Case Study

Next Fuel, Inc.

In 2009, a third party looking to help fund oil and gas venture in Wyoming approached HOF. The company, Wytex Ventures, was drilling shallow gas wells in the Powder River Basin (PRB) outside Gillette, Wyoming. The PRB is the third largest gas-producing region in the United States. The company strategy was to drill wells of roughly 1,500 feet, pump off the water, and produce gas.

As part of its strategy, one of the company’s engineers had been doing some pioneering work in water technology at the University of Wyoming’s Western Research Institute and developed two projects. The first was an injection system into coal beds in an attempt to recreate the conditions necessary for methane production or Coal to Gas Technology (CTG). The second was a pervaporation system to clean the water that comes from producing an oil and gas well. Typically, the water produced from drilling contains salt, hydrocarbons, and other compounds that require treatment. Historically, the main routes of disposal in mature fields was to simply truck the water from the site and inject it into an abandoned well known as an injection well.

HOF helped Wytex raise money from outside investors, as well as committed capital from the Fund, in an effort to exploit these technologies. HOF invested in the form of convertible debt. In 2011, HOF helped Wytex merge into Next Fuel Inc. Next Fuel is publically traded on the OTCBQ symbol NXFI.

After shedding non-core assets, in 2014 NXFI acquired the water filtering division of Layne Christensen, a NASDAQ traded oil service company. The division, INTEGRA, owns the patents to a disk filtration technology that can be used by the oil and gas industry, as well as by other industrial users in power plants, chemicals, petrochemicals, marine, agriculture, and food processing.

HOF, through its efforts to nurture a development stage company, is now the largest shareholder in that company. In the coming months, as the company is able to commercialize its technology, HOF believes a market capitalization in excess of $200,000,000 is attainable.

Case Study

Philadelphia Real Estate

HOF purchased several single-family residential row homes in Center City Philadelphia for rehab and rental. Shortly thereafter, a local bank approached the Fund with a proposition: the bank was embroiled in a contentious situation with a local slumlord and two other local banks. The lead bank needed help in restructuring the debt and taking the owner out of the picture. The owner had in excess of 260 parcels, including some rented houses, vacant houses, shells, and lots. The vast majority was in North Philadelphia.

The landlord was in default on approximately $12,000,000 in debt on the rental properties, shells, and lots. The property owner had cross collateralized (illegally), through his title company, the properties among three different banks. The banks were in a position that if they foreclosed on the properties, the landlord would file bankruptcy and thereby tie up the banks in court for several years as they tried to sort out priority on the collateral. Our estimate to the lead bank was that legal costs alone could exceed $500,000 and the bank may still not gain title to the properties. The lead bank had the most exposure and finally determined that the time and expense of bankruptcy would only serve to delay the restructuring and cost it even more money than it already had tied up. That was right.

HOF agreed to help. We structured an agreement whereby the property owner would confess judgment for a small cash out and that would then allow the banks to foreclose. HOF settled all of the outstanding tax, water, and utility claims. The bank restructured the notes at closing to a 50% discount and gave HOF new loans, paid off the other banks, and financed most of HOF’s equity.

Since then, HOF has culled out properties, paid down about 60% of the debt, and the remaining property is valued in excess of $15,000,000. We are in the process of rolling the real estate into a separate company and taking it public. Hawk expects to realize a significant equity return on its investment.

Case Study

Arenas Del Mar

A real estate developer in Costa Rica who was in need of funds to complete construction of his hotel approached HOF. HOF agreed to advance funds on a secured basis, as units went under contract, to build out the individual condo units and, as they were sold, be repaid the funds advanced by the condo purchaser. The developer sold out the units but ended up with a shortfall for infrastructure. Since he could not open the hotel without the pools, restaurants, and pathways, the developer approached the bank of Costa Rica, which gave him an $8,000,000 first mortgage loan to complete the project. Inasmuch as this was never disclosed to the condo owners who thought the hotel was debt free, they threatened to sue under the theory it adversely affected the value of their investment.1

HOF was in a second lien position behind the bank for a residual debt piece (all of our principal had been paid back), and offered to negotiate a settlement on behalf of the condo owners. The Fund was able to extract a significant equity settlement for itself and the condo owners and essentially reduced the developer’s stake in the hotel to less than 5% from 60%. HOF, in combination with the condo owners, now controls the equity and has contracted out the management of the hotel, which has been appraised by the bank in excess of $25,000,000.

The hotel, Arenas del Mar (ADM), is the largest holding in the Fund. The number one hospitality group in Central America, Cayuga Sustainable Hospitality, currently manages the hotel. ADM became cash flow break even in 2012 and turned positive in 2014. The hotel expects to report record revenue and profit in fiscal year 2015. In addition, since HOF acquired a majority stake in ADM and hired an oversight and property management team, the bank debt has been reduced to under $5,000,000.

1In Costa Rica, condo ownership is not deeded. It is typically a usage right and some claim to income after expenses. In most areas of Costa Rica it is unlawful to sell more than 13 weeks of usage in a resort, which the hotel condo owners had. They did have the right to resell the 13 weeks of usage. At this writing the owners, known as preferred holders in CR, have mostly been converted to equity.