.

We attempt to maximize shareholder value by allocating capital to investments that we believe will generate high returns and reallocating capital over time as needed. In doing this, Clarke’s goal is to identify investments that are either undervalued or are underperforming and may be in need of positive change. These investments may be companies, securities or other assets such as real estate, and they may be public entities or private entities. We do not believe in limiting ourselves to specific types of investments. Clarke seeks active involvement in the governance and/or management of the company in which it invests. In these cases, Clarke will have acquired the security with a view of changes that could be made to improve the underlying company’s performance and maximize the company’s value. When Clarke believes that an investee company has implemented appropriate changes and/or the value of the investee company has reached or exceeded its intrinsic value, Clarke may sell its investment. Clarke generally invests in industries that have hard assets, including manufacturing, industrial, energy and real estate businesses.

FULL YEAR REVIEW AND OUTLOOK

During 2020, the Company’s book value per Common Share decreased by $3.86, or 25.6%. The decrease can primarily be ascribed to (i) the distribution to shareholders of the Company’s shares of TerraVest Industries Inc. (“Terravest”) with a value at the time of distribution in the amount of $58.1 million, or $3.58 per Common Share, (ii) a net revaluation loss of certain hotels owned by Holloway Lodging Corporation (“Holloway”) in the amount of $12.1 million, or $0.73 per Common Share, (iii) losses in our operating businesses and corporate overhead in an amount of $12.1 million, or $0.73 per Common Share, offset by (iv) repurchasing our Common Shares at prices below our book value per share in the amount of $11.3 million, or $0.35 per Common Share, (v) net realized/unrealized gains on our marketable securities in the amount of $5.8 million, or $0.35 per Common Share, (vi) an increase in the after-tax value of our pension plan surplus in the amount of $4.8 million, or $0.29 per Common Share, and (vii) a fair value increase of certain office buildings owned by Holloway in the amount of $2.0 million, or $0.12 per Common Share. Our book value per Common Share at the end of the year was $11.20 while our Common Share price was $6.68.

During the fourth quarter, the Company, through its wholly-owned subsidiary, Holloway, sold the Best Western[®] in Grande Prairie, Alberta to a company controlled by Clarke’s Executive Chairman and his immediate family member (the "Purchasing Company") for consideration of $11.5 million. The transaction constituted a "related party transaction" pursuant to Multilateral Instrument 61-101 – Protection of Minority Security Holders in Special Transactions ("MI 61-101"). The Company was exempt from the requirements to obtain a formal valuation and minority shareholder approval in connection with the sale in reliance on the exemptions contained in sections 5.5(a) and 5.7(1)(a) of MI 61-101, respectively, as the fair market value of the transaction did not exceed 25% of the Company’s market capitalization. The transaction was reviewed and approved by the board of directors of the Company, excluding Mr. George Armoyan, the Executive Chairman of the Purchasing Company, who abstained from voting on the matter.

Subsequent to December 31, 2020, the Company announced its intention to commence a substantial issuer bid pursuant to which it would offer to purchase up to 1,150,000 of its outstanding common shares (or such greater number of common shares that the Company may determine it will take up and pay for) at a purchase price of $7.00 per share. The aggregate purchase price pursuant to the offer will be $8.1 million if all common shares are purchased.

COVID-19

The spread of COVID-19, consumer and business perceptions of the danger of COVID-19 and Canadian and provincial government responses to COVID-19 have affected the Company materially and adversely during 2020. The impact has been particularly strong on the hotel and ferry businesses due to the decline in business and leisure travel and even day-to-day commuting.

Economic activity has been resuming throughout the second half of the year, and our businesses are beginning to recover. How long it takes for business levels to normalize remains highly uncertain. In mid-March, as the impact of COVID-19 on business levels became apparent, we took immediate and drastic action at our businesses to safeguard employee and customer safety, ensure financial liquidity, reduce and/or defer expenses and minimize cash burn. We do not expect to generate significant positive cash flow at Holloway or our ferry business until the travel and leisure industries return to more normal economic levels.

Holloway Lodging Corporation

The percentage decline of our revenue compared to the prior year in the fourth quarter was consistent with the decline we experienced in the third quarter. This implies that the situation has not further eroded, but has stabilized, albeit at a very low level. We believe that demand will increase from here, but the recovery will be volatile, and the pace of improved results could vary significantly between markets. As jurisdictions cycle between raising and lowering alert levels, we have adapted operations quickly, and positioned ourselves to take advantage of an eventual recovery. While all of our hotels have remained open since six were closed initially, we have had various food and beverage operations close sporadically due to regional restrictions and low business levels. While the recent emergence of several COVID-19 variants is a new threat, the planned vaccination program does offer hope for a return to more traditional business patterns.

We continue to work on the pre-construction phase of the redevelopment of our Ottawa hotel site and we engaged a general contactor in the fourth quarter. We expect the construction phase to commence in 2021.

Trican Well Service Ltd. (“Trican”)

Our patience was rewarded in the fourth quarter of 2020. Boosted by vaccine developments and a substantial rally in commodities, Trican shares gained nearly 46% in the quarter. We took this opportunity and reduced our position by about one fifth of our total holdings, divesting roughly 7 million common shares of Trican.

We maintain an optimistic view on the sector, with recovery in energy prices hopefully translating into E&P Capex spending. We believe that a recovery in demand for oil field services, coupled with reduced and idled supply, will result in sector-wide tailwinds in 2021.

Real Estate and Corporate

We currently own three vacant office buildings in Houston, TX totalling approximately 435,000sf. We acquired these properties far below the cost at which they can be replaced, and we are actively working to redevelop and/or lease these properties. During the year, we recorded a fair value adjustment increase on two of these properties for a total of $2.0 million as a result of unsolicited purchase offers. We also own a vacant parcel of land in Moncton, NB.

We currently have $51 million of debt at the Clarke corporate level and $115 million of debt on a consolidated basis. We have availability under our corporate and subsidiary credit lines of $46 million (although our borrowing bases may decline due to the impact of COVID-19). During the fourth quarter, we amended our credit facilities with our primary lender to establish incremental, long-term liquidity to the Company.

BOOK VALUE PER SHARE

The Company’s book value per share at December 31, 2020 was $11.20, a decrease of $3.86 per Common Share since December 31, 2019. The following graph shows Clarke’s book value per share, share price and cumulative dividends paid since 2002 (the year the present Executive Chairman joined the Company).

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$15.00
15.06
$14.00
$13.00 12.44
$12.00 12.57 12.21 12.21 12.50
$11.00 11.61
11.20
$10.00 10.71 10.45 9.70
$9.00 10.00 9.86 9.36
$8.00 7.52 8.32 6.68
6.55 7.99
$7.00
6.12 6.12 6.12
6.95
$6.00 5.00
$5.00$4.00 3.03 3.71 4.79 5.62 3.27 4.07 3.35 5.41 4.12 5.31 4.00 5.15 4.77 4.12
$3.00 2.34 3.53
1.92
$2.00 2.62 2.68 2.74 1.52
1.02
$1.00 0.08 0.16 0.24 0.32 0.40 0.48 0.56 0.56 0.56 0.56 0.68
$0.00
2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018 2019 2020
Book Value Per Share Cumulative Dividend Clarke Share Price
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* Information for the years ended 2002 and 2003 is as at March of the following year. In 2004 the Company’s year-end was changed to December. All other information is for the years ended December 31.

RESULTS OF OPERATIONS

Highlights of the consolidated financial statements for the last three completed fiscal years are as follows:

	Year ended	Year ended	Year ended
(in millions, except per share amounts)	December 31, 2020	December 31, 2019	December 31, 2018
	$	$	$
Hotel and management services	30.5	73.9	―
Provision of services	4.6	8.1	7.4
Bargain purchase	―	21.8	―
Investment and other income (loss)*	(8.2)	16.7	(0.9)
Net income (loss) attributable to equity holders of the
Company	(19.2)	38.4	(0.6)
Comprehensive income attributable to equity holders
of the Company	(10.5)	38.9	18.6
Basic earnings (loss) per share (“EPS”)	(1.21)	2.90	(0.04)
Diluted EPS	(1.21)	2.78	(0.04)
Total assets	311.0	401.2	164.1
Long-term financial liabilities	109.7	94.3	2.4
Book valueper share	11.20	15.06	12.21

*Investment and other income (loss) include unrealized/realized gains/losses on investments, hotel revaluations and property fair value adjustments, dividend and interest income, pension recovery/expense, insurance proceeds, gains/losses on disposal of assets, foreign exchange gains/losses, and gains on repurchase of convertible debentures.

Net loss attributable to equity holders of the Company for the year ended December 31, 2020 was $19.2 million compared to net income of $38.4 million in 2019. During the year ended December 31, 2020, the Company had unrealized losses on its investments of $24.6 million compared to unrealized gains of $17.0 million in 2019. The Company had realized gains on its investments of $30.4 million for the year ended December 31, 2020 compared with realized losses of $3.3 million in 2019. The Company recorded a bargain purchase gain of $21.8 million during the year ended December 31, 2019 as a result of the acquisition of control of Holloway.

SEGMENT REPORTING

The table below summarizes the Company’s holdings as at December 31, 2020 based on total assets. The Other category is not a segment and is disclosed for reconciliation purposes. It consists of our treasury and executive functions, the results of our pension plans and the interest payable on our convertible debentures.

	December	2020	December	2019
Segment	$	%	$	%
Investment	68.9	22.2	131.5	32.7
Hospitality	207.8	66.8	238.2	59.4
Other	34.3	11.0	32.0	8.0
Intercompany elimination	―	―	(0.5)	(0.1)
Total	311.0	100.0	401.2	100.0

Investment segment

The Company’s investment segment is comprised of securities, a ferry business, and vacant office buildings in Houston, TX. During the year ended December 31, 2020, the Investment segment had unrealized losses on its investments of $24.6 million compared to unrealized gains of $44.7 million in 2019. The Investment segment had realized gains on its investments of $30.4 million for the year ended December 31, 2020 compared with realized losses of $17.6 million in 2019. The Company’s equity holdings generated dividends of nil in 2020 compared to $2.8 million in 2019.

At December 31, 2020, the Company owned 28,000,000 shares of Trican with a value of $46.8 million. During the first quarter of 2020, Clarke’s investment in the common shares of Terravest were disposed of through the dividend-in-kind and all other public company securities were sold. During 2020, the Company generated total proceeds of $12.6 million from the sale of marketable securities, compared to total proceeds of $5.6 million in 2019.

A summary of the change in the Company’s securities portfolio is as follows:

	Year ended
	December 31, 2020
	$
Securities – beginning of year	111.7
Proceeds on sale	(12.6)
Net realized and unrealized gains on securities	5.8
Disposal of Terravest common shares by dividend-in-kind	(58.1)
Securities – end ofyear	46.8

There were no material developments with our office buildings in Houston during the year aside from the fair value adjustment of $2.0 million. We also own a passenger/car ferry operating on the St. Lawrence River under contract with the Government of Québec since 1973. During 2020, we experienced a significant reduction in revenue due to the delayed opening of the season as a result of the state of emergency due to the pandemic. The ferry normally begins its operating season at the start of the second quarter. This year we opened in the latter half of May. There were no other material developments with the ferry business during the year.

Hospitality segment

Holloway owns and operates hotels across Canada. We began to consolidate Holloway’s results into our own results after acquiring control by obtaining 51% of Holloway’s outstanding shares in early 2019. We acquired the remaining outstanding shares of Holloway on September 30, 2019 to increase our ownership to 100%. Holloway’s results for the year ended December 31, 2020 compared to the year ended December 31, 2019 are as follows:

	Year ended	Year ended
	December 31, 2020	December 31, 2019
	$	$
Hotel operations	30.5	73.9
Investment and other income (loss), net of hotel revaluations	(16.0)	0.7
Total revenue and other income	14.5	74.6
Less:
Hotel operating expenses, corporate expenses, property taxes and
insurance	24.7	55.5
Selling costs on property and equipment sales	―	2.8
Share-based payment expense	―	0.4
Depreciation	10.6	11.9
Interest expense	3.1	7.1
Loss before income taxes	(23.9)	(3.1)

Hotel occupancy in the fourth quarter declined significantly compared to the prior year and declined by a modest amount from our third quarter levels which traditionally produces the greatest demand due to summer leisure travel. Our fourth quarter revenue and occupancy levels remain significantly above our second quarter results driven by the reopening of our closed hotels and the gradual reopening of certain parts of the economy. Nonetheless, the revenue decline has made for a very difficult quarter.

We continue to use all available means to mitigate the impact of lower revenue. These measures include significant staffing reductions in both hotel operations and corporate departments, availing to the Canadian Emergency Wage Subsidy, Canadian Emergency Rent Subsidy and other government programs and reducing operating expenses across all areas of our business.

OUTSTANDING SHARE DATA

At March 2, 2021, the Company had:

An unlimited number of Common Shares authorized and 15,049,792 Common Shares outstanding;
An unlimited number of First and Second Preferred Shares authorized and none outstanding; and
150,000 options to acquire Common Shares outstanding, 50,000 of which are vested and exercisable.

NORMAL COURSE ISSUER BIDS (“NCIB”)

The directors and management are of the opinion that, from time to time, the prices of the Company’s Common Shares may not reflect their intrinsic value and, therefore, purchasing such Common Shares may be a worthwhile use of funds and in the best interests of the Company and its shareholders.

In June 2018, Clarke announced that it had received approval from the TSX to conduct a NCIB to purchase for cancellation up to 627,514 Common Shares, representing 5% of the issued and outstanding Common Shares as at that date. The NCIB commenced on June 8, 2018 and Clarke repurchased 264,400 Common Shares by the end of 2018 and 244,459 Common Shares in 2019 prior to the expiry date of June 7, 2019.

In June 2019, Clarke announced that it had received approval from the TSX to conduct a NCIB to purchase for cancellation up to 810,774 Common Shares, representing 5% of the issued and outstanding Common Shares as a that date. The NCIB commenced on June 27, 2019 and Clarke repurchased 91,200 Common Shares by the end of 2019 and 719,574 Common Shares in 2020 prior to the expiry date of June 26, 2020.

In June 2020, Clarke announced that it had received approval from the TSX to conduct a NCIB to purchase for cancellation up to 795,024 Common Shares, representing 5% of the issued and outstanding Common Shares as a that date. The NCIB commenced on June 29, 2020 and will terminate on June 28, 2021. Clarke repurchased 437,925 Common Shares by the end of 2020.

LIQUIDITY AND CAPITAL RESOURCES

During 2020, the Company’s net short term debt position (a non-IFRS measure representing short-term indebtedness net of cash and cash equivalents) decreased $22.0 million and is $5.5 million as at December 31, 2020. This increase in cash is largely a result of proceeds on the sale of marketable securities and the Best Western hotel in Grande Prairie.

Cash flow from operating activities

Cash used in operating activities was $5.9 million for the year ended December 31, 2020, compared to $11.5 million provided during 2019. The cash from operating activities is driven mainly by the hospitality and ferry operations as well as interest received during the year.

At December 31, 2020, working capital excluding securities was negative $9.1 million, compared to negative $36.5 at December 31, 2019. The Company has the ability to fund any working capital needs through its cash on hand and its existing credit facilities.

Cash flow from investing activities

Cash provided by investing activities was $28.6 million for the year ended December 31, 2020, compared to $22.8 million provided in 2019. Net cash provided by investing activities during the year was a result of proceeds from the sale of marketable securities of $12.6 million, proceeds from the sale of a hotel of $11.5 million, the after-tax pension surplus distribution of $1.2 million and collections of loans receivable of $5.6 million, offset by additions of property and equipment and investment properties of $2.4 million. Net cash provided by investing activities during the year ended December 31, 2019 was a result of proceeds from the sale of hotel properties of $66.6 million and the after-tax pension surplus distribution of $1.2 million, offset by net purchases of investments of $28.4 million, and the purchase of investment properties of $17.7 million.

Cash flow from financing activities

Cash used in financing activities was $22.5 million for the year ended December 31, 2020, compared to $38.8 million used in 2019. Net cash used in financing activities during the year was related to the repurchase of Common Shares of $11.3 million, and the repayment of short and long-term debt of $23.5 million, offset by the proceeds of long-term debt of $12.5 million. Net cash used in financing activities during the year ended December 31, 2019 was related to the repayment of long-term debt of $27.0 million, the repurchase of Common Shares of $6.6 million, the purchase of non-controlling interests of $1.4 million, and net repayments on short-term borrowings of $2.0 million.

Contractual obligations and capital resource requirements

The effects of commitments, events, risks and uncertainties on future performance are discussed in the sections relating to Contractual Obligations and Capital Resource Requirements. The table below summarizes Clarke’s maximum contractual obligations by due date:

Contractual obligations Total $ Less than 1 year $ 1 – 3 years $ 3 - 5 years $	After 5 years $
Short-term indebtedness 8.2 8.2 ― ― Convertible debentures 50.8 ― 50.8 ― Long-term debt 64.1 6.2 50.7 5.1 Lease obligation 0.8 0.2 0.4 0.2	― ― 2.1 ―
123.9 14.6 101.9 5.3	2.1

The convertible debentures balance of $50.8 million is the face value repayment required upon maturity of the Series B Debentures. These debentures are convertible into common shares of the Company at any time at the option of the holder, and

therefore the actual cash required at maturity, if any, is dependent upon the number of debentures remaining unconverted. The debentures are also redeemable, at the option of the Company, in whole or in part, at any time after June 2, 2020. The redemption price is the principal amount plus accrued and unpaid interest. The Company is required to provide at least 30 days’ prior notice of the redemption.

Clarke expects to be able to fund all working capital requirements, contractual obligations, and capital expenditures from a combination of operating cash flows, existing credit facilities, and its current cash and cash equivalents position.

Clarke has credit and margin facilities with Canadian brokerage companies. The facilities permit draws of a portion of the market value of purchases of qualifying securities, depending upon the type of instrument, with certain market value restrictions, as well as a borrowing base calculation on five hotel properties. Holloway also has a credit facility secured by four hotel properties. At December 31, 2020, $41.6 million was available under these facilities and $8.2 million was drawn on these facilities (December 31, 2019 – $61.3 million and $30.1, respectively). Declines in the market value of pledged securities and the operations of the hotels may have an adverse effect on the amount of credit available under these facilities. (see note 11 to the consolidated financial statements for the year ended December 31, 2020) .

Unrecorded commitments

At December 31, 2020, Clarke continued to be a party to the unrecorded commitments and contingencies as discussed in note 17 to the consolidated financial statements for the year ended December 31, 2020.

FOURTH QUARTER

A comparison of results for the three months ended December 31, 2020, compared to three months ended December 31, 2019, is as follows:

	Three months ended	Three months ended
	December 31, 2020	December 31, 2019
	$	$
Revenue
Hotel and management services	6.0	15.2
Provision of services	0.8	1.4
Investment and other income	20.1	6.2
	26.9	22.8
Expenses
Hotel operating expenses	4.7	11.6
Cost of services provided	0.9	1.0
General and administrative expenses	0.6	1.6
Property taxes and insurance	0.1	1.2
Share-based payment expense	0.1	―
Depreciation	2.6	3.0
Interest expense and accretion on debt	1.6	1.5
Income before income taxes	16.3	2.9
Provision for (recovery of) income taxes	1.8	(2.8)
Net income	14.5	5.7
Comprehensive income	29.6	10.9
Net income attributable to equity holders of the Company	14.5	6.0
Comprehensive income attributable to equityholders of the Company	29.6	11.2

Net realized and unrealized gains on investments for the fourth quarter of 2020 were $18.0 million compared to gains of $6.3 million for the same period in 2019. Revaluation gains on hotel properties were $2.3 million in the fourth quarter of 2020 compared to a loss of $0.8 million for the same period in 2019. General and administrative expenses during the fourth quarter of 2020 were $1.0 million lower than expenses during the same period in 2019 due to ongoing cost reductions as a result of the pandemic. The Company had net income attributable to equity holders of the Company of $14.5 million in the fourth quarter of 2020 compared to net income of $6.0 million in the same period in 2019. This was largely driven by the realized and unrealized net gains on investments during the period compared to the same period in the prior year. Comprehensive income

attributable to equity holders of the Company for the fourth quarter was $29.6 million compared to comprehensive income of $11.2 million for the same period in 2019.

For the three months ended December 31, 2020, Clarke’s basic EPS was $0.94, compared to $0.36 for the same period in 2019, and the diluted EPS was $0.79, compared to $0.34 for the same period in 2019.

Net cash used in operating activities was $2.3 million for the fourth quarter of 2020, compared to $0.1 million used in the same period in 2019. Cash flows in the fourth quarters of 2020 and 2019 were driven mainly by the hospitality and ferry operations as well as interest received during the periods.

Net cash provided by investment activities was $23.1 million in the fourth quarter of 2020, compared to $2.5 million used in the same period in 2019. Proceeds on the sale of investments and a hotel in the fourth quarter of 2020 totalled $22.3 million compared to net purchases of investments of $1.8 million and property and equipment additions of $1.4 million in the fourth quarter of 2019.

Net cash used in financing activities for the fourth quarter of 2020 was $18.6 million compared to net cash provided of $1.1 million for the same period in 2019. During the fourth quarter of 2020 the Company repaid a large portion of its short-term credit facilities using proceeds from the sale of investments and the hotel and continued to purchase shares under its NCIB. This was offset by additional long-term debt proceeds of $12.5 million received during the period.

SUMMARY OF QUARTERLY RESULTS

Key financial information for the current and preceding seven quarters is as follows:

	Mar.	Jun.	Sep.	Dec.	Mar.	Jun.	Sep.	Dec.
*Three months ended*	2019	2019	2019	2019	2020	2020	2020	2020
	$	$	$	$	$	$	$	$
Revenue and other income (loss)	55.7	20.5	21.3	22.8	(40.6)	17.5	23.1	26.9
Net income (loss)	36.5	0.6	(3.6)	5.7	(53.1)	6.9	12.5	14.5
Other comprehensive income (loss)	(0.8)	(3.5)	(0.4)	5.2	(1.7)	(2.5)	(2.1)	15.1
Comprehensive income (loss)	35.7	(2.9)	(4.0)	10.9	(54.8)	4.4	10.4	29.6
Basic EPS (in dollars)	3.06	(0.13)	(0.24)	0.36	(3.26)	0.43	0.79	0.94
Diluted EPS(in dollars)	3.04	(0.13)	(0.24)	0.34	(3.26)	0.38	0.67	0.79

As seen in the table above, our results can fluctuate significantly from quarter to quarter, in part as a result of certain accounting standards the Company follows, and as a result of fluctuations in the market prices of our securities portfolio. Under IFRS, realized and unrealized gains and losses on our publicly-traded securities are recorded in “Investment and other income” on our consolidated statements of earnings. The Company does not believe that quarterly fluctuations in the stock prices of our investee companies necessarily reflect a change in the value of the underlying businesses in which we are invested. The values of the underlying businesses are often more stable than their stock prices reflect. Clarke views its investments on a longer-term basis as opposed to on a quarter-to-quarter basis. These fluctuations, however, often provide us with an opportunity to invest more capital in particular investments that we like or vice-versa. Our results have also fluctuated significantly since the first quarter of 2019 as a result of consolidating Holloway’s results with ours. Holloway’s business is seasonal in nature and the results fluctuate throughout the year. The revenues are generally highest in the third quarter due to increased leisure travel during the summer months. While certain expenses fluctuate according to occupancy levels, other expenses such as property taxes, insurance and interest are fixed and are incurred evenly throughout the year.

SIGNIFICANT EQUITY INVESTMENTS

In accordance with National Instrument 51-102 of the Canadian Securities Administrators, the Company has determined that Trican is a significant equity investee. Accordingly, we are required to disclose the following summary financial information. The summarized financial information provided is for the most recent annual period and the comparative annual period.

Trican

Trican is an oilfield services company with considerable operations in pressure pumping, coil tubing and cementing as well as numerous other service lines. As of December 31, 2020, Clarke owned 11.0% of the outstanding shares of Trican.

	Year ended	Year ended
Selected Financial Information	December 31, 2020	December 31, 2019
	$	$
Total assets	563.2	926.5
Total liabilities	(70.9)	(185.4)
Shareholders’ equity	492.3	741.1
Total revenue	397.0	636.1
Net loss	(234.7)	(73.5)

RELATED PARTY TRANSACTIONS

The Company was party to the following related party transactions during the year ended December 31, 2020:

The Company was a party to rental, information technology and tax services agreements with companies owned or partially owned by the Executive Chairman and his immediate family member. Included in ‘Expenses’ of the consolidated financial statements is rental, IT and tax services expenses of $0.3 million (2019 – $0.4 million) under the agreements.
The Company provides administrative and asset management services to two pension plans it sponsors. Included in ‘Revenue’ of the consolidated financial statements is $0.5 million (2019 – $0.5 million) for services provided to the pension plans during the year.
During the year, the Company sold marketable securities through the facilities of the Toronto Stock Exchange to the Clarke Inc. Master Trust (the “Master Trust”), which holds the units of the pension plans administered by the Company. During the prior year, the Company sold marketable securities through the facilities of the Hong Kong Stock Exchange to the Master Trust. The sales were made for investment purposes and the Company received net proceeds of $0.6 million (2019 – $3.6 million).
During the prior year, Holloway purchased common shares of the Company through the facilities of the Toronto Stock Exchange from the Master Trust for $2.3 million. Following the acquisition of the remaining common shares of Holloway by the Company, Holloway transferred the common shares to the Company by way of a dividend, and the common shares were cancelled.
During the year, the Company sold the Best Western hotel in Grande Prairie, AB to a company controlled by the Executive Chairman and his immediate family member for gross proceeds of $11.5 million.

Key management consists of the directors and officers of the Company. The compensation accrued is as follows:

Year ended December 31, 2020	Board of directors	Officers	Total
	$	$	$
Salary and fees	―	0.5	0.5
Pension value	0.1	―	0.1
Total	0.1	0.5	0.6

FINANCIAL INSTRUMENTS

In the normal course of operations, the Company uses the following financial and other instruments:

To generate investment returns, the Company will invest in equity, debt and other securities. These instruments may have interest rate, market, credit and foreign exchange risk associated with them.
To manage foreign exchange, interest rate and general market risk, the Company may enter into futures and forward exchange contracts. These instruments may have interest, market, credit and foreign exchange risk associated with them. Clarke hedges its foreign currency exposure on U.S. dollar denominated investments. Clarke anticipates continuing this policy for the foreseeable future.

As an investment company, Clarke has a significant number of financial instruments. Notes 1, 2, 3, 4, 5, 11, 12, 13, 14 and 24 to the consolidated financial statements for the year ended December 31, 2020 and the Company’s 2020 AIF, provide further information on classifications in the financial statements, and risks, pertaining to the use of financial instruments by the Company, as well as further information on the risks and uncertainties of estimates, liquidity, and credit as a result of COVID19.

DISCLOSURE CONTROLS AND INTERNAL CONTROLS OVER FINANCIAL REPORTING

The implementation of Canadian Securities Administrators National Instrument 52-109 - Certification of Disclosure in Issuers’ Annual and Interim Filings represents a continuous improvement process, which has prompted the Company to formalize existing processes and control measures and to introduce new ones. The objective of this instrument is to improve the quality, reliability, and transparency of information that is filed or submitted under securities regulation.

In accordance with this instrument, the Company has filed certificates signed by the President & Chief Executive Officer and the Chief Financial Officer that, among other things, report on the design and effectiveness of disclosure controls and procedures and the design and effectiveness of internal controls over financial reporting.

Management has designed disclosure controls and procedures to provide reasonable assurance that material information relating to the Company is made known to the President & Chief Executive Officer and the Chief Financial Officer, particularly during the period in which annual filings are being prepared. These two certifying officers evaluated the effectiveness of the Company’s disclosure controls and procedures as of December 31, 2020, and based on their evaluation, concluded that these controls and procedures were adequate and effective.

Management has also designed internal controls over financial reporting to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with IFRS. The President & Chief Executive Officer and the Chief Financial Officer have supervised Company’s management in the evaluation of the design and effectiveness of the Company’s internal controls over financial reporting as of the end of the period covered by the annual filings and believe the design and effectiveness to be adequate to provide such reasonable assurance using the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) in Internal Control – Integrated Framework (2013).

Finally, there have been no changes in the Company’s disclosure controls and procedures or internal controls over financial reporting during the year ended December 31, 2020 that have materially affected, or are reasonably likely to materially affect, the effectiveness of the internal controls over financial reporting.

ENVIRONMENTAL MATTERS

The Company’s businesses are exposed to the following environmental risks in conducting regular operations: (i) contamination of owned or leased property; and (ii) contamination of the environment relating to spills or leaks originating from the Company’s ferry.

The Company’s businesses regularly review their operations and facilities to identify any potential environmental contamination or liability. Limited internal reviews, which may include third party environmental assessments, have been conducted at all the Company’s wholly-owned real estate. These limited reviews identified no material remediation issues and potential risks and there have been no material events arising subsequently that would indicate additional obligations.

The Company believes it and its businesses comply in all material respects with all relevant environmental laws and regulations. The Company is not aware of any material uninsured pending or proceeding actions against it or any of its businesses relating to environmental issues.

SIGNIFICANT ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES

Please refer to notes 1 and 2 of our consolidated financial statements for the year ended December 31, 2020 for a detailed discussion regarding our significant accounting policies and application of significant accounting judgments, estimates and assumptions. Such changes are reflected in the assumptions when they occur.

Valuation of property and equipment

Land and buildings and components are revalued on a sufficiently regular basis using third party offers, internal models or external appraisals, when available, so that the carrying value of an asset does not differ materially from its fair value at each reporting date. The Company has established a methodology to evaluate when circumstances indicate that the carrying amount may differ materially from its fair value, which includes significant changes in operating performance, economic activity, regional development opportunities and new competition in the markets in which each property operates.

Increases in fair value are recorded in other comprehensive income (loss) and accumulated in revaluation surplus, except to the extent that they reverse a revaluation decrease previously recorded in the consolidated statement of earnings, in which case the reversal is recorded in the consolidated statement of earnings. Decreases in fair value are charged against other comprehensive income and the revaluation surplus to the extent of any credit balance existing in the revaluation surplus in respect of that asset, and thereafter are recorded in the consolidated statement of earnings.

The global pandemic related to the virus known as COVID-19 adversely impacted the Company’s operations during 2020, particularly the hotel operations. This had resulted in significant economic uncertainty, of which the potential impact on our future financial results is difficult to reliably measure. The Company began to feel the impact of COVID-19 in its hotel occupancy levels commencing in mid-March 2020 and closed six of its hotels to streamline and manage costs. All six hotels were reopened during the second and third quarters. Due to the decline in hotel operations, the Company performed a revaluation analysis on its hotels during the first quarter and recorded a revaluation loss on 15 hotels in the amount of $18,800. Revaluations were not taken on two hotels which were not expected to see material declines in operations.

Using the Company’s updated outlook and new information obtained regarding the future cash flows of the business the Company again performed a revaluation analysis on its hotels during the fourth quarter of 2020, and recorded a net revaluation increase in the amount of $7.0 million. Four hotel properties recorded revaluation decreases totaling $3.0 million, eleven recorded revaluation increases totaling $10.0 million and one hotel did not record a revaluation.

Property and equipment was reduced by $11.2 million as a result of the revaluations recorded during the year ended December 31, 2020. A $16.5 million reduction is included in the consolidated statement of earnings and an increase of $5.3 million is included in the consolidated statement of comprehensive income (loss).

Four hotel properties were revalued using third-party appraisals. The Company expects its hotel operations to recover over time, and as such, for those hotels without third-party appraisals, the Company used a five-year discounted cashflow model to assess fair value. This approach was a change from the capitalized income model used by the Company in the prior year as it more accurately factors in a recovery of financial results and cashflows over a future timeframe. The revaluation model was prepared internally. The source of the discount and terminal capitalization rates used were consistent with those used as part of the Holloway purchase price allocation recorded in the three months ended March 31, 2019. The rates were obtained from an independent third party and were risk-adjusted in the analysis to reflect the impact of COVID-19 on the hospitality industry, and for the specific market in which the hotel operates. In situations where a five-year discounted cashflow value resulted in a fair value which differed significantly from the price per room metrics in recent market transactions, the Company used comparable hotel sales prices, professional judgement, and management expertise to determine the fair value.

Key factors of estimation uncertainty used in the internal model included the cashflow forecasts, the discount rates and the terminal capitalization rates, and in certain situations the comparability of recent hotel sales. The discount rates ranged from 9.5% – 13.0% and the capitalization rates ranged from 9.0% – 11.0%. The cashflow forecasts were performed on a hotel-byhotel basis. The forecast in year one of the model was consistent with the Company’s fiscal 2021 budget. In years two through five of the internal models, cashflows were based on a gradual recovery as a function of the respective historical results. If the discount rates had been 0.25% higher/lower, the estimated fair value would result in a change of $0.9 million to property and equipment and the revaluation of hotel properties. If the terminal capitalization rates had been 0.25% higher/lower, the estimated fair value would result in a change of $1.5 million to property and equipment and the revaluation of hotel properties. The fair value of the Company’s property and equipment will continue to be closely monitored as the pandemic evolves. As clarity on the Company’s outlook is obtained, additional revaluation increases or decreases may be required.

During the prior year, the Company used a capitalized income internal model and considered hotel sales in comparable markets. The fair value models were prepared internally. Capitalization rates used were obtained from an independent third party. In the Company’s internal models, each hotel’s recent historical operating income was normalized for any unusual and nonrecurring events and reduced by a capital expenditure reserve of 4% of revenues. A 4% capital expenditure reserve may not

have reflected actual capital expenditures for a particular hotel. A capitalization rate specific to the market in which each hotel operates was applied to the operating income. In situations where a capitalized income value resulted in a fair value which differed significantly from the price per room metrics in recent market transactions, the Company used comparable hotel sales prices, professional judgment and management expertise to determine the fair value. The fair value may not reflect the realizable value in the event a particular hotel is sold by the Company.

On the acquisition of control during the prior year, if the capitalization rate had been 0.25% higher/lower for the purpose of the purchase price allocation, the estimated fair value under the capitalized income approach would have resulted in a change of $4.5 million to property and equipment and the bargain purchase gain. If the value of the comparable hotel sales had been 5% higher/lower in the purchase price allocation, the estimated fair value would have resulted in a change of $2.8 million to property and equipment and the bargain purchase gain.

During the fourth quarter of 2019, the Company revalued two of its hotels based on purchase offers. The value of one hotel increased by $6.0 million and the increase was recorded through other comprehensive income. The value of the other hotel decreased by $0.8 million and was included in investment and other income.

Fair value of investment properties

The Company’s significant investment properties consist of three office buildings as at December 31, 2020. The prior year also included a leased hotel property, which is classified as an asset held for sale for the current year. The three office buildings were acquired in 2019 and due to the proximity of their respective acquisition dates, there were no fair value adjustments recorded during the year ended December 31, 2019. A fair value adjustment of $2.0 million was recorded during the year ended December 31, 2020 as a result of purchase offers received. Changes to the fair value of the Company’s investment properties will occur periodically, based on operating performance, economic activity, regional development opportunities and new competition in the markets in which they operate.

Investment entity

IFRS 10, Consolidated Financial Statements defines investment entities, and it allows entities to measure their subsidiaries at fair value through profit or loss (“FVTPL”) instead of consolidating the results. Management has assessed the standard and determined that the Company does not meet all criteria outlined in IFRS 10 in order for a parent to be considered an investment entity. The Company consolidates all of its controlled investments.

Marketable securities

The Company has interests in publicly-traded marketable security investments. The Company does not own greater than fifty percent of the outstanding shares of these investments nor does it hold options or have other contractual arrangements that would lead to increased ownership. De facto control exists in circumstances when an entity owns less than 50% of the voting shares in another entity but has control for reasons other than potential voting rights, contract or other statutory means. The Company does not consider de facto control to be present in any of the marketable security investments and does not consolidate these investments.

Venture capital organization

The Company has elected to use the exemption in IAS 28 for venture capital companies. Under this exemption, the Company may designate all investments managed in the same way at FVTPL. The Company has designated all publicly-traded securities in which it has significant influence to be measured at FVTPL as those form part of the Company’s venture capital portfolio. In these cases, all realized and unrealized gains and losses are recorded in the consolidated statements of earnings.

Business combinations

The purchase price allocation process requires management to use significant estimates and assumptions, including fair value estimates of assets acquired and liabilities assumed.

While the Company uses its best estimates and assumptions as part of the purchase price allocation process to accurately value the assets acquired and liabilities assumed at the business combination date, estimates and assumptions are inherently uncertain and subject to refinement. As a result, during the measurement period, which is the earlier of the date management receives the information it requires or one year from the business combination date, adjustments are recorded to the assets acquired and liabilities assumed.

During the prior year, the non-controlling interest (49% ownership interest in Holloway) recognized at the acquisition date was measured using the proportionate share of the fair value of net assets of the acquiree.

Although the Company believes the assumptions and estimates made in the past have been reasonable and appropriate, they are based in part on historical experience and information obtained from the management of the acquired company and are inherently uncertain. Examples of critical estimates in valuing certain of the assets acquired and liabilities assumed include but are not limited to:

future expected cash flows from the hotel properties and capitalization rates applied to future expected cash flows; and
uncertain tax positions and the fair value of both current and deferred income tax related assets and liabilities assumed in connection with a business combination which are initially estimated as of the acquisition date and are re-evaluated quarterly as management continues to collect information in order to determine their estimated value, with any adjustments to preliminary estimates recorded during the measurement period.

Changes in any of the assumptions or estimates used in determining the fair value of assets acquired and liabilities assumed could impact the initial amounts assigned to assets and liabilities in the purchase price allocation. Unanticipated events and circumstances may occur which may affect the accuracy or validity of such assumptions, estimates or actual results.

The key assumptions concerning the future and other key sources of estimation uncertainty at the reporting date, that have a significant risk of causing a material adjustment to the carrying amounts of assets and liabilities within the next financial year, are described below. The Company based its estimates and assumptions on parameters available when the consolidated financial statements were prepared. Existing circumstances and assumptions about future developments, however, may change due to market changes or circumstances arising beyond the control of the Company. Such changes are reflected in the assumptions when they occur.

Taxes

Deferred income tax assets and liabilities require management’s judgment in determining the amounts to be recognized. In particular, judgment is used when assessing the extent to which deferred income tax assets should be recognized with respect to estimated future taxable income, which impacts the amount of deferred income tax assets recorded related to differences on the tax basis of assets and available non-capital losses. The estimates of future taxable income, the years when the temporary differences are expected to reverse and the tax rates in those years have an impact on the deferred income tax assets and liabilities recorded in the consolidated statements of financial position. Significant estimates and judgments are used in determining the future taxable income, which includes consideration of the history of profitability. Actual results will differ from the amounts estimated for future taxable income.

Management considers both favourable and unfavourable evidence in determining whether or not it is probable that the future economic benefits will flow to the Company and the amount of deferred income tax assets that should be recognized. In making its assessment, management considers past operating results, forecasted future operating results and economic conditions in the locations in which it operates.

Pension benefits and asset ceiling

The costs of defined benefit pension plans and the present value of the pension obligation are determined using actuarial valuations. An actuarial valuation involves making various assumptions which may differ from actual developments in the future. These include the determination of the discount rate, future salary increases, mortality rates and future pension increases. Due to the complexity of the valuation, the underlying assumptions and its long-term nature, a defined benefit obligation is highly sensitive to changes in these assumptions.

All assumptions are reviewed at each reporting date. In determining the appropriate discount rate, management considers the interest rates of corporate bonds in the respective currency with at least AA rating, with extrapolated maturities corresponding to the expected duration of the defined benefit obligation. The underlying bonds are further reviewed for quality, and those having excessive credit spreads are removed from the population of bonds on which the discount rate is based, on the basis that they do not represent high quality bonds. The mortality rate is based on publicly available mortality tables. Future salary increases and pension increases are based on expected future inflation rates. Further details about the assumptions used are disclosed in note 7 to the consolidated financial statements for the year ended December 31, 2020. Management is also required to make certain assumptions regarding the quantification of the asset ceiling, which impacts the accrued pension benefit recorded on the consolidated statements of financial position.

CAUTIONARY STATEMENT REGARDING USE OF NON-IFRS ACCOUNTING MEASURES

This MD&A makes reference to the Company’s book value per share as a measure of the performance of the Company as a whole. Book value per share is measured by dividing shareholders’ equity of the Company at the date of the statement of financial position by the number of Common Shares outstanding at that date. Clarke’s method of determining this amount may differ from other companies’ methods and, accordingly, this amount may not be comparable to measures used by other companies. This amount is not a performance measure as defined under IFRS and should not be considered either in isolation of, or as a substitute for, net earnings prepared in accordance with IFRS.

FORWARD-LOOKING STATEMENTS

This MD&A may contain or refer to certain forward-looking statements relating, but not limited, to the Company’s expectations, intentions, plans and beliefs with respect to the Company. Often, but not always, forward-looking statements can be identified by the use of words such as “plans”, “expects”, “does not expect”, “is expected”, “budgets”, “estimates”, “forecasts”, “intends”, “anticipates” or “does not anticipate”, “believes”, or equivalents or variations of such words and phrases, or state that certain actions, events or results, “may”, “could”, “would”, “should”, “might” or “will” be taken, occur or be achieved. Forward-looking statements include, without limitation, those with respect to the future or expected performance of the Company’s investee companies, the future price and value of securities held by the Company, changes in these securities holdings, the future price of oil and value of securities held in the Company’s energy basket, changes to the Company’s hedging practices, currency fluctuations and requirements for additional capital. Forward-looking statements rely on certain underlying assumptions that, if not realized, can result in such forward-looking statements not being achieved. Forward-looking statements involve known and unknown risks, uncertainties and other factors that could cause the actual results of the Company to be materially different from the historical results or from any future results expressed or implied by such forward-looking statements. Such risks and uncertainties include, among others, the Company’s investment strategy, legal and regulatory risks, general market risk, potential lack of diversification in the Company’s investments, interest rates, foreign currency fluctuations, the sale of Company investments, the fact that dividends from investee companies are not guaranteed, reliance on key executives, commodity market risk, risks associated with investment in derivative instruments and other factors. With respect to the Company’s investment in a ferry operation, such risks and uncertainties include, among others, weather conditions, safety, claims and insurance, labour relations, and other factors.

Although the Company has attempted to identify important factors that could cause actions, events or results not to be as estimated or intended, there can be no assurance that forward-looking statements will prove to be accurate as actual results and future events could differ materially from those anticipated in such statements. Other than as required by applicable Canadian securities laws, the Company does not update or revise any such forward-looking statements to reflect events or circumstances after the date of this document or to reflect the occurrence of unanticipated events. Accordingly, readers should not place undue reliance on forward-looking statements.