The following discussion and analysis is intended as a review of significant factors affecting our financial condition and results of operations for the periods indicated. The discussion should be read in conjunction with our consolidated financial statements and the notes presented herein and the consolidated financial statements and the other information set forth in our Form 10-K/A filed with the Securities and Exchange Commission on December 28, 2020. In addition to historical information, the following Management's Discussion and Analysis of Financial Condition and Results of Operations contains forward-looking statements that involve risks and uncertainties. Our actual results could differ significantly from those anticipated in these forward-looking statements as a result of certain factors discussed herein and any other periodic reports filed and to be filed with the Securities and Exchange Commission.

Overview and recent developments

We are a holding company organized under the laws of Ontario, Canada, that is engaged in various aspects of the oil and gas industry. Our primary focus is on the development and implementation of our proprietary oil sands mining and processing technology to recover oil from surface mined bitumen deposits (the "Extraction Technology"). Our wholly-owned subsidiary, Petroteq Energy CA, Inc., a California corporation, conducts our oil sands extraction business through two wholly owned operating companies, Petroteq Oil Recovery, LLC, a Utah limited liability company ("POSR"), and TMC Capital, LLC, a Utah limited liability company ("TMC").

Through PCA, and its two subsidiaries POSR and TMC, we are in the business of oil sands mining operations on the TMC Mineral Lease in Uintah County, Utah, where we process mined oil sands ores using our Extraction Technology to produce crude oil and hydrocarbon products. Our primary extraction and processing operations are conducted at our Asphalt Ridge processing facility, which is owned by POSR.

Petroteq owns the intellectual property rights to the Extraction Technology which is used at our Asphalt ridge processing facility to extract and produce crude oil from oil sands utilizing a closed-loop solvent based extraction system.

We had expected to generate revenue from the sale of hydrocarbon products commencing in the third quarter ended May 31, 2020. However, due to the COVID-19 pandemic and volatility in oil prices, we reduced operations to a single shift per day during the quarter ended February 29, 2020, and ultimately suspended production of hydrocarbon products during the quarter ended May 31, 2020.

On July 2, 2020, TomCo Energy PLC ("TomCo") announced that, following the establishment by TomCo of Greenfield Energy LLC ("Greenfield") as a joint venture company with Valkor LLC ("Valkor") on June 17, 2020, Greenfield would take over the management and operations of our Asphalt Ridge processing facility. Valkor remains party to a non-exclusive technology licensing agreement with Petroteq dated July 2, 2019, as amended, in respect of the plant.

Since assuming responsibility for the management of the Asphalt Ridge facility in July 2020, Greenfield has made certain upgrades to the plant to improve its capacity and reliability, and is undertaking tests to assess its potential commerciality. All critical equipment has been received and installed at the plant. In addition, buildings have been erected over the nitrogen system and the vapor recovery system, and wind-walls have been erected at the mixing tank area and decanter deck, to better allow for operations during winter months. Pressure testing of piping systems is currently underway as part of plant pre-commissioning activities in preparation for plant start-up, which is expected to occur in the near term.

The Company expects that Greenfield will also be in a position to restart mining and ore handling operations in the near term. All site personnel completed mandatory Mine Safety and Health Administration (MSHA) training in late November 2020, and rental equipment needed for ore crushing and handling has arrived on site. Valkor has completed its evaluation of recently received mining quotations and has selected a mining contractor. The mining contract has been executed and the mining contractor has already begun mobilizing equipment to site. After initial work to prepare the site, it is expected that mining of oil sands ore will begin in late January 2021.

Even once we resume production, we anticipate that our revenue will be limited until we are at full production. We expect that we will require additional capital to continue our operations and planned growth.

As announced by TomCo on September 16, 2020, the board of TomCo believes that the Pre-FEED (Front-End Engineering and Design) Report prepared by Crosstrails Engineering LLC, a subsidiary of Valkor, provides a high level of confidence that the processes being utilized at the Asphalt Ridge processing facility can be scaled up to enable commercial production of 10,000 barrels of oil per day from a single site. Proof of commerciality though is subject to the successful completion of the upgrade works to the plant, that are currently being completed prior to its restart, and the associated trials to demonstrate the commerciality of the processes used in Petroteq's Extraction Technology process and the identification and securing of a suitable site for a commercial scale plant.

Once the Asphalt Ridge processing facility has been restarted, Petroteq intends to undertake a series of associated tests and trials, to be verified by an independent third party, to demonstrate both the commerciality of the Extraction Technology process and validate the proposed design for the commercial scale plant, thereby enabling Greenfield to move forward with the final FEED report for a 10,000 barrels of oil per day plant.





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In addition, Greenfield has announced that, following the restart of the Asphalt Ridge processing facility, it intends to start working with Quadrise Fuels International plc, regarding a trial of Quadrise's MSAR® technology at the plant. This will initially comprise the supply of oil samples produced by at the plant to Quadrise to enable them to undertake test work in the United Kingdom to finalize the required MSAR® formulations, before the planned on-site demonstration trial to produce approximately 600 barrels (100 tonnes) of MSAR®. MSAR® is a low viscosity oil-in-water emulsified synthetic heavy fuel oil ("HFO"). It is manufactured using Quadrise's proprietary technology to mix heavy residual oils with small amounts of specialist chemicals and water to a bespoke formulation. According to Quadrise, the resulting emulsion contains approximately 30% water and less than 1% chemicals. The emulsion is a low viscosity liquid at room temperature, which makes it easier to handle and reduces the heating costs for storing, transportation and use in comparison to HFOs.

Results of Operations for the three months ended November 30, 2020 and the three months ended November 30, 2019

Net Revenue, Cost of Sales and Gross Loss

During the current period, the Company entered into a Technology License Agreement with Valkor whereby Valkor paid $2,000,000 for a non-exclusive license to the Oil Sands Recovery Technology, the Company has no obligation to delivery any technology or know-how on an ongoing basis to Valkor, therefore the revenue is recognizable immediately.

There has been no sale of hydrocarbon products during the three months ended November 30, 2020 and minimal sales of $100,532 during the three months ended November 30, 2019.

The cost of sales during the three months ended November 30, 2020 consists of fees charged to Petroteq by Valkor for plant operations recovery expenses. The cost of sales for the three months ended November 30, 2019 consists of; i) advance royalty payments which expire at the end of the calendar year two years after the payment has been made; and ii) certain production related expenses consisting of labor and maintenance expenditure.





Expenses

Expenses were $2,065,228 and $2,513,469 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $448,241 or 17.8%. The decrease in expenses is primarily due to:

Depletion, depreciation and amortization

Depletion, depreciation and amortization was $11,523 and $74,320 for the three months ended November 30, 2020 and 20190, respectively, a decrease of $62,797 or 84.5%. The decrease is primarily due to the accelerated amortization of leasehold improvements in the prior period which were incurred at premises previously occupied by the Company.

Selling, general and administrative expenses

Selling, general and administrative expenses was $1,044,857 and $2,382,082 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $1,337,225 or 56.1%. Included in selling, general and administrative expenses are the following major expenses:





  a. Professional fees was $399,129 and $1,026,765 for the three months ended
     November 30, 2020 and 2019, respectively, a decrease of $627,636. The
     decrease is primarily related to other professional fees incurred on plant
     set up in the prior year prior to conclusion of the agreement with Valkor.
     Valkor have expertise in oil field operations which is expected to result in
     significant expense savings to the Company.




  b. Travel and promotional fees was $83,464 and $571,492 for the three months
     ended November 30, 2020 and 2019, respectively, a decrease of $488,028, the
     decrease is due to an overall reduction in travel expenditure to the site,
     impacted by the COVID-19 pandemic and lower promotion expenditure incurred as
     Valkor readies the site for production.

  c. Salaries and wages was $87,936 and $200,474 for the three months ended
     November 30, 2020 and 2019, respectively, a decrease of $112,538. The
     decrease is primarily due to Valkor assuming operational responsibility for
     the plant all salaries and wages are currently administrative in nature.

  d. General and administrative expenses was $234,696 and $381,248 for the three
     months ended November 30, 2020 and 2019, respectively, a decrease of
     $146,552. The overall decrease is due to Valkor assuming operational
     responsibility of the production site.




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Financing costs

Financing costs was $621,387 and $509,294 for the three months ended November 30, 2020 and 2019, respectively, an increase of $112,093. Financing costs includes; (i) interest expense of $287,639 and $143,308 for the three months ended November 30, 2020 and 2019, respectively, an increase of $144,331, is attributable to the increase in debt and convertible debt outstanding over the prior fiscal period; (ii) amortization of debt discount of $333,748 and $353,095 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $19,347, primarily due to the timing of the debt agreements entered into and the subsequent amortization of the discount over the life of the debt.





Other expense (income), net

Other expense was $544,459 and other income was $(416,680) for the three months ended November 30, 2020 and 2019, respectively, an increase of $961,139. In the current fiscal period we realized a loss on settlement of labilities and on convertible debt which had conversion terms at a discount to market prices. In Addition we renegotiated the maturity dates of several convertible notes as well as the conversion price of these instruments, resulting in a loss on debt extinguishment of $330,256

Mark to market of derivative liability

The mark to market of the derivative liability was $(156,998) and $(35,547) for the three months ended November 30, 2020 and 2019, respectively. The derivative liability arose due to the issuance of convertible securities with variable conversion prices and no floor conversion price. The charge during the current period represents the mark-to-market of the derivative liability outstanding as of November 30, 2020, which depends on our current share price, risk free interest rates and the volatility of our common share price.

Net loss before income taxes and Net loss and Comprehensive loss

Net loss before income taxes was $410,514 and $3,182,671 for the three months ended November 30, 2020 and 2019, respectively, a decrease of $2,772,157 or 87.1%. The decrease is primarily due to the $2,000,000 technology license fee and an overall reduction in operating expenses as Valkor prepares itself for production at the plant.

Liquidity and Capital Resources

As at November 30 2020, we had cash of approximately $98,510. We also had a working capital deficiency of approximately $11,285,842, due primarily to accounts payable, short term debt, convertible debentures and accrued interest thereon which remain outstanding as of November 30, 2020. During the three months ended November 30, 2020, we raised $1,547,545 in private placements warrant exercises and convertible debt issuances, to meet operational requirements and plant improvement expenditure.

Subsequent to November 30, 2020, we raised a further $75,000 in the form of a convertible debt and promissory note.

We have spent, and expect to continue to spend, a substantial amount of funds in connection with implementing our business strategy and do not have sufficient cash on hand to implement our business strategy. Our financial statements have been prepared assuming we are a going concern. To date, we have generated minimal revenue from operations and have financed our operations primarily through sales of our securities, and we expect to continue to seek to obtain our required capital in a similar manner. During the quarter ended November 30, 2020, our primary sources of funding were from our sales of convertible notes through which we received gross proceeds of approximately $1,069,500. There can be no assurance that we will be able to generate sufficient revenue to cover our operating costs and general and administrative expense or continue to raise funds through the sale of debt. If we raise funds by securities convertible into common shares, the ownership interest of our existing shareholders will be diluted.





Capital Expenditures

We continue to incur capital expenditure on the oil extraction plant as we refine our processes and improve on our efficiencies. These expenses are at times unpredictable but we do not anticipate spending more than $2,000,000 on the existing plant.

We also intend to construct two new oil extraction facilities and expand the existing facility. Each facility is estimated to cost $10,000,000.





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Other Commitments

The Company has various commitments including those disclosed under Commitments in note 23 to the financial statements, in addition the Company has commitments to repay convertible notes, promissory notes and debt as fully disclosed in notes 9,10 and 11 to the financial statements.

Recently Issued Accounting Pronouncements

The recent Accounting Pronouncements are fully disclosed in note 2 to our unaudited condensed consolidated financial statements.

Management does not believe that any other recently issued but not yet effective accounting pronouncements, if adopted, would have an effect on the accompanying unaudited condensed consolidated financial statements.

Off-balance sheet arrangements

We do not maintain off-balance sheet arrangements, nor do we participate in non-exchange traded contracts requiring fair value accounting treatment.





Inflation

The effect of inflation on our revenue and operating results was not significant.





Climate Change

We believe that neither climate change, nor governmental regulations related to climate change, have had, or are expected to have, any material effect on our operations.

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