CANADA

Province of Ontario

Court No.: 31-1481974

Estate No.: 31-1481974

TRUSTEE’S PRELIMINARY REPORT TO CREDITORS

ON THE BANKRUPTCY ADMINISTRATION

IN THE MATTER OF THE BANKRUPTCY OF

TERRASAN ENVIRONMENTAL SOLUTIONS INC.

OF THE CITY OF TORONTO, IN THE PROVINCE OF ONTARIO

Section A – Background

Terrasan Environmental Solutions Inc. (the “Company”) is an Ontario

corporation that was incorporated in March, 2004. The Company operated as
a construction company, specializing in all aspects of responsible demolition
and environmental contracting. It operated from a leased commercial space
located at 94 Brockport Drive, Toronto, Ontario (“Premises”).

On April 4, 2011, the Company filed an assignment in bankruptcy with the

Official Receiver under the Bankruptcy and Insolvency Act. MSI Spergel Inc.
(“Trustee”) was named as the Trustee of the Estate by the Official Receiver.
The Designated Officer of the Company in this bankruptcy administration is
Mr. Luigi Santaguida.

The Trustee has been advised by the management of the Company that
financial difficulties commenced in 2009 as a result of some delayed
payments from contractors, a $4,000,000 contract for the Constellation Hotel
that was not paid due to the bankruptcy of the owner, an unprofitable
venture into the United States market due to the downturn in the United
States economy, and a lack of confidence in the industry that has created
difficulties in collecting outstanding accounts receivables. Additionally, as a
result of significant debts owing to Canada Revenue Agency (“CRA”) for
unremitted payroll deductions and GST/HST, CRA issued enhanced
garnishment notices on the Company’s customers and bank account holders
which resulted in an interruption in the Company’s cash flow. The
indebtedness to CRA for unremitted payroll source deductions and GST/HST is
approximately $2,171,753. The Company was unable to continue operating
and accordingly filed an assignment in bankruptcy.

Prior to the date of the bankruptcy the company employed approximately 72

employees.

Section B - Evaluation of Assets

Based on the sworn Statement of Affairs dated April 1, 2011, the Company’s
assets are as follows:

Asset description

Per Statement of Affairs

Work in progress

$ 3,168,526

Accounts receivable

817,290

Machinery and equipment

192,212

Furniture & fixtures

5,462

Prepaid expenses and deposits

61,972
$ 4,245,463

Work in progress

The work in progress of $3,168,526 encompasses 11 projects that are at

various stages of completion, and is calculated based on the estimated equity
available in the projects. The estimated equity includes the outstanding
accounts receivable and accounts payable, and the future expected cash
collections and disbursements. The realization of this amount is dependent
on the co-operation of the Canada Revenue Agency (“CRA”) and the
owners/general contractors for each of these projects.

Upon its appointment, the Trustee attempted to negotiate an assignment of

eight of the unfinished contracts to a third party; however, the bankruptcy
filing triggered default provisions in the contracts and the bonding company
advised that it would not allow an assignment of the bonds to a third party.
Accordingly, the potential purchaser could not complete the transaction. The
Trustee also attempted to negotiate a sale of another unfinished contract to a
third party; however, the owner cancelled the contract due to inactivity. The
Trustee no longer has the ability to complete or assign the contracts to any
other party.

Accounts receivable

The accounts receivable of $817,290 represents amounts due for completed

projects. CRA has issued enhanced garnishments on these amounts, and will
apply any collections against the amount owing to it. The Trustee is of the
view that this amount is understated by approximately $885,000 due from
another contract, which is also subject to CRA’s enhanced garnishment.

Machinery and equipment

The Company’s machinery and equipment is comprised substantially of large

construction equipment and vehicles that are located at various job sites,
properties owned by Mr. Santaguida and bailiffs and mechanics, pursuant to
liens. The Trustee has obtained a copy of a recently completed appraisal of
the large construction equipment and will discuss this appraisal with the
Estate Inspectors. Proceeds realized from the sale of the machinery and
equipment are subject to priority claims and security interests of secured
creditors.

At the time of the Trustee’s appointment the equipment was located

primarily on construction sites. The Trustee has not taken possession of the
equipment due to a lack of funding required to relocate the equipment. The
director has taken actions to relocate equipment from risky job sites,
wherever possible, to more secure locations. This is discussed further in
Section E of this report.

Section C –Priority Claims and Secured Creditors

Priority Claims

The Trustee has received a copy of an Examiner’s Statement of Account

dated March 3, 2011 produced by CRA indicating unpaid deductions at source
totaling $1,837,476 and unremitted GST/HST in the amount of $334,227,
which has been registered on PPSA. The Trustee is currently in negotiations
with CRA to enter into an administrative agreement that would allow the
Trustee’s fees and disbursements to be paid in priority to the claims of CRA
with respect to certain realizations.

Eligible employees may be entitled to a claim pursuant to the Wage Earner

Protection Program Act for unpaid wages, vacation pay, termination pay and
severance pay. Based on the Company’s books and records as at the date of
bankruptcy, the Trustee anticipates that Service Canada will have a priority
over the Company’s current assets for approximately $106,709. This claim
will rank in priority to the claims of secured creditors with respect to the
Company’s current assets.

Secured Creditors

A search pursuant to the Personal Property and Security Act (Ontario) was
conducted on April 4, 2011, which revealed that the following registrations
may have a security interest in the Company’s assets:

Name

Registration type

Fleet Street Financial Corporation

General Security Agreement

Scotia Tire & Alignment Services (2003) Ltd.

Motor Vehicles

Meridian Credit Union Limited

General Security Agreement

Travelers Guarantee Company of Canada

Indemnity and Security Agreement

Landmark Vehicle Leasing Corporation

Motor Vehicles

Gold Card Leasing O/B Goldcard Inc.

Equipment and Motor Vehicles

Ford Credit Canada Limited

Equipment, Other and Motor Vehicles

Business Development Bank of Canada

General Security Agreement

Royal Bank of Canada

Equipment, Accounts, Other, Motor Vehicles

John Deere

Equipment, Other, Motor Vehicles

Citicapital Commercial Corporation

Equipment and Motor Vehicles

Mazda Canada Credit Leasing

Equipment, Other and Motor Vehicles

Ricoh Canada Inc.

Equipment and Other

DCFS Canada Corp.

Equipment, Other, Motor Vehicle

Trisura Guarantee Insurance Company

General Security Agreement

Luigi Santaguida

General Security Agreement

The Trustee is in the process of reviewing the claims of the secured creditors.
Valid claims will rank in priority to the claims of unsecured creditors.
Furthermore, all assets that are not subject to a true lease may be subject to
the priority claims of CRA. The Trustee has contacted the secured creditors
and requested that they file their proofs of claim as soon as possible. At the
present time the Trustee does not anticipate any funds to be available for
distribution to unsecured creditors.

Section D - Provable Claims

Claims filed against the estate are as follows to date:

Per Statement of Affairs

Filed to Date

Deemed Trust

$ 1,837,476

$ -

Secured

13

10,171,969

Preferred

Unsecured

7,532,314

3,695,840

$ 9,369,803
 $ 13,867,809

Contingent

$ 16,583,939

Section E - Conservatory and Protective Measures

On April 4, 2011, the Trustee made arrangements for an inventory of the

Company’s assets and to secure the Company’s books and records.

The Trustee is currently not in possession of the capital assets because it

does not have funding to do so, as it does not currently have an
administrative agreement in place with CRA to allow for its fees and
disbursements that would be required in order to take possession.

The Trustee did not take possession of the Company’s Premises and has
removed the records of the Company from the Premises.

Section F – Legal Proceedings, Reviewable Transactions and Preference

Payments

No legal proceedings have been commenced by the Trustee prior to the First
Meeting of Creditors; however there is a significant amount of litigation that
had commenced prior to the bankruptcy, including claims for debts due to
the Company. The Trustee will request an administrative agreement with CRA
with respect to the handling of these claims.

As set out above, the Trustee is in the process of reviewing the security
documents of secured claimants in order to verify the enforceability of the
security as against the Trustee. The claim of the secured creditors will rank
in priority to the claims of unsecured creditors.

“Preference payments” are payments that may have resulted in one or more
creditors being paid in preference to other creditors at a time when the
Company was insolvent. “Transfers at under value” is a disposition of
property or provision of services for which no consideration was received by
the debtor, or for which the consideration given was conspicuously less than
the fair market value. A Court can issue a judgement or possibly reverse a
preference or transfer at under value if it can be proven that a preference
was given to a creditor(s) or if a transaction did not take place for “fair
value”.

The Trustee has completed a preliminary review of the Company’s bank

statements and payments made prior to the date of bankruptcy, and has not
found to date any transactions that qualify as a preferential payment or
transfer at under value.

Section G – Remuneration of Trustee

The Trustee’s fees will be based on time and hourly basis and will be paid
from the realizations of the Estate.

Luigi Santaguida has guaranteed the Trustee’s fees for its time and
disbursements incurred in administering the Estate and has provided a
limited third party deposit. These funds have been deposited to the Trustee’s
third party trust account and will be drawn upon in the event that the
realization of assets is insufficient to pay the Trustee’s fees and
disbursements.

Section H - Anticipated Realization and Projected Distribution

Based on the estimated realizations set out in the Company’s Statement of

Affairs, the Trustee anticipates a shortfall to the secured creditors,
accordingly no distributions are anticipated for unsecured creditors.

Dated: April 21, 2011

MSI Spergel Inc.,

Trustee of the Estate of

Terrasan Environmental Solutions Inc.

Per:

______________________________

Alan H. Spergel, CA, CA∙CIRP, CFE

President