Forbidden Spirits Distilling Corp. — Management Reports 2022

May 10, 2022

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FORBIDDEN DISTILLERY INC.

MANAGEMENT DISCUSSION & ANALYSIS FOR THE YEAR ENDED DECEMBER 31, 2021

The following Management’s Discussion and Analysis (“ MD&A ”) dated April 15, 2021 of Forbidden Distillery Inc. dba Forbidden Spirits Distilling Co. (“ Forbidden ”) should be read in conjunction with the audited financial statements and accompanying notes as at and for the year ended December 31, 2021 and comparative year December 31, 2020, prepared in accordance with International Financial Reporting Standards (“IFRS”).

Forbidden’s financial information throughout this MD&A is presented in Canadian dollars, the functional currency of the Company, therefore all dollar amounts are in Canadian (“ CAD ”) dollars, except where otherwise noted. Throughout the report we refer to Forbidden Spirits Distilling Co. as “Forbidden”, the “Company”, “we”, “us”, “our” or “its”. All these terms are used in respect of Forbidden Distillery Inc. dba Forbidden Spirits Distilling Co .

Cautionary Statement on Forward-Looking Information

This MD&A contains forward-looking statements, including statements concerning possible or assumed future results of operations of Forbidden and are made as of the date of this MD&A and the Company does not intend, and does not assume any obligation, to update these forward-looking statements, except as required under applicable securities legislation. Forward- looking statements typically are preceded by, followed by or include the words “believes”, “expects”, “anticipates”, “estimates”, “intends”, “plans” or similar expressions. Forward-looking statements are not guarantees of future performance. They involve risks and uncertainties, including, but not limited to: the impact of the COVID-19 pandemic; the impact of competition; the impact, and successful integration of, acquisitions; business interruption; trademark infringement; consumer confidence and spending preferences; regulatory changes; general economic conditions; and the Company’s ability to attract and retain qualified employees. 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. Accordingly, readers should not place undue reliance on forward looking statements. These factors are not intended to represent a complete list of the factors that could affect the Company and other factors could also affect Forbidden’s results. For more information, please see the “Risk and Risk Management” section of this MD&A.

BUSINESS OVERVIEW

Forbidden is a craft distillery licensed by the province of British Columbia to manufacture, bottle and sell alcohol from its on-site tasting room directly to retail customers or from its manufacturing plant directly to on-premises customers such as restaurants, pubs, hotels and golf courses and directly to off-premises customers such as private beer, wine and spirits stores. Forbidden was also granted a temporary license by the government of Canada to produce alcohol based sanitizer until May 8, 2022 and further is authorized to sell sanitizer produced until November 8, 2022.

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Forbidden owns the trademark for REBEL Vodka, Forbidden Spirits Vodka, Eve’s Original Gin and Adam’s Apple Brandy as well as the wordmark for its inverted apple press cross logo. Forbidden also owns the URL for www.ForbiddenSpirits.ca, www.ForbiddenVodka.ca and www.Sanitizer.ca .

Forbidden is a craft distillery that ferments, distills, bottles and distributes all of its own products from its distillery, tasting room, and warehouse located in Kelowna, British Columbia.. Forbidden receives competitive pricing for frozen apple juice concentrate, its main raw material, as well as for glass and glass decorations which are its other main input costs. Forbidden has considerable brand name assets in its REBEL Vodka, Forbidden Spirits Vodka, Eve’s Original Gin, Adam’s Apple Brandy, Wallace Hill Whisky, Forbidden Fire Liquor. Forbidden’s business cycle peaks twice a year, once in December and once in July and August.

Forbidden currently sells all its brands in Canada through its Shopify on-line sales platform as well as throughout the province of British Columbia direct through its third party contracted wholesale sales agents. In 2022 the Company anticipates expanding its sales by way of agency wholesale agreements and potential merger and acquisitions into the provinces of Alberta, Ontario, and Quebec.

Forbidden has had discussions with international liquor brokers that are assisting Forbidden with the export of some of its brands into the European Union and into Mainland China, Hong Kong, and Macau the market acceptance of which has yet to be proven. COVID has impacted international sales in all sectors, including Forbidden’s however as the climate improves Forbidden anticipates the sale of REBEL Vodka and Eve’s Original Gin as well as a new ready-to drink REBEL Vodka & Soda and EVE’s Gin & Tonic product into Alberta, Canada, and certain EU countries in fiscal 2022 and the sale of its Wallace Hill Whisky into Mainland China, Hong Kong, and Macau in fiscal 2022 as well.

Forbidden currently sells its brands in British Columbia through a new third-party liquor agent that currently employs 8 salespeople and effective April 1, 2022, operates in both BC and Alberta. This new third-party liquor agent is arms length and is compensated on a commission basis only. Forbidden’s marketing efforts are currently closely linked with this liquor agent and dedicated to in-store programing with a premium pricing model. Forbidden’s marketing and promotional expenses for the year ended December 31, 2021 was $202,160 or 34% of sales (2020 - $26,781, or 5%).

Forbidden competes with craft distilleries located in BC and in Canada as well as international distillers of vodka, gin, brandy, whisky and ready to drink beverages. Within Forbidden’s price point its current principal competition for ultra premium vodka includes international brands such as Grey Goose, Chopin, Cîroc, and Crystal Head.

Outlook

Forbidden is getting ready to launch a new ready-to-drink canned REBEL Vodka & Soda and an Eve’s Gin & Tonic beverage in fiscal 2022 for sales in Canada and the European Union. Forbidden it seeking to expand its whisky brand into Mainland China, Hong Kong, and Macau. Additionally, Forbidden is looking to expand through the merger and or acquisition of craft distillers and canners in Canada and others potentially located in the USA. Additionally Forbidden is working to complete the Proposed Transaction and Private Placement as described hereinbelow.

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Managing COVID-19

Since December 31, 2019, the outbreak of the novel strain of coronavirus, specifically identified as “COVID19”, has resulted in governments worldwide enacting emergency measures to combat the spread of the virus. These measures, which include the implementation of travel bans, retail store closures, self-imposed quarantine periods and physical distancing, have caused material disruptions to businesses globally resulting in an economic slowdown. Global equity markets have experienced significant volatility and weakness. The duration and impact of the COVID-19 outbreak is unknown at this time, as is the efficacy of the government and central bank interventions. It is not possible to reliably estimate the length and severity of these developments and the impact on the financial results and condition of the Company in future periods.

Forbidden continues to maintain business continuity during the COVID-19 pandemic and takes its cues from the government and public health officials to keep employees and customers safe and healthy. During the pandemic, enhanced office and tasting room procedures including safety shields, more frequent cleaning, on-line sales and curbside pickup of product and delivery services, where permissible, were enacted.

These changes have had direct impacts on the Company's business, reducing sales from our retail tasting room (including fewer international visitors), on-premise licensee business, contracts and potential export channels. The loss of business in those channels has been partially compensated for by increased sales from farmer’s markets, online, direct delivery and tasting room pickups.

In order to adapt to this new reality, the Company's retail operations have changed with the introduction of physical distancing, reduced density and a modified shopping experience in all retail locations. This includes touchless retail, limited product tastings and greater use of external physical resources (patios, event canopies and outdoor venues).

The Company is seeing a rebound in revenue as the COVID-19 restrictions ease across the country, particularly in British Columbia. As the proportion of the population fully vaccinated increases and as physical distancing is relaxed, social bubbles are expanded, and restaurants, bars and night clubs are fully reopened, sales through our direct delivery on-premise channels are beginning to rebound. Depending on the duration and extent of future waves of the pandemic, the Company's results of operations, cash flows and financial position could continue to be materially impacted.

Over the past 18 months, the COVID-19 pandemic continues to have a material impact on the global economy, the scale and duration of which remains uncertain. To date, there has been significant volatility in foreign exchange rates, restrictions on the conduct of businesses, including travel restrictions and supply chain disruptions.

Corporate

On November 20, the Company entered into a binding non-arm’s length amalgamation agreement (the “ Amalgamation Agreement ”) with Spartan a Capital Pool Company as defined in Policy 2.4 of the Exchange. Effective December 16, 2021 the parties completed the Amalgamation. The Amalgamation constituted a Qualifying Transaction, as defined in the policies of Exchange.

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Summary of the Qualifying Transaction

Pursuant to the Amalgamation Agreement Spartan and FDI amalgamated pursuant to the BCBCA and continued as Forbidden Sprits Distilling Corp. As a result of the Amalgamation, the shareholders of FDI own a majority of the issued and outstanding Forbidden Shares (as defined herein). Each prior common share in the capital of Spartan (the “ Spartan Shares ”) that were outstanding immediately prior to the Amalgamation was converted into one (1) common share in the capital of the resulting issuer (the “ Forbidden Shares ”), representing a deemed price of $0.30 per Forbidden Share.

Each class “A” voting common share in the capital of FDI (the “ FDI Voting Shares ”) that were outstanding immediately prior to the were converted into twenty-four (24) Forbidden Shares at a deemed price of $0.30 per Forbidden Share. Each class “B” non-voting common share in the capital of FDI (the “ FDI Non-Voting Shares ”) that were outstanding immediately prior to the Amalgamation were converted into four (4) Forbidden Shares at a deemed price of $0.30 per Forbidden Share. Each class “C” non-voting preferred share in the capital of FDI (the “ FDI Preferred Shares ”) that were outstanding immediately prior to the Amalgamation were converted into four (4) Forbidden Shares at a deemed price of $0.30 per Forbidden Share.

Upon completion of the Amalgamation, the former holders of Spartan Shares held in the aggregate 4,788,500 Forbidden Shares representing 10.62% of the outstanding Forbidden Shares and the former holders of FDI Shares held in the aggregate 40,296,000 Forbidden Shares representing 89.38% of the outstanding Forbidden Shares.

In addition, each share purchase warrant and option of Spartan and FDI outstanding immediately prior to the effective date of the Amalgamation were converted into securities of Forbidden on the same ratio as the Spartan Shares and the FDI Shares, respectively.

The Amalgamation has been accounted for using the purchase method of accounting as it constitutes a reverse takeover with FDI being the acquirer for accounting purposes as the FDI Shareholders hold approximately 89.38% of the outstanding shares of the combined entity prior to the completion of the Concurrent Financing. As such FDI will be the continuing entity for accounting purposes. A reverse takeover transaction involving a non-public operating entity and a non-operating public company is in substance a share-based payment transaction, rather than a business combination. The transaction is equivalent to the issuance of shares by the non-public operating entity FDI, for the net assets and listing status of the non-operating public company, Spartan. Upon completion of the Amalgamation, the business of the Company will the continuation of the business of FDI.

As the Amalgamation does not meet the definition of a business combination under IFRS 3 Business Combinations, accordingly the Company accounted for the Amalgamation in accordance with IFRS 2 Share-based Payment. Where an estimated value of the Spartan Shares cannot be relied on, section B20 of IFRS 3 Business Combinations was used wherein the estimate is based on the number of FDI Shares that would have been issued to Spartan Shareholders to have had the same equity interest in the Forbidden as a combined entity. The fair value of the shares issued was determined based on the fair value of the common shares issued by FDI as follows:

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Fair Value of Purchase Consideration
Fair Value of 4,788,500 FDI Shares issued	$ 1,436,550
Estimated fair value of 478,850 Spartan Options	104,434
Estimated fair value of 273,850 Spartan Warrants	42,714
Estimated transactioncosts	66,867
Total Purchase Price	$1,650,566
Cash and cash equivalents	$ 335,592
Receivables	2,955
Trade and other payable	(114,091)
Prepaid	2,450
Listing expense	1,423,660
	$1,650,566

The FDI Shares issued have a fair value of $0.30 per common share of Forbidden, totaling $1,436,550. The transaction costs have been included in the listing expense which include legal and accounting fees.

The fair value of the Spartan Options was determined using the Black-Scholes option pricing model with the following assumptions: Risk free interest rate of 1.47%, volatility of 95%, expected life of 9.17 years, expected dividend yield of 0.00%.

The fair value of the Spartan Warrants was determined using the Black-Scholes option pricing model with the following assumptions: Risk free interest rate of 1.17%, volatility of 95%, expected life of 1.17 years, expected dividend yield of 0.00%.

The fair value of consideration exceeds the fair value of net assets of Spartan assumed by Forbidden of $1,423,660 which will be treated as a public company listing cost and recorded in the statements of profit and loss for the year ended December 31, 2021.

Concurrent Financing

A condition to the completion of the Amalgamation required FDI to complete a concurrent financing (the “ Concurrent Financing ”) for aggregate gross proceeds of a minimum of $3,600,000 and up to maximum gross proceeds of $4,500,000.

The Concurrent Financing was completed on a non-brokered private placement basis for the issuance of 11,893,011 of subscription receipts of FDI (the “ Subscription Receipts ”) at a price of $0.30 per Subscription Receipts for gross proceeds of $3,567,903. Each Subscription Receipt entitled the holder thereof to receive, without payment of any additional consideration to one unit of Forbidden (a “ Unit ”). The Units issued pursuant to the Subscription Receipts were automatically exchanged for one Forbidden Share and one-half of one transferrable common share purchase warrant of Forbidden (each whole warrant, a “ Warrant ”) pursuant to the Amalgamation.

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Each Warrant entitles the holder to acquire a Forbidden Share at a price of $0.50 until December 17, 2023 subject to an acceleration clause where in If, at any time following the issuance of the Warrants, the daily volume weighted average trading price of Forbidden on the Exchange, is greater than $0.75 for the preceding 10 consecutive trading days, Forbidden may, upon providing written notice to the holders of Warrants, accelerate the expiry date of the Warrants to the date that is 30 days following the delivery of such written notice. Agent’s fees include cash payments of $208,656 and the issuance of 669,226 agent’s warrants (“ Agent’s Warrants ”). Each Agent Warrant entitles the holder to acquire one common share at an exercise price of $0.50 until December 17, 2023 on the same terms as the Warrants.

Niagara LOI

On March 4, 2022 the Company entered into a non-binding letter of intent (“LOI”) to acquire all of the issued and outstanding securities of Ontario-based Niagara Falls Craft Distillers Ltd. ( “Niagara” ) for an aggregate purchase price of approximately $4.8 million dollars payable as to approximately $4 million in cash and as to approximately $800,000 in common shares (the “Proposed Transaction” ).

Completion of the Proposed Transaction is subject to a number of conditions, including, but not limited to: (i) the entering into of a definitive agreement by April 15, 2022 (ii) the completion of satisfactory due diligence by each of the parties, (iii) the approval by the directors and shareholders (if required) of the Company and Niagara, (iv) receipt of all requisite regulatory approvals, including the approval of the Exchange (and/or governmental authorizations and consents, and (v) the Company obtaining the requisite financing on terms and conditions satisfactory to the Company. Provided that all closing conditions are satisfied, the Proposed Transaction is expected to close in the summer of 2022. The parties are currently working to extend the dates for completion of the definitive agreement.

Convertible Debenture

On April 5, 2022 the Company launched a non-brokered private placement of convertible debenture units (the “ Units ”) for aggregate gross proceeds of up to $8,000,000 (the “ Private Placement ”). Each Unit to be comprised of one secured convertible debenture of the Company in the aggregate principal amount of $1,000 (each, a “ Convertible Debenture ”) and 500 common share purchase warrants of the Company (each, a “ Warrant ”).

Each Convertible Debenture shall be convertible into common shares of the Company (the “ Common Shares ”) at a price of $0.30 per share (the “ Conversion Price ”) for a period of three years following the Closing Date (as defined herein). Each Warrant entitles the holder to acquire one Common Share at a price of $0.50 for a period of two years from the Closing Date.

The Convertible Debentures shall bear simple interest at a rate of 8.0% per annum from the date of issue and payable semi-annually in arrears on the last day of December and June in each year, commencing June 30, 2022.

The June 30, 2022 interest payment will represent accrued interest for the period from the Closing Date to June 30, 2022. Should the volume weighted average trading price of the Common Shares on the TSX Venture Exchange (the “ Exchange ”) (or such other recognized stock exchange on which the Common Shares primarily trade) be greater than $0.75 for any ten consecutive trading days, the Company may give

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notice to all holders of outstanding Debentures of the mandatory conversion of all, but not less than all, of the then outstanding Debentures at the Conversion Price. In addition, at any time following the Closing Date, the Company may, at its option, redeem pro rata all or part of the Convertible Debentures, upon not less than 30 nor more than 60 days’ prior written notice, at a redemption price which is equal to 105% of the principal amount thereof, plus any accrued and unpaid interest that would otherwise be payable to the holder up to the redemption date.

The Company intends to use the net proceeds from the Private Placement to fund the acquisition (the “ Acquisition ”) of Niagara and for planned capital expenditures, working capital and general corporate requirements associated with the Acquisition and otherwise.

It is anticipated that the Convertible Debentures will be secured by way of share pledge against the common shares of a wholly-owned subsidiary of the Company which the Company anticipates will own 100% of the common equity of Niagara should the Acquisition be completed..

Subject to the satisfaction of customary conditions, including receipt of approval of the Exchange as well as finalization and execution of definitive documentation, the Private Placement is expected to close on or about May 15, 2022, or such other date as the Company may determine (the “ Closing Date ”).

The Convertible Debentures and the Warrants comprising the Units and any Common Shares issuable upon conversion or exercise thereof, as applicable, will be subject to a statutory hold period lasting four months and one day following the Closing Date.

The Company anticipates paying a cash commission to eligible finders equal to 6.0% of the gross proceeds of the Private Placement as well as issuing compensation warrants equal to 6.0% of the gross proceeds of the Private Placement divided by the CDN$0.30 Conversion Price for a period of 24 months after the Closing Date.

Selected Annual Financial Information

The following table summarizes selected financial data reported by the Company for the years ended December 31, 2021, 2020 and 2019. The following annual results are compliant with IFRS. The selected financial information has been derived, except where indicated, from the audited financial statements of December 31, 2021 and 2020 and unaudited December 31, 2019. The following should be read in conjunction with the said financial statements.

	Years Ended	Years Ended	Years Ended
	December 31 2021 (audited)	December 31 2020 (audited)	December 31 2019 (un-audited)
Total Revenue Loss before other items Loss and comprehensive loss Net loss per share basic and diluted Total assets Current liabilities Long term liabilities Shareholders’ equity	$593,426	$499,250 $(1,050,392) $(1,130,847) $(0.22) $3,778,325 $1,655,892 $1,174,210 $948,223	$206,860 $(969,875) $(1,024,791) $(0.23) $3,522,987 $888,906 $981,991 $1,652,091
	$(1,980,165)
	$(3,889,645)
	$(0.10)
	$5,308,776
	$1,323,103
	$1,278,134
	$2,707,539

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Results of Operations

Brand and Retail Sales Performance

Forbidden’s principal product is alcohol which it ferments from apples and distils, blends, bottles, boxes, and distributes throughout British Columbia. REBEL Vodka is Forbidden’s main brand, which accounted for 28% of total sales during the year ended December 31, 2021 (2020 – 43%). Forbidden also manufactures and sells Forbidden Spirits Vodka, Forbidden Fire, Eve’s Original Gin, Adam’s Apple Brandy and Wallace Whisky. Commencing in March 2020 with the onset of the COVID-19 pandemic, the Company introduced Eve’s Gin and Wallace Whisky in 2020. Forbidden also began to manufacture and sell Serpent Hand & Surface Sanitizer in April 2020. As sanitizer become more readily available spirits made up 83% of sales for the year ended December 31, 2021 (2020 – 67%) and sanitizer made up for 8% of overall sales (2020 – 27%). Income from tastings is derived from customer sales in Forbidden’s on-site tasting room.

During the year end December 31, 2021 sales of spirits was $494,094 (December 31, 2020 - $332,500) derived from the various brands as follows:

	2021	% of Spirit Sales	2020	% of Spirit Sales
**Rebel **	139,922	28%	143,782	43%
Eve's	123,172	25%	67,338	20%
**Forbidden **	$ 74,645	15%	$ 55,532	16%
Wallace Hill Whisky	67,021	14%	21,332	6%
Adam's brandy	36,323	7%	34,726	10%
Tastings	30,448	6%	9,790	3%
Forbidden Fire	19,037	4%
**Other **	3,526	1%	-	-
Total Spirits Sales	$ 494,094	100%	$332,501	100%

Overall total sales for the year end December 31, 2021 of $593,425 (December 31, 2020 - $499,250) included and were derived from:

	2021	% Sales	2020	% Sales
Spirits	$ 494,094	83%	$ 332,501	67%
**Sanitizer **	45,356	8%	136,565	27%
Retail Merchandise	53,976	9%	30,185	6%
Total sales	$ 593,426	100%	$499,250	100%

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Financial and Operating Results

	2021	2020	Variance
Revenue
Sales - spirits	$494,094	$332,501	161,593
Sales - sanitizer	45,356	136,565	(91,209)
Sales- merchandise	53,976	30,184	23,792
Total revenue	593,426	499,250	94,176
Cost of sales
Spirits	(232,987)	(188,884)	(44,103)
Sanitizer	(9,581)	(83,724)	74,143
Merchandise	(48,939)	(21,434)	(27,505)
Gross profit	301,919	205,208	96,711
Expenses
General and administration	1,074,989	658,081	416,908
Salary, wages, benefits	512,431	321,958	190,473
Corporate development and marketing	203,974	-	203,974
Depreciation and amortization	202,524	253,086	(50,552)
Share-based payments	288,166	22,475	**265,691 **
	(2,282,084)	(1,255,600)	(1,026,484)
Loss before other items	(1,980,165)	(1,050,392)	(929,773)
Other items
Interest income	1,579	186	1,393
Other income	8,090	42,666	(34,576)
Loss on termination of equipment lease	(277,013)	-	(277,013)
Government grant	-	24,722	(24,722)
Financing costs	(218,476)	(148,029)	(70,447)
Listing expense	(1,423,660)	-	(1,423,660)
Net loss and comprehensive loss for theyear	$ (3,889,645)	$(1,130,847)	(2,758,798)
Lossper share for theyear- basic and diluted	$(0.09)	$(0.22)	$ 0.13

Overall Financial Results for the years ended December 31, 2021 and 2020

The Company saw an overall increase in revenue of $94,176 or 19% for the year ended December 31, 2021 compared to December 31, 2020. The Company saw higher spirit sales in the current year of $161,593 as the Company introduced new products and additional distribution of its brands wherein Forbidden’s products were sold in over 26 liquor agency stores and 90 private liquor stores and featured in 40 local restaurants and bars which drove favourable results.

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The Company however saw a significant decline in hand sanitizers sales of $91,209 as the product was more readily available in 2021 compared to the early stages of Covid 19 in 2020 where demand for sanitizer was high.

The Company saw an increase in gross profit during the year ended December 31, 2021, of $96,711 or 47% from the comparative year as it introduced new spirit products. During the year ended December 31, 2021 the Company recorded cost of sales of $291,507 or 49% compared to $294,042 or $59%. The decrease was primarily attributed to the higher costs of sanitizer sales and costs to produce same in the initial production phase in 2020 offset by utilizing some of the same ingredients to produce certain sprits products however having a premium price point such as Eve’s Gin resulting in a slight decrease of 10% for costs of goods.

During the year ended December 31, 2021 overall expenses saw an increase of $1,026,484 or 84% which was primarily attributed increase in general and administrative costs of $416,908 as a result of increased activity and going public transaction as outlined herein below. Additionally the Company saw an increase wages and benefits of $190,473 with the addition of new employees as the Company expanded its operations. The Company also incurred $203,974 during the year ended December 31, 2021 for corporate development and marketing in connection with the Company going public compared to $Nil in the comparative year. The Company also saw an increase in share-based payments of $265,691 during the year end December 31, 2021 in connection with the grant of 1,096,000 options compared to 111,600 option granted in the prior year.

	For the Years Ended	For the Years Ended	For the Years Ended
	**December 31 **
	2021		2020	Variance
Administrative and General Expenses include: Accounting and legal Building maintenance, repairs, utilities Business licenses and fees Consulting - Note 15 Penalties, interest and taxes Equipment rental and supplies Insurance Interest, service charges and commissions Office and administration fees Rent Research and development Shareholder communication Tasting room, patio and entertainment Transfer agent fees and regulatory filing fees Markets and trade shows Website, advertising and social media Travel		$89,154 48,611 6,604 280,940 43,843 47,716 3,794 34,498 55,169 14,573 - - - - - 26,781 6,401
	130,763			$41,609
	54,154			5,542
	9,776			3,173
	278,919			(2,020)
	-			(43,843)
	27,663			(20,052)
	23,716			19,922
	85,698			51,200
	114,774			59,605
	25,034			10,461
	5,660			5,660
	10,690			10,690
	52,230			52,230
	7,261			7,261
	27,234			27,234
	174,926			148,145
	46,491			40,090
	**1,074,989 **	$658,081		$416,908

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Notable expenses included:

• the decrease in accounting and legal was the result of legal fees in connection with the going public transaction were included in the listing fees as described hereinabove;

• the increase in website, advertising and promotion as the Company increased its brand awareness and go public transaction;

• expenses related to the tasting room, patio and entertainment and market and trade shows were all new costs for 2021 as the Company worked to draw customers back to on-site tasting and attend farmers and craft markets in response to Covid 19 restrictions being eased;

• the Company incurred an increase in news release dissemination as part of its go public transaction; and

• incurred costs for transfer agent fees as a result of going public.

Notable Other Items included:

• the loss on the termination and buyout of the distillery equipment lease; and

• the listing expense in connection with the Amalgamation and go public transaction as described hereinabove.

SUMMARY OF QUARTERLY RESULTS

The Company became a reporting issuer on December 17, 2021 and has not prepared quarterly interim financial statements for each of the previous eight quarters. As a result, the Company is unable to provide a summary or the current quarterly results but future quarters will be prepared on a go forward basis.

LIQUIDITY AND CAPITAL RESOURCES

	December 31		December 31 2020
	2021
Financial position: Cash and restricted cash Working capital Total Assets Shareholders' equity		$130,993 $(1,017,094) $3,778,325 $948,223
	$1,730,926
	$1,028,849
	$5,285,257
	$2,683,618

As at December 31, 2021 the Company had a working capital of $1,028,849 (December 31, 2020 - $1,017,092 deficiency). The Company will require additional funding to complete any further significant capital investments beyond it current business objectives for the next 12 months.

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Cash Flows for the years ended December 31, 2021 and 2020

	For the Years Ended	For the Years Ended
	December 31
	2021	2020
Cash flows used in operating activities: - before non-cash working capital adjustments Changes in non-cash working capital Prepaid expenses Inventory Receivables Trade and other payables		$ (808,882) 19,802 (327,489) (10,334) 286,156 (75,708) 896,416 (20,759) 151,752
	$ (1,696,380)
	(38,845)
	8,296
	(58,903)
	624,093
Cash flows provided by (used) in investing activities	230,538
Cash flows provided by financing activities Increase (decrease) in cash during the period Cash and cash equivalents beginningofperiod	2,531,134
	1,599,933
	130,993
Cash and cash equivalents end ofperiod	$ 1,730,926	$ 130,993

For the years ended December 31, 2021 and 2020:

• Cash flows used in operating activities decrease in 2021 primarily attributed to the settlement of trade payables of $607,954 through the issuance of Subscription Receipts as described herein.

• Cash flows used in investing activities deceased as the Company purchased less equipment from previous year and recorded a sale of assets in the previous year for net proceeds of $45,000.

• Cash flows from financing activities in the current year were primarily related to the completion of the Concurrent Financing described hereinabove and an increase in proceeds from short term loans offset by the lease buyout and purchase of equipment and repayment of loans.

Going Concern

The Company has not yet achieved profitable operations. These financial statements are prepared on a going concern basis, which assumes that the Company will be able to realize its assets and discharge its liabilities in the normal course of business for the foreseeable future. During the year ended December 31, 2021 the Company has incurred a net loss from operations of $3,889,645 (2020 - $1,130,847) and, as at that date, has accumulated a deficit of $7,511,577 (2020 - $3,621,932) and is expected to continue to incur losses. The Company had working capital as at December 31, 2021 of $1,112,416 (2020 - $1,017,093 deficit).

The continuing operations of the Company are dependent upon obtaining, the Company obtaining future financing to meet the Company’s outstanding debt obligations. Should the Company no longer be able to continue as a going concern, certain assets and liabilities may require restatement on a liquidation basis,

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which may differ materially from the going concern basis. No adjustments to the carrying values of the assets and liabilities have been made in the financial statements.

OFF-BALANCE SHEET ARRANGEMENTS

The Company had no material off-balance sheet arrangements as at the date of this MD&A.

TRANSACTIONS WITH RELATED PARTIES

Compensation for key management and personnel, including Company officers, directors, and private companies controlled by officers and directors, was as follows:

	December 31 2021	December 31 2020
Key management personnel compensation comprised: Wages and salaries Administration Consulting fees Website, advertising and social media		$100,000 - 255,593 -
	**$ 120,0001 **
	39,4652
	**264,2503 **
	**56,1854 **
	$479,900	$355,593

1 Includes wages of $60,000 per annum paid or accrued to Blair Wilson, President and CEO and Kelly Wilson, Chief Sustainability Officer;

2 Includes accounting and administrative personnel provided paid or accrued to a company controlled by Terese Gieselman, the Company’s CFO at rates of $50 per hour;

3 Includes consulting fees paid or accrued as follows:

• $158,400 to a company controlled by the President and CEO

• $54,000 to a company controlled by the Chief Sustainability Officer

• $51,850 to company controlled by the CFO, for financial reporting and corporate secretary services;

4 includes consulting fees paid or accrued to a company controlled by a family member of the CEO and Chief Sustainability Officer of $56,185.

Included in trade and other payables are amounts due to officers, directors and related parties for fees and expenses of $189,508 (2020– $477,408). These amounts are non-interest-bearing and due on demand.

Amalgamation

As described hereinabove the Amalgamation is considered non-arm’s length as certain directors and officers had an interest in the Qualifying Transaction.

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Shares for Debt

The Company settled outstanding amounts due to the CEO, Chief Sustainability Officer and related company’s controlled by same through the issuance of an aggregate 2,026,513 subscription receipts for the settlement of $607,954.

Leases

On June 1, 2018 the Company entered into a land lease with Apple Orchard Inc. a Company controlled by an the Chief Sustainability Officer for a period of 20 years. Lease payments commenced on January 1, 2019 at an initial monthly rate of $1000 per month with an escalation rate of 5% per year thereafter. As at December 31, 2021 the Company had accrued or paid $43,050 (2020 – $37,500) in lease payments.

On September 1, 2020 the Company entered into an office lease with Apple Orchard Inc. for a period of 5 years at an initial monthly rate of $3,500 per month with an escalation rate of 5% per year thereafter. As at December 31, 2021 the Company had accrued or paid $48,700 (2020 – $12,000) in lease payments.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions.

The effect of a change in an accounting estimate is recognized prospectively by including it in loss/income in the year of the change, if the change affects that year only, or in the year of the change and future years, if the change affects both.

Information about critical judgments and estimates in applying accounting policies that have the most significant risk of causing material adjustment to the carrying amounts of assets and liabilities recognized in the financial statements within the next financial year are discussed below:

The Company makes estimates and assumptions about the future that affect the reported amounts of assets and liabilities. Estimates and judgments are continually evaluated based on historical experience and other factors, including expectations of future events that are believed to be reasonable under the circumstances. In the future, actual experience may differ from these estimates and assumptions.

The effect of a change in an accounting estimate is recognized prospectively by including it in loss/income in the year of the change, if the change affects that year only, or in the year of the change and future years, if the change affects both.

Information about critical judgments and estimates in applying accounting policies that have the most significant risk of causing material adjustment to the carrying amounts of assets and liabilities recognized in the financial statements within the next financial year are discussed below:

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Critical Accounting Judgments

Income Taxes

Deferred tax assets, including those arising from tax loss carry-forwards, require management to assess the likelihood that the Company will generate sufficient taxable earnings in future periods in order to utilise recognised deferred tax assets. Assumptions about the generation of future taxable profits depend on management’s estimates of future cash flows. In addition, future changes in tax laws could limit the ability of the Company to obtain tax deductions in future periods. To the extent that future cash flows and taxable income differ significantly from estimates, the ability of the Company to realise the net deferred tax assets recorded at the reporting date could be impacted.

Going Concern

The assumption that the Company will be able to continue as a going concern is subject to critical judgments of management with respect to assumptions surrounding the short- and long-term operating budget, expected profitability, investment and financing activities and management’s strategic planning. Should those judgments prove to be inaccurate, management’s continued use of the going concern assumptions be inappropriate.

Convertible Promissory Notes

The identification of convertible debenture components is based on interpretations of the substance of the contractual arrangement and therefore requires judgment from management. The separation of the components affects the initial recognition of the convertible debenture at issuance and the subsequent recognition of interest on the liability component. The determination of the fair value of the liability is also based on a number of assumptions, including contractual future cash flows, discount factors, and the presence of any derivative financial instruments.

Application of IFRS 16

The Company applies judgment in determining whether the contract contains an identified asset, whether the Company has the right to control the asset, and the lease term. Lease term reflect the period over which the lease payments are reasonably certain including renewal options that the Company is reasonably certain to exercise. The determination of lease terms involves significant judgment with respect to assumptions of whether lease extensions will be utilizes. Management makes assumptions about longterm industry outlook and store operating performances and growth which relate to future events and circumstances. Actual results could vary from these assumptions, and the differences could be material to the carrying value of the lease liabilities and right-of-use assets, for which the lease term is the basis for determining useful life.

Canada Emergency Business Account loan (“CEBA”)

In determining the initial fair value of the CEBA loan, the Company applied judgment to assume that the Company would repay $60,000 by December 31, 2022 and the Company used a discount rate of 5%, an estimate of its incremental borrowing interest rate under similar terms.

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Determination of control in the Amalgamation

The determination of the acquirer in the Amalgamation is subject to judgment and requires the Company to determine which party obtains control of the combining entities. Management applies judgment in determining control by assessing the following three factors: whether the Company has power over Spartan, whether the Company has exposure or rights to variable returns from its involvement with Spartan, and whether the Company has the ability to use its powers over Spartan to affect the amount of its returns. In exercising this judgment, the Company was deemed to be the acquirer in the Amalgamation.

Management has had to apply judgment relating to acquisitions with respect to whether the acquisition was a business combination or an asset acquisition. Management applied a three-element process to determine whether a business or an asset was purchased, considering inputs, processes and outputs of the acquisition in order to reach a conclusion. The Amalgamation was accounted for as a reverse acquisition and the difference between the fair value of net assets acquired and the consideration paid was recorded as a listing expense (Note 5).

Critical Accounting Estimates

Interest Rates

The Company estimates a market interest rate in determining the fair value of the liability component of its convertible debentures and the fair value of the right-of-use assets and lease liabilities. The determination of the market interest rate is subjective and could materially affect these fair value estimates.

Impairment of Property, Plant and Equipment and Intangible Assets

At the end of each reporting period, the Company reviews the carrying amounts of its long-lived assets to determine whether there is any indication that the carrying amount is not recoverable. The determination of whether any such indication exist requires significant management judgment. If any such indication exists, the recoverable amount of the asset is estimated in order to determine the extent of the impairment loss (if any). As at December 31, 2021 there were no indicators of impairment. When an individual asset does not generate independent cash flows, the Company estimates the recoverable amount of the cashgenerating unit to which the asset belongs. Assets are grouped together into the smallest group of assets that generates cash inflows from continuing use that are largely independent of the cash inflows of other assets or groups of assets. When a reasonable and consistent basis of allocation can be identified, corporate assets are also allocated to individual cash-generating units, or otherwise they are allocated to the smallest group of cash-generating units for which a reasonable and consistent allocation basis can be identified.

Recoverable amount is the higher of fair value less costs of disposal and value in use. Fair value is determined as the price that would be received to sell an asset in an orderly transaction between market participants at the measurement date. In assessing value in use, the estimated future cash flows are discounted to their present value using a pre-tax discount rate that reflects current market assessments of the time value of money and the risks specific to the asset for which the estimates of future cash flows have not been adjusted. Many factors are used in assessing recoverable amounts and are outside of the control of management and it is reasonably likely that assumptions and estimates will change from period to period. These changes may result in future impairments.

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Inventory

Management has estimated the value of inventory based upon their assessment of the net realizable amount less selling costs. No inventory has been identified as requiring a write-down.

Share-Based Payments

The Company has applied estimates with respect to the valuation of shares issued for non-cash consideration. Shares are valued at the fair value of the equity instruments granted at the date the Company receives the goods or services for share-based payments made to those other than employees or others providing similar services.

The Company measures the cost of equity-settled transactions by reference to the fair value of the equity instruments at the date at which they are granted for share-based payments made to employees or others providing similar services. Estimating fair value for share-based payment transactions requires determining the most appropriate valuation model, which is dependent on the terms and conditions of the grant. This estimate also requires determining the most appropriate inputs to the valuation model including the fair value of the underlying common shares, the expected life of the share option or warrant, volatility and dividend yield and making assumptions about them. The assumptions and models used for estimating fair value for share-based payment transactions are discussed hereinabove.

Estimated Useful Lives and Depreciation/Amortization of Property, Plant and equipment and Intangible Assets

Depreciation/amortization of property, plant and equipment and intangible assets is dependent upon estimates of useful lives which are determined through the exercise of judgment. The assessment of any impairment of these assets is dependent upon estimates of recoverable amounts that take into account factors such as economic and market conditions and the useful lives of assets.

Fair value of consideration in the Amalgamation

The fair value of consideration to acquire Spartan in a reverse takeover transaction comprised common shares and replacement warrants and options. Common shares were valued on the date of issuance. Replacement warrants and options were valued using the Black-Scholes model. The Company applied IFRS 2 Share-based Payments, in accounting for the Amalgamation.

.

FINANCIAL INSTRUMENTS

The Company is exposed through its operations to the following financial risks:

• Market risk

• • Credit risk

• Liquidity risk

The Company is exposed to risks that arise from its use of financial instruments. This note describes the

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Company’s objectives, policies and processes for managing those risks and the methods used to measure them. Further quantitative information in respect of these risks is presented throughout these financial statements.

There have been no substantive changes in the Company’s exposure to financial instrument risks, its objectives, policies and processes for managing those risks or the methods used to measure them from previous years unless otherwise stated.

General Objectives, Policies and Processes

The Board of Directors has overall responsibility for the determination of the Company’s risk management objectives and policies and, whilst retaining ultimate responsibility for them, it has delegated the authority for designing and operating processes that ensure the effective implementation of the objectives and policies to the Company’s management. The effectiveness of the processes put in place and the appropriateness of the objectives and policies it sets out are reviewed periodically by the Board of Directors if and when there are any changes or updates required.

The overall objective of the Board is to set policies that seek to reduce risk as far as possible without unduly affecting the Company’s competitiveness and flexibility. Further details regarding these policies are set out below.

Market Risk

Market risk is the risk that the fair value of future cash flows of a financial instrument will fluctuate due to changes in market prices. Market prices are comprised of interest rate risk, currency risk and other price risk. The Company is not exposed to significant market risk.

Interest Rate Risk

Interest rate risk is the risk that future cash flows will fluctuate as a result of changes in market interest rates. The Company has cash balances that bear interest at market rates. The Company’s financial liabilities consist primarily fixed rate debt other than the Commercial Loan which is the greater of 12% or prime plus 9.55%. During the year ended December 31, 2021 the interest rate remained the greater of 12% however for 2022 with the increase in the prime rate the interest rate will increase to 12.75%. The Company’s current policy is to invest excess cash in GICs or interest-bearing accounts of major Canadian chartered banks. The Company regularly monitors compliance to its cash management policy. The Company is not exposed to significant interest rate risk.

Forbidden is exposed to interest rate risk as a result of the issuance of variable rate Demand Loan and Commercial Loan. For the period ended June 30, 2021, every 1% increase or decrease in the Demand Loan and Commercial Loan interest rate results in a corresponding $13,197 (2020 - $Nil) decrease or increase in the Company’s statements of loss and comprehensive loss..

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Currency Risk

Currency risk is the risk that the fair values of future cash flows of a financial instrument will fluctuate because they are denominated in currencies that differ from the Company’s functional currency. The Company is currently not exposed to currency risk.

Credit Risk

Credit risk is the risk of financial loss to the Company if a customer or counterparty to a financial instrument fails to meet its contractual obligations. Financial instruments which are potentially subject to credit risk for the Company consist primarily of cash and receivables. Cash is maintained with financial institutions of reputable credit and may be redeemed upon demand and receivables are entered into with credit-worthy counterparties.

The carrying amount of financial assets represents the maximum credit exposure. Credit risk exposure is limited through maintaining cash with high-credit quality financial institutions and management considers this risk to be minimal for all cash assets based on changes that are reasonably possible at each reporting date.

Liquidity Risk

Liquidity risk is the risk that the Company will not be able to meet its financial obligations as they become due. The Company’s policy is to ensure that it will always have sufficient cash to allow it to meet its liabilities when they become due, under both normal and stressed conditions, without incurring unacceptable losses or risking damage to the Company’s reputation.

The key to success in managing liquidity is the degree of certainty in the cash flow projections. If future cash flows are fairly uncertain, the liquidity risk increases.

Typically, the Company ensures that it has sufficient cash on demand to meet expected operational expenses for a period of 90 days. To achieve this objective, the Company would prepare annual capital expenditure budgets, which are regularly monitored and updated as considered necessary.

The Company monitors its risk of shortage of funds by monitoring the maturity dates of existing trade and other payable, lease liabilities and option payment commitments. The Company’s trade and other payables are all due within 90 days. The amount of the Company’s remaining contractual maturities for the convertible note payable, government assistance loan, lease liabilities and advances from shareholders is approximately $370,184 due within 12 months, and $1,218,945 beyond 12 months..

Determination of Fair Value

Fair values have been determined for measurement and/or disclosure purposes based on the following methods. When applicable, further information about the assumptions made in determining fair values is disclosed in the notes specific to that asset or liability.

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The statements of financial position carrying amounts for cash, receivables, trade and other payables, loan payables, government assistance and advances to shareholders approximate fair value due to their shortterm nature.

Due to the use of subjective judgments and uncertainties in the determination of fair values these values should not be interpreted as being realizable in an immediate settlement of the financial instruments.

Fair Value Hierarchy

Financial instruments that are measured subsequent to initial recognition at fair value are grouped in Levels 1 to 3 based on the degree to which the fair value is observable:

• Level 1 fair value measurements are those derived from quoted prices (unadjusted) in active markets for identical assets or liabilities;

• Level 2 fair value measurements are those derived from inputs other than quoted prices included within level 1 that are observable for the asset or liability, either directly (i.e., as prices) or indirectly (i.e., derived from prices); and

• Level 3 fair value measurements are those derived from valuation techniques that include inputs for the asset or liability that are not based on observable market data (unobservable inputs).

Cash and is measured as Level 1 financial instruments.

CAPITAL MANAGEMENT

The Company considers its share capital, loan payable and borrowings as capital. The Company’s objectives when maintaining capital are to maintain a sufficient capital base in order to meet its short-term obligations and at the same time preserve investor’s confidence required to sustain future development and production of the business.

The Company is not exposed to any externally imposed capital requirements. There has been no change in the Company’s approach to capital management during the year ended December 31, 2021.

OUTSTANDING SHARE DATA

Forbidden’s authorized capital is unlimited common shares without par value. As at the date of this report 59,004,024 common shares were issued and outstanding.

The Company as at the date of this report had the following outstanding options, share purchase warrants and agent warrants as follows:

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Stock Options

	Exercise	Number of	Vested and
Expiry Date	Price	Options	Exercisable	Unvested
17-Dec-31	$0.30	1,096,000	1,096,000	-
31-Dec-30	$0.25	111,600	111,600	-
30-Aug-30	$0.30	392,657	392,657	-
31-Dec-29	$0.25	390,600	390,600	-
31-Dec-28	$0.25	1,223,400	1,223,400	-
31-Dec-28	$0.05	2,304,000	2,304,000	-
		5,518,257	5,518,257	-

Share Purchase Warrants

**Number **	Price Per Share	Expiry Date
**6,959,762 **	$0.50	17-Dec-23

Agents Warrants

**Number **	Price Per Share	Expiry Date
669,266 273,850	$0.50 $0.20	17-Dec-23 31-Aug-22
943,116

RISK FACTORS

AN INVESTMENT IN FORBIDDEN IF THE AMALGAMATION PROCEEDS, IS HIGHLY SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK AND SHOULD ONLY BE MADE BY INVESTORS WHO CAN AFFORD TO LOSE THEIR ENTIRE INVESTMENT.

Forbidden’s activities are subject to the risks normally encountered by companies which manufacture, market and sell beverages, including alcoholic spirits. A number of factors, including input prices, economic and political matters, and pandemics are beyond its control.

Financing Risks

There is no assurance given by Forbidden that it will be able to secure the financing necessary to develop and grow its business. Forbidden does not presently have sufficient financial resources or operating cashflow to undertake by itself all of its planned programs. The development of Forbidden’s business may therefore depend on Forbidden’s ability to obtain additional required financing. There is no assurance Forbidden will be successful in obtaining the required financing on terms acceptable to it, or at all, the lack of which could result in the loss or substantial dilution of its interests (as existing or as proposed to be acquired) in its properties. Forbidden’s ability to continue as a going concern is dependent on its ability to

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raise equity capital financings, the attainment of profitable operations and the completion of further share issuances to satisfy working capital and operating needs.

Competition

Distilleries operate in a highly competitive environment. Forbidden's products compete primarily in the premium spirits segment, the defining qualities of which are taste, price, quality, and image. This category includes both premium spirits and craft spirits. The premium spirits segment has become increasingly competitive over the past several years due to local craft distilleries producing and aggressively marketing craft distillery products along side the existing premium brands in the marketplace. Large established distilleries have substantially greater resources for support of marketing and distribution activities and compete aggressively with extensive advertising and promotion campaigns. Competition has also increased in the micro and craft spirit segment, with significant growth in the number of craft distilleries and products in all Forbidden's markets. These sources of competition may reduce demand for the Forbidden's products, which could have an adverse effect on revenue and profitability.

With the vast choice of craft brands now available, and the advertising of craft divisions of the major distilleries and growth in ready-to-drink alcoholic beverages, it is likely that competitive pressures on price will continue. When coupled with low barriers to entry, it has resulted in unprecedented consumer choice and blurring of categories, channels and competition in the beverage alcohol space. Such pricing pressures may have an adverse impact on the Forbidden’s margins and profitability. Due to the ongoing shifting effects of competition, the ability to predict future sales and profitability with any degree of certainty is limited.

Government Regulation

The alcoholic beverage industry in Canada is subject to government policy, extensive regulatory requirements and significant rates of taxation at both the federal and provincial levels. As a result, changes in the government policy, regulatory and/or taxation environments within the alcoholic beverage industry may affect Forbidden’s business operations, causing changes in market dynamics or changes in consumer consumption patterns. In addition, Forbidden’s provincial liquor board customers have the ability to mandate changes that can lead to increased costs, as well as other factors that may impact financial results. If Forbidden becomes more reliant on international product sales, exposure to changes in the laws and regulations (including on matters such as regulatory requirements, import duties and taxation) in those countries could also adversely affect the operations, financial performance or reputation of Forbidden.

Taxation

Alcohol is subject to extensive taxes both on the provincial and federal level. As a distillery, Forbidden is subject to regulation by the Canada Revenue Agency. These regulations currently impose notification and bonding requirements, as well as production reporting. In addition, Forbidden's taxable production is subject to a federal excise tax. Any increase in such regulation or the level of excise tax levied upon Forbidden's taxable production may adversely affect Forbidden's business and financial results.

Forbidden is also subject to provincial mark-up rates levied by provincial liquor control bodies, including the British Columbia Liquor Distribution Board. There can be no assurance that in the future new or increased regulations will not be adopted at city, municipal, provincial or federal levels in Forbidden's

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markets. Such measures could include proposals for higher taxes on alcoholic beverages, or efforts to further regulate or limit producers, distributors or retailers of alcoholic beverages. The adoption of any such measures could have a material adverse effect on Forbidden's business and financial results.

Expansion Outside British Columbia

Forbidden’s ability to grow its business outside its home market of British Columbia, if desired, is dependent on the availability of appropriate facilities, or sites on which facilities can be constructed, in strategic growth markets. Even if such facilities can be located at reasonable cost, there can be no assurance that it will be possible to obtain permits and licenses necessary to operate such facilities.

Additionally, there can be no assurance that local demand in these markets will be sufficient to justify continued operations.

Ability to Retain Key Personnel

Forbidden’s business is dependent in part on its ability to retain key personnel, including but not limited to its master distiller and other operational personnel that have a key role in developing and producing Forbidden’s products.

While Forbidden believes that it can secure the expertise necessary to continue to develop new product offerings and to continue to produce its existing product offerings to its current quality standards, the inability to retain key personnel or fill key personnel vacancies could have a material adverse effect on Forbidden’s business.

Dependence on Sales Personnel

Forbidden’s business is dependent in part on its ability to maintain effective distribution and sales networks. Developing and maintaining these networks requires the use of sales personnel to establish relationships with businesses, both local and abroad. The termination of any of these relationships could require Forbidden to negotiate replacement arrangements, which could disrupt sales and/or have a material adverse effect on Forbidden’s business.

Distribution/Supply Chain Interruption

Forbidden is susceptible to risks relating to distributor and supply chain interruptions. Distribution in Canada is largely accomplished through the government-owned provincial liquor boards and, therefore, an interruption (e.g., a labour strike) for any length of time or a change in business model may have a significant impact on Forbidden’s ability to sell its products in a particular province and/or market. International sales are subject to the variations in distribution systems within each country where the products are sold.

Supply chain interruptions, including a manufacturing or inventory disruption, could impact product quality and availability. Forbidden adheres to a comprehensive suite of quality programmes and proactively manages production and supply chains to mitigate any potential risk to consumer safety or Forbidden’s reputation and profitability. Inherent to producing maturing products there is a potential for shortages or surpluses in future years if demand and supply are materially different from long-term forecasts.

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Additionally, the loss through contamination, fire or other natural disaster of the stock of maturing products may result in significant reduction in supply and, as a result, Forbidden may not be able to meet customer demands. Forbidden monitors category trends and regularly reviews maturing inventory levels.

Dependence on proprietary formulas

The formulas for Forbidden's products are proprietary trade secrets. Although Forbidden takes measures to safeguard such formulas, there can be no assurance that existing or future competitors will not develop spirits of the same or similar tastes and qualities as Forbidden's products. Competing products with the same or similar tastes and qualities as Forbidden's spirits could erode demand for Forbidden’s products and have a material adverse effect on Forbidden’s business.

Consumer preferences

The alcoholic spirits market has grown substantially over the past decade. Forbidden believes that one factor in such growth has been increasing consumer demand for more unique and interesting spirits in a wider variety of styles. A shift in demand profiles away from craft distillery products could negatively affect Forbidden’s current business plan and profitability. There has also been an increase in the level of health consciousness amongst consumers. This trend can lead to reduced consumption negatively affecting Forbidden’s business.

Consumer Consumption Patterns

Alcoholic beverage companies are susceptible to risks relating to changes in consumer consumption patterns. Consumer consumption patterns are affected by many external influences, not the least of which is economic outlook and overall consumer confidence in the stability of the economy as a whole. Additionally, the legalization of recreational cannabis in Canada could impact consumer consumption patterns with respect to beverage alcohol products.

Trademark Infringement

Craft distilleries in generally rely on the brand recognition associated with its existing product offerings. Under the laws of Canada, Forbidden may enforce its trademarks by enjoining infringing users and by obtaining damages against intentional infringers. A person who used such trademark before Forbidden’s first use, if the trademark is used on a similar product and there is a likelihood of confusion, could enjoin Forbidden from using a trademark. In the event Forbidden was denied from continuing to use any one or more of its existing trademarks, it is possible that the resulting loss of brand recognition could negatively impact sales.

Brand Promotion

A critical component of Forbidden’s future growth is its ability to promote and sustain its brands, which it believes can be achieved by providing a high-quality user experience. An important element of Forbidden’s brand promotion strategy is establishing a relationship of trust with its consumers. In order to provide a high-quality user experience, Forbidden has invested and will continue to invest substantial amounts of resources in the development of its products, infrastructure, fulfilment and customer service operations. If

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Forbidden’s consumers are dissatisfied with the quality of the products or services sold to them, the customer service they receive or their overall customer experience, Forbidden’s consumers may stop purchasing products and services from it.

Intellectual Property

The ownership and protection of Forbidden’s intellectual property is a significant aspect of Forbidden’s future success. In accordance with industry practice, Forbidden's proprietary rights are currently protected through a combination of copyright, trademark and contractual provisions.

Although Forbidden has registrations for certain trademarks, it may be unable to obtain or maintain trademark registrations for the marks and names it uses in one or more countries. In the event of actual or alleged infringement or contravention of rights, Forbidden may be forced to cease using these marks and names. There is no assurance that Forbidden’s competitors will not develop similar technology, business methods or that Forbidden will be able to exercise its legal rights.

Operating Hazards

Forbidden’s operations are subject to certain hazards and liability risks faced by all distilleries, such as potential contamination of ingredients or products and equipment defects. The occurrence of such a problem could result in a product recall, which could damage Forbidden’s reputation and or result in financial loss. In addition, a major equipment defect or malfunction could adversely affect product quality or supply.

Restrictions on Potential Growth

Forbidden may distribute a substantial portion of its operating cash flow to shareholders in the form of dividends. As a result, Forbidden’s ability to make future capital and operating expenditures is dependent on increased cash flow or external financing. The inability to source such funds could limit the future growth of Forbidden. In addition, the level of Forbidden’s indebtedness from time to time could impair Forbidden’s ability to obtain additional financing on a timely basis or on satisfactory terms. The inability of Forbidden to manage growth effectively could have a material adverse impact on its business, operations and prospects.

Dilution

Forbidden may make future acquisitions or may enter into financings or other transactions involving the issuance of securities of Forbidden, which may be dilutive to existing shareholders.

Dividends

Forbidden does not currently declare dividends. Forbidden’s ability to declare future dividends, if any, is dependent upon, among other things, the operational performance of Forbidden’s business, their operating and capital obligations, net income, cash from operating activities, net debt levels, exchange rates, access to capital markets and timing and level of income tax payments, as well as the satisfaction of solvency tests imposed by the Business Corporations Act (British Columbia) on corporations for the declaration and

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payment of dividends. Further, future treatment of any dividends for tax purposes will be subject to the nature and composition of Forbidden’s dividends and potential legislative and regulatory changes.

Cybersecurity

Cyber-attacks have the potential to impact Forbidden both operationally and financially. Forbidden’s information technology (“ IT ”) are subject to an increasing threat of continually evolving cybersecurity risks including computer viruses, security breaches and cyberattacks. Additionally, Forbidden is subject to the risk of unauthorized access to its IT systems or its information through fraud or other means.

Trade Regulation

In the last several years, the United States and certain European countries have experienced significant political events that have cast uncertainty on global financial and economic markets. Since the 2016 U.S. presidential election, the American administration has withdrawn the United States from the Trans-Pacific Partnership and the United States Congress has passed sweeping tax reform, which, among other things, significantly reduces U.S. corporate tax rates. This has affected the competitiveness of other jurisdictions, including Canada. While Forbidden currently does not have significant cross-border sales it is actively pursuing such strategies. The adoption of new trade regulations, repeal or amendment of existing trade regulations, or future trade disputes that result in retaliatory practices or increased tariffs could adversely affect Forbidden’s ability to expand into foreign markets or the costs associated with inputs into Forbidden’s products.

Litigation

From time to time, Forbidden may be involved in legal actions and disputes arising from the ordinary course of business. A negative result could adversely affect Forbidden’s business.

Valuation of Goodwill and Intangible Assets

Goodwill and intangible assets account for a significant amount of Forbidden’s total assets. Goodwill and intangible assets are subject to impairment tests that involve the determination of fair value. Inherent in such fair value determinations are certain judgments and estimates including, but not limited to, projected future sales, earnings and capital investment; discount rates; and terminal growth rates. These judgments and estimates may change in the future due to uncertain competitive market and general economic conditions, or as Forbidden makes changes in its business strategies. Certain of the aforementioned factors affecting the determination of fair value may be impacted and, as a result, Forbidden’s financial results may be adversely affected.

Covid-19 Pandemic

The Covid-19 pandemic comes with its own risks but has a significant impact on many of the risk factors above, including but not limited to the ability to export/import products and materials, and consumer demand for products. Covid-19 creates uncertainties regarding demand for alcoholic products and also

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creates uncertainties regarding employees of Forbidden. It may be harder to keep employees if they are concerned of the risk of contracting Covid-19.

Conflicts of Interest

Forbidden provides no assurance that its directors and officers will not have conflicts of interest from time to time. Forbidden’s directors and officers may serve as directors or officers of other companies or have significant shareholdings in other companies and, to the extent that such other companies may participate in ventures in which Forbidden may participate, Forbidden’s directors and management may have a conflict of interest in negotiating and concluding terms respecting the extent of such participation. The interests of these companies may differ from time to time. In the event that such a conflict of interest arises at a meeting of Forbidden’s directors, a director who has such a conflict will abstain from voting for or against any resolution involving any such conflict. In accordance with the laws of the Province of British Columbia, the directors of Forbidden are required to act honestly, in good faith and in the best interests of Forbidden. In determining whether or not Forbidden will participate in any particular undertaking at any given time, the directors will primarily consider the upside potential for the undertaking to be accretive to shareholders, the degree of risk to which Forbidden may be exposed and its financial position at that time.

Negative Operating Cash Flow

In the event that Forbidden’s operating cash flow is not positive in future financial periods it may need to raise additional capital in order to fund operations. There is no guarantee that additional funds will be available on terms acceptable to Forbidden or at all. In the event that Forbidden’s operating cash flow is negative this may have a Material Adverse Effect on Forbidden (and on the Resulting Issuer’s stock price).

Uninsured Risks

Forbidden provides no assurance that it is adequately insured against all risks. Forbidden may become subject to liability for pollution or other hazards against which it cannot insure or against which it has elected not to insure because of high premium costs or other reasons. The payment of such liabilities would reduce the funds available for corporate activities.

Environmental and Other Regulatory Requirements

Forbidden provides no assurance that it has met all environmental or regulatory requirements. The current or future operations of Forbidden require permits from various federal, provincial and local governmental authorities and such operations are and will be governed by laws and regulations governing alcoholic beverage production, exports, taxes, labour standards, occupational health, waste disposal, toxic substances, land use, environmental protection and other matters. There can be no assurance that Forbidden will be able to obtain or maintain all necessary permits that may be required to continue its operations as currently conducted or as proposed to be conducted on terms which enable operations to be conducted at economically justifiable costs.

Failure to comply with applicable laws, regulations, and permitting requirements may result in enforcement actions including orders issued by regulatory or judicial authorities causing operations to cease or be curtailed, and may include corrective measures requiring capital expenditures, installation of additional

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equipment or remedial actions. New laws or regulations or amendments to current laws, regulations and permits governing operations could have a material adverse impact on Forbidden and cause increases in capital expenditures or production costs or reduction in levels of production.

Other Requirements

Additional disclosure of the Company’s material change reports, news release and other information can be obtained under the Company’s profile on SEDAR at www.sedar.com.