We maintain our web site at www.continentalrailcorporation.com. Information on this web site is not a part of this report.
Unless specifically set forth to the contrary, when used in this prospectus the terms Continental Rail", the "Company," "we", "us", "our" and similar terms refer to Continental Rail Corp., a Nevada corporation, and its subsidiaries, including Transportation Management Services, Inc. a Michigan corporation which we refer to as TMS, Continental Rail Holdings Corp. a Nevada corporation which we refer to as Continental Rail Holdings (
CRHC
), Continental Rail Leasing, Corp., a Florida corporation which we refer to as Continental Rail Leasing (
CRLC
) and Continental Rail Leasing Corp., an Alberta Canada extra-provincial corporation. In addition, 2014 refers to the year ended December 31, 2014, 2015 refers to the year ended December 31, 2015, and 2016 refers to the year ending December 31, 2016.
ITEM 1. BUSINESS.
Overview
We are a freight rail transportation holding company, however, we have not generated any revenue during 2015 or 2014. Subject to the availability of capital we intend to conduct our operations through two divisions:
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railroad freight division, and
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rail rolling stock leasing division.
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Our rail freight division intends to acquire ancillary and complimentary operations for the short line and regional freight railroad industry. Our rail rolling stock leasing division will seek to purchase existing rail car and locomotive leasing companies and/or directly purchase rolling stock for lease to railroads. This division will also seek to acquire rail-related service companies to partner with our freight railroad operations. These operations will consist of repair facilities, track refurbishing facilities and other complimentary operations.
Our company was originally formed in 1998 and has been engaged in a number of different businesses. Most recently, between 2011 and June 2013 we were a shell company focused on researching and identifying potential merger and acquisition opportunities. In December 2012 we entered into an agreement with TBG, a company whose shareholders include John Marino, Jr. and Timothy Hart, executive officers and directors of our company, under which we engaged TBG to provide various consulting and advisory services, including assisting us in the identification of potential merger or acquisition targets.
In pursuit of our business plan, in July 2013 we acquired TMS, a company which provides railroad consulting services. In addition, in December 2013 we updated the business plan for the acquisition of short-line and regional freight railroads and established a rail rolling stock leasing division. During 2014 and into the first quarter of 2015 our Chief Executive Officer has devoted substantial time and effort in the pursuit of our business plan. During the fourth quarter of 2014 we were in the late stage of discussions with an entity which was negotiating the purchase of a fleet of rail cars for which we would provide management services. We were unsuccessful, however, in securing this agreement. On June 19, 2015, an agreement was made between the Company, Continental Rail, LLC (LLC), a Florida limited liability company and the Series A Preferred Shareholders of Continental (the Preferred Shareholders).
The LLC was organized by certain Preferred Shareholders to provide management services to Golden Gate Capital (the Firm), for the Delta Southern Railroad (Delta Southern). Delta Southern is a Class III short-line railroad, owned by the Firm, headquartered in Tallulah, Louisiana. Delta Southern operates a 15 mile disconnected rail line from Monroe, LA, to Sterlington, LA. It was expected that Continental would provide management services to Delta Southern, however the Firm required that the manager cannot be owned (more than 10%) or controlled by a public company. In consideration for a 10% membership interest in the LLC, Continental has agreed to waive any rights it may have had to manage Delta Southern, as well as any other corporate opportunities previously introduced to Continental by the Preferred Shareholders. To facilitate the transaction, and for no additional consideration, the Preferred Shareholders returned all of the 600,000 shares (convertible to 56,400,000 shares of common stock) of Series A Preferred Stock to Continental, which shares will be cancelled and returned to the status of authorized but unissued and undesignated shares of Continental preferred stock.
Since the formation of Continental Rail LLC, filed in the 8K dated June 19, 2015, the management of the Company has been seeking new acquisitions and other opportunities on behalf of the Company and its shareholders. As stated in the 8K, both the CEO and CFO of the Company are actively involved in these activities in both companies.
Historically, we have funded our operating expenses from proceeds received from the sale of equity securities, as well as advances from TBG, a related party. In addition to the capital necessary to implement our business plan set forth above, we need to raise between $250,000 and $300,000 of working capital to provide sufficient funds to continue our operations for the next 12 months. While we have been able to raise working capital through the sale of our securities in private transactions in the past, we do not presently have any commitments for this working capital and there are no assurances that we will be successful in raising the necessary capital. We expect that TBG will continue to make working capital advances to us to pay our operating expenses until such time as we are able to raise this additional capital. If for any reason, however, it should cease making these advances and we are unable to raise the additional capital, we would be unable to continue our business.
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In addition to short-term capital to fund our operating expenses until we are able to begin generating revenues, we will need to raise significant additional capital to fund the acquisitions of ancillary and complimentary operations for short line or regional freight railroads or rolling stock or locomotives for lease to railroad companies. We estimate the acquisition cost for each railroad will be between $500,000 and $2 million, and we will need to raise an additional $100 million to fund the purchase of a fleet of 5,000 rail cars and 150 locomotives for our rolling stock division. We do not presently have any firm commitments for this capital and there are no assurances we will be successful in obtaining all or any portion the necessary capital. Even if we are able to raise this necessary capital, we estimate that it could take between six and 12 months from the receipt of the capital to locate and negotiate the first acquisition.
Once we have closed one or more acquisitions, we expect to generate revenues from the operation of existing rail car leases through our rail rolling stock division. Additional revenues will result from consulting and advisory services to operators. These consulting services may also result in contracts for the operation and shippers. Our primary operating costs are expected to be the cost of due diligence to investigate and acquire profitable companies that meet our criteria. Additional costs will include legal, audit and professional services necessary to include these operations and file the required regulatory SEC and other filings.
Our business strategy
Our goal will be to provide customers with a total suite of transportation services focused on exceptional customer service, safe rail operations, tailored transportation solutions, professional and reliable service, and strong partnerships with the communities we serve.
Our rail freight division will seek to acquire short line and regional freight railroad acquisitions in North America. With over 560 short line and regional railroads in the U.S., we believe that there are significant opportunities to acquire attractive rail properties from Class I railroads, industrial corporations and independently owned short line railroad owners. Our managements experience is that many industrial corporations seek to spin off the railroad assets as a way to monetize their investment or divest a non-core business, while independent short line owners often seek a strategic exit. Class I railroads, seeking to improve efficiency, are continuing to right-size their properties by divesting non-core, low density lines. We are currently seeking capital to assist us with our plans.
With these numerous opportunities, our management has utilized its industry knowledge and experience to identify multiple viable acquisition opportunities. Management is targeting railroads with annual revenues in the range of $2 million to $10 million.
We will target rail lines that have strong earnings before income taxes, depreciation and amortization, or EBITDA, margins and consistent, predictable growth. We believe that these potential acquisitions must have certain characteristics, including:
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a solid customer base;
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the ability to locate new customers on the line;
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a solid infrastructure and low capital needs;
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rail operating ratios better than the industry average;
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ancillary opportunities on the line, such as a right of way for cable access; and
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a dedicated and motivated work force
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Once acquired, we expect to be able to improve the acquired rail operations through one or more of the following factors:
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Increase line density/carloads per mile
: We expect that our marketing will be conducted in four stages. First, every shipper on the line will be interviewed, with the focus on bringing business back to the railroad that had been switched to truck. We will seek to accomplish this through more competitive pricing and better service levels, such as on-demand service as opposed to scheduled service. Second, we will seek to increase the number of carloads currently shipped by existing customers, again through better pricing and service, and incentive pricing. Third, we will seek out new customers near the rail line, to which we can provide a new siding, transloading facility or other transportation alternatives. Lastly, we will work with industrial development representatives in the local communities to have new shippers relocate on the rail line.
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Improve customer service
: Our customer service efforts will be headed by regional sales personnel, and supplemented by the local railroad management. In addition, we will require that each general manager meet periodically with every major shipper to assess their need for the coming year as part of the budget process. Finally, we expect to provide rail service on demand, rather than scheduled service which we believe will enable us to augment our rail services to meet individual customer needs, thereby gaining a competitive advantage over Class I railroads that typically employ a rigid scheduled service that may be less convenient to the customer and may fail to meet changing customer demands.
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Improve safety
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We will follow a model that places a high degree of importance on safety. A safety director will be appointed to reduce the incidence of accidents per track mile, with the goal of lower insurance costs as well as decreased personal injury and property costs associated with accidents.
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Achieve lower operating costs
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Through our internal analysis of variable and discretionary expenses, and the examination of redundant and avoidable costs, we expect to implement a focused budgeting process that seeks to lower overall operating costs on acquired rail lines. Typically, Class I railroads are burdened with maintenance standards that are greater than the short lines. For example, trains operated by Class 1 railroads operate at faster speeds to stay on schedule, which requires higher line maintenance standards and high horsepower locomotives. Short lines, on the other hand, can operate at speeds necessary only to reach an interchange point on time. This allows the short line to utilize low horsepower, typically less expensive, locomotives and to maintain the line to match the lower speeds. In addition, Class I railroads incur labor costs which are greater than those of short line railroads due to union contracts that dictate higher rates and more restrictive work rules. Although some short lines employ unionized labor, generally the labor rates are substantially lower than those of Class I railroads, and its work rules permit cross-functionality. For example, an individual worker can operate the train, perform maintenance tasks, or complete office work
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all on the same day.
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Achieve price increases
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Base rate per carload is often determined at the time the line is acquired from the prior owner or Class I railroad. Thereafter, the rate can increase through one or more mechanisms including a pre-determined percentage, implementation of the rail cost adjustment factor (RCAF), which is a rail-specific consumer price index adjustment, and/or direct negotiation between the shipper, the Class I railroad and the owner of the short line railroad. The rate can also be supplemented by surcharges such as a fuel surcharge. Typically rates are increased on an annual basis.
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Rationalization of assets
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Railroads often possess unneeded real estate, buildings, and equipment. If, based upon our internal analysis the acquired company has excess assets, we expect to sell those assets.
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Integration of corporate functions
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Once multiple railroad assets have been purchased, corporate functions such as accounting, purchasing and legal will be consolidated at the corporate level to eliminate redundancies.
We are not a party to any agreements or letters of intent related to any railroad acquisitions as of this date. Based upon our internal analysis, we believe the average acquisition costs for each railroad will range from $5 million to $15 million. We expect to fund acquisitions through equity and debt financings. Our ability to consummate any acquisition, however, is dependent on our ability to raise the necessary capital which we have been unable to do since inception. As we do not have any firm commitments for any capital, the timing of these proposed acquisitions, if any, is unknown as this time.
Rail rolling stock leasing division
Subject to the availability of capital, our rail rolling stock leasing division will pursue acquisitions of existing rail car and locomotive leasing companies and/or directly purchase rolling stock for lease to our future railroads and to our future rail customers. We expect to lease the equipment to our rail customers, other railroads and third party rail customers. Our goal is to grow the rolling stock fleet through a cascaded leasing program as dictated by customer demand. Our strategy is to seek financing whereby the asset is retained by the financing company and we will manage, operate and maintain the leased rail cars. This division will also seek to acquire rail-related service companies including railroad equipment, maintenance and repair firms. We also expect to provide management and advisory services to rail entities in matters involving transportation and logistics, marketing, engineering, finance and regulatory matters. We do not, however, currently have any rolling stock, locomotives or rail customers.
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Based upon our internal analysis, we believe that there are significant opportunities in the rail equipment market. According to the AAR, in 2012 there were approximately 1.2 million rail cars in the U.S. fleet. The trend has been for the larger Class I railroads to lease equipment due to the high cost of maintaining equipment. Small railroads often lease equipment due to capital constraints. In 2009, according to the AAR, Class I railroads owned or operated approximately 24,700 locomotives, while the small railroads owned or operated 4,050 locomotives. Railroads both large and small often resort to leasing locomotives to cover peak or seasonal traffic demands or to minimize capital outlays.
Subject to the availability of sufficient capital, we anticipate building a fleet of rail freight cars for lease of approximately 5,000 units, and a locomotive lease fleet of approximately 150 units. While small in comparison to larger leasing company fleets, we intend to pursue market opportunities where agreements are customized to serve specific customer needs not in direct competition with larger fleets served by companies such as GE Rail Car, GATX, Wells Fargo, and others. Many larger car and locomotives lessors will occasionally reduce their fleets in order to concentrate on specific equipment types. We believe that this practice will create opportunities for our company, permitting us to focus on customers requiring smaller equipment orders or unique equipment types.
We have established contacts with a number of potential sellers of rolling stock, as well as companies interested in maintaining our fleet at such time as we have acquired rolling stock. We plan to partner with mechanical service providers to repair and maintain our equipment at an expected lower cost than the large Class I railroads and leasing companies, who often have higher labor costs due to union work rules and wages.
As of the date of this report, however, we have not entered into any firm agreement with any companies to either purchase or maintain rolling stock. We expect that the cost to acquire this fleet will be approximately $100 million. However, as our ability to implement this portion of our business plan is dependent upon raising the necessary capital, and as we do not presently have firm commitments for the capital, we are unable at this time to project when. If ever, we may be able to make the first of the necessary acquisitions to accomplish this goal.
We will seek to configure financial and operational structures to meet a wide variety of customer requirements, including full-service, net, and per diem lease arrangements with both short- and long-term options, sale/lease-back, like-kind exchanges, and upgrade and modification programs. We expect to offer both capital and operating leases, depending upon the customer and their specific needs. Generally, a capital lease gives the lessee all of the economic benefits and risk of the leased property. These contracts usually cannot be cancelled and the lessee is responsible for the upkeep of the equipment. Capital leases usually amortize the value of the equipment over the life of the lease. An operating lease is also known as a full service lease and is written for less than the life of the equipment and the lessor is responsible for all the maintenance and servicing. The operating lease usually can be cancelled if the equipment becomes obsolete or redundant.
Many factors affect the earnings of rail car leasing companies, including new car purchases, the number of car leased and leasing rates. New cars are purchased during, or in anticipation of, strong economic periods and when tax laws favor equipment investments. Many times utilization rates are determined by the state of the economy. The most important factor in utilization rates is having the correct fleet composition. Our goal will be to have a diversified fleet to minimize underutilization of the fleet.
Executing our business strategy and our capital needs
We believe that there are a number of factors driving our perceived opportunities in the short line railroad industry. With over 560 short line railroads in the U.S., there are numerous opportunities to acquire short line rail properties from Class I railroads, industrial corporations and independently-owned short line railroad owners. We believe that many industrial corporations will seek to spin off the railroad assets as a way to monetize their investment or divest a non-core business, while independent short line owners will often seek a strategic exit. We also believe that Class I railroads, seeking to improve efficiency, may be continuing to right-size their properties by divesting non-core, low density lines. We also believe that there are significant opportunities in the rail equipment market. The trend has been for the larger Class I railroads to lease equipment rather than own due to the high cost of maintaining such equipment.
In order to pursue the acquisitions of railroads and rolling stock, we will need to raise significant additional capital. We estimate we will need between $5 million and $15 million of capital to purchase a short-line or regional railroad, and approximately $100 million to purchase our target fleet of rail freight cars for lease of approximately 5,000 units, and a locomotive lease fleet of approximately 150 units. Our current activities with respect to capital raising are focused on institutional lenders, funds and banks that can assist in providing the necessary funding for the acquisition of short line railroads. Additional efforts have been made to obtain funding for the leasing of rail cars through financial institutions that specialize in this type of funding.
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On September 11, 2013 the company announced that it had engaged an energy and infrastructure investment banking firm, Taylor-DeJongh Ltd., which we refer to as TDJ, to assist us with developing a freight rail car acquisition finance program. The term of this initial agreement has expired and no transaction occurred which obligated us to pay TDJ any additional compensation. We continue to work with TDJ on an informal basis, however, we have not entered into a new agreement with that company at this time and there are no assurances we will do so in the future.
We continue to make efforts in identifying acquisition targets and outlining the terms under which a successful can be made. These terms include management and key personal retention, financing structures and timeframes. Our ability, however, to consummate one or more acquisitions is wholly-dependent on our ability to raise the necessary capital.
Competition
We expect to experience competitive pressure in both our rail freight division, and our rail rolling stock leasing division. In our rail freight division, we will compete in the identification and acquisition of target companies with a number of companies, both large and small. Within this division, our acquired companies will compete with companies that operate in the same regions.
A significant number of our competitors will have greater name recognition and are better capitalized than we are. Our ability to effectively compete in the acquisition of target companies will be dependent upon establishing a credible base in the industry, commencing with our first acquisition, and the ability to continue and expand its operations. These factors, together with the acquired company management, will be the principal factors enabling us to compete in the operation of our acquired railroad properties. Our ability to effectively compete in our rail rolling stock leasing division will be dependent upon identifying target acquisitions and obtaining the necessary capital. There are no assurances we will ever be able to effectively compete in our markets in the future.
Government regulation
Regulations impacting our operations
Our operations will be subject to regulation by:
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Surface Transportation Board (STB);
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Federal Railroad Administration (FRA);
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Federal agencies, including the United States Department of Transportation (DOT), Occupational Safety and Health Administration (OSHA), Mine Safety and Health Administration (MSHA) and Transportation Security Administration (TSA), which operates under the Department of Homeland Security (DHS);
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State departments of transportation; and
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some State and Local regulatory agencies.
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The STB is the successor to certain regulatory functions previously administered by the Interstate Commerce Commission (ICC). Established by the ICC Termination Act of 1995, the STB has jurisdiction over, among other things, certain freight rates where there is no effective competition, extension or abandonment of rail lines, the acquisition of rail lines and consolidation, merger or acquisition of control of rail common carriers. In limited circumstances, the STB may condition its approval of an acquisition upon the acquirer of a railroad agreeing to provide severance benefits to certain subsequently terminated employees. The FRA, DOT and OSHA have jurisdiction over safety, which includes the regulation of equipment standards, track maintenance, handling of hazardous shipments, locomotive and rail car inspection, repair requirements, operating practices and crew qualifications. The TSA has broad authority over railroad operating practices that have implications for homeland security. Additionally, various state and local agencies have jurisdiction over disposal of hazardous waste and seek to regulate movement of hazardous materials in ways not preempted by federal law.
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The STB launched wide-ranging proceedings to explore whether to expand rail regulation. The STB has not taken further action and denied a petition seeking one form of access regulation that would impact railroads' ability to limit the access of other rail service providers to their rail infrastructure. Several bills were introduced in the United States Senate in early 2011 that would expand the regulatory authority of the STB and could include new antitrust provisions. Additionally, a two-year DOT study on the impact of a possible increase in federal truck size and weight limits, which commenced in 2012, could result in subsequent federal legislation. The majority of the actions under consideration and pending are directed at Class I railroads; however, we continue to monitor these proposed bills. The outcome of these initiatives could impact regulation of railroad operations and future prices for our rail services at such time as we commence operations, which could undermine the economic viability of our company as well as threaten the service we will be able to provide to our future customers.
In 2010, the FRA issued final rules governing the installation of positive train control (PTC) by the end of 2015. Although still under development, PTC is a collision avoidance technology intended to override locomotive controls and stop a train before an accident. Legislation recently introduced by the House Transportation and Infrastructure Committee, entitled the Positive Train Control Enforcement and Implementation Act of 2015, calls to extend the 2015 PTC implementation deadline to the end of 2018, while also providing limited authority for the United States Department of Transportation Secretary to extend the 2018 deadline beyond 2018 if railroads show they are having continued difficulties in meeting the deadline while making a full effort to install PTC, coupled with requiring railroads to complete progress reports on implementation efforts.
Our future operations will also be subject to various federal, state, provincial and local laws and regulations relating to the protection of the environment. These environmental laws and regulations, which are implemented principally by the United States Environmental Protection Agency (EPA) and comparable state agencies, govern the management of hazardous wastes, the discharge of pollutants into the air and into surface and underground waters and the manufacture and disposal of certain substances. The primary laws which we expect will affect our operations are the Resource Conservation and Recovery Act, regulating the management and disposal of solid and hazardous wastes, the Clean Air Act, regulating air emissions, and the Clean Water Act, regulating water discharges. We expect to also be indirectly affected by environmental laws that impact the operations of our customers.
Jumpstart Our Business Startups Act
In April 2012, the Jumpstart Our Business Startups Act, or the JOBS Act, was enacted into law. The JOBS Act provides, among other things:
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exemptions for
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emerging growth companies
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from certain financial disclosure and governance requirements for up to five years and provides a new form of financing to small companies;
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amendments to certain provisions of the federal securities laws to simplify the sale of securities and increase the threshold number of record holders required to trigger the reporting requirements of the Securities Exchange Act of 1934;
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relaxation of the general solicitation and general advertising prohibition for Rule 506 offerings;
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adoption of a new exemption for public offerings of securities in amounts not exceeding $50 million; and
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exemption from registration by a non-reporting company of offers and sales of securities of up to $1,000,000 that comply with rules to be adopted by the SEC pursuant to Section 4(6) of the Securities Act of 1933 and exemption of such sales from state law registration, documentation or offering requirements.
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In general, under the JOBS Act a company is an emerging growth company if its initial public offering, or IPO, of common equity securities was effected after December 8, 2011 and the company had less than $1 billion of total annual gross revenues during its last completed fiscal year. A company will no longer qualify as an
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emerging growth company
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after the earliest of:
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the completion of the fiscal year in which the company has total annual gross revenues of $1 billion or more,
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the completion of the fiscal year of the fifth anniversary of the company's IPO;
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the company's issuance of more than $1 billion in nonconvertible debt in the prior three-year period, or
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the company becoming a "larger accelerated filer" as defined under the Securities Exchange Act of 1934.
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The JOBS Act provides additional new guidelines and exemptions for non-reporting companies and for non-public offerings. Those exemptions that impact our company are discussed below.
Financial Disclosure.
The financial disclosure in a registration statement filed by an emerging growth company pursuant to the Securities Act of 1933 will differ from registration statements filed by other companies as follows:
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audited financial statements required for only two fiscal years;
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selected financial data required for only the fiscal years that were audited and
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executive compensation only needs to be presented in the limited format.
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However, the requirements for financial disclosure provided by Regulation S-K promulgated by the rules and regulations of the SEC already provide certain of these exemptions for smaller reporting companies. Currently a smaller reporting company is not required to file as part of its registration statement selected financial data and only needs to include audited financial statements for its two most current fiscal years with no required tabular disclosure of contractual obligations. Upon the effectiveness of the registration statement of which this prospectus is a part, we will be considered a smaller reporting company for SEC reporting purposes.
The JOBS Act also exempts a company's independent registered public accounting firm from having to comply with any rules adopted by the Public Company Accounting Oversight Board, or PCAOB, after the date of the JOBS Act's enactment, except as otherwise required by SEC rule. The JOBS Act further exempts an emerging growth company from any requirement adopted by the PCAOB for mandatory rotation of a companys accounting firm or for a supplemental auditor report about the audit.
Internal Control Attestation.
The JOBS Act also provides an exemption from the requirement of the company's independent registered public accounting firm to file a report on the company's internal control over financial reporting, although management of the company is still required to file its report on the adequacy of the company's internal control over financial reporting, unless the company is otherwise exempt from this requirement based upon its status as a smaller reporting company. Section 102(a) of the JOBS Act exempts emerging growth companies from the requirements in §14A(e) of the Securities Exchange Act of 1934 for companies with a class of securities registered under that act to hold shareholder votes for executive compensation and golden parachutes; smaller reporting companies are not subject to this requirement.
Other Items of the JOBS Act.
The JOBS Act also provides that an emerging growth company can communicate with potential investors that are qualified institutional buyers or institutions that are accredited to determine interest in a contemplated offering either prior to or after the date of filing the respective registration statement. The JOBS Act also permits research reports by a broker or dealer about an emerging growth company regardless of whether such report provides sufficient information for an investment decision. In addition the JOBS Act precludes the SEC and FINRA from adopting certain restrictive rules or regulations regarding brokers, dealers and potential investors, communications with management and distribution of research reports on the emerging growth companys IPOs.
Section 106 of the JOBS Act permits emerging growth companies to submit registration statements under the Securities Act of 1933, on a confidential basis provided that the registration statement and all amendments thereto are publicly filed at least 21 days before the issuer conducts any road show. This is intended to allow emerging growth companies to explore the IPO option without disclosing to the market the fact that it is seeking to go public or disclosing the information contained in its registration statement until the company is ready to conduct a road show.
Election to Opt Out of Transition Period.
Section 102(b)(1) of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standard. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We have elected not to opt out of the transition period.
Employees
As of December 31, 2015 we employed no full-time employees and one part-time employee who is an executive officer. With each acquisition, it is our intention to maintain existing management, whenever possible, thereby eliminating the necessity of hiring and training new personal.
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Our history
Continental Rail Corp (the "Company or Continental) was incorporated on December 21, 1998 under the laws of the State of Nevada under the name of IP Gate, Inc. In 2002, IP Gate, Inc. changed its name to Action Stocks, Inc. and on June 23, 2003, Action Stocks, Inc. changed its name to Specialized Home Medical Services, Inc. Through December 2006 the Company was in the durable medical equipment business through its subsidiary Classic Health, and from January 3, 2006 to June 30, 2009 was in the business of cataloguing and valuing stamps through its South East Stamp Sales subsidiary. On October 29, 2007, Specialized Home Medical Services, Inc. changed its name to IGSM Group, Inc. During 2011 and 2012 the Company focused on researching and identifying potential merger and acquisition opportunities for investment and operating. Late December 2012, the Company contracted the services of TBG Holdings Corporation ("TBG") who assisted with restructuring the Company into a short line and regional freight railroad holding company that will selectively invest in short line and regional freight railroad properties and railroad rolling stock. On July 10, 2013 the Company changed its name to Continental Rail Corp.
The Company has three wholly-owned subsidiaries, Continental Rail Leasing Corp. (a Florida corporation), Transportation Management, Inc. (a Michigan corporation) and Continental Rail Leasing, Corp., an Alberta Canada extra-provincial corporation in order to conduct railcar leasing business in Canada. The subsidiary has a registered office in Calgary Alberta at the office of our registered agent. These subsidiaries are currently inactive.
On June 19, 2015, the Company entered into an agreement (Agreement) with Continental Rail, LLC (LLC), a Florida limited liability company, and the Series A Preferred Shareholders of the Company. The Company was actively seeking to secure financing for the purchase of the Delta Southern Railroad (Delta), a Class III short-line railroad headquartered in Tallulah, Louisiana. Delta was subsequently purchased by Golden Gate Capital (Golden Gate), a private equity firm in San Francisco, California. Golden Gate decided that it was in its best interest to utilize the railroad operations management skills of certain Preferred Shareholders of the Company to manage the daily operations of Delta (the Manager). By the terms of the Agreement, however the Delta Manager cannot be owned (more than 10%) or controlled by a public company. Consequently, the LLC was organized by the Preferred Shareholders as the vehicle to manage Delta and satisfy the conditions set forth in the agreement. In conjunction with this transaction the Company received a 10% interest in the LLC and the preferred shareholders returned their preferred shares to the Company for cancelation.
ITEM 1A. RISK FACTORS.
Before you invest in our securities, you should be aware that there are various risks. You should consider carefully these risk factors, together with all of the other information included in this annual report before you decide to purchase our securities. If any of the following risks and uncertainties develop into actual events, our business, financial condition or results of operations could be materially adversely affected.
RISKS RELATED TO OUR BUSINESS
Our auditors have raised substantial doubts as to our ability to continue as a going concern
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Our financial statements have been prepared assuming we will continue as a going concern. We have experienced substantial and recurring losses from operations, which losses have caused an accumulated deficit of $5.0 million at December 31, 2015. At December 31, 2015 we had no cash on hand. We did not generate any revenues in 2015 or 2014 and we continue to experience operating losses. Currently, our burn rate is approximately $10,000 per month. We have been and expect to continue funding our business until, if ever, we generate sufficient cash flow to internally fund our business, with and through sales of our securities and working capital advances from TBG. These factors, among others, raise substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. We anticipate that our operating expenses will approximate $300,000 per year until we are successful in generating revenues sufficient to pay our operating expenses. There are no assurances that we will be able to increase our revenues and cash flow to a level which supports profitable operations and provides sufficient funds to pay our obligations. There are also no assurances we will be able to raise additional working capital or that TBG will continue to advance funds to us for working capital. If we are unable to meet those obligations, we could be forced to cease operations in which event investors would lose their entire investment in our company.
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We have incurred net losses since inception and we expect our operating expenses to increase significantly in the foreseeable future.
We incurred net losses of $348,621 and $684,087 for the years ended December 31, 2015 and 2014, respectively. We anticipate that our operating expenses will increase substantially when, if ever, we implement our business plan. These efforts may prove more expensive than we currently anticipate, and we may not succeed in increasing our revenue sufficiently to offset these higher expenses. We cannot be certain that we will be able to attain or increase profitability on a consistent and substantial basis. Even if we are successful in the development of our company, our success will depend upon our ability to finance the acquisition of short line and regional freight railroads as well as the leasing or acquisition of rail cars and will also be dependent on our ability to raise capital. If we are unable to effectively manage these risks and difficulties as we encounter them, our business, financial condition and results of operations will suffer, which would, in all likelihood, cause investors to lose their entire investment in our company.
We will need additional financing which we may not be able to obtain on acceptable terms, if at all. If we cannot raise capital as needed, our ability to continue our operations and/or grow our company could be in jeopardy.
Capital is needed for the effective development of our business. Our near term capital needs are between $250,000 and $300,000 which will provide us with sufficient funds to pay our operating expenses for the next 12 months. Our longer term capital needs will vary depending upon the number of acquisitions we are able to undertake. We do not have any firm commitments to provide any additional capital and we anticipate that we will have certain difficulties raising capital given the limited operating history of our company. Accordingly, we cannot assure you that additional working capital to satisfy either our short-term or long-term working capital requirements will be available to us upon terms acceptable to us, if at all. If we are subsequently unable to raise additional funds as needed, our ability to implement our business plan and grow our company will be in jeopardy and investors risk losing their entire investment.
Because our chief financial officer has other business interests, he may not be able or willing to devote a sufficient amount of time to our business operations, causing our business to fail.
Our chief financial officer, Mr. Timothy Hart, does not devote his full time and attention to our business and operations. Mr. Hart presently devotes approximately 10 hours a week of his business time to our affairs. It is possible that the demands on Mr. Hart from his other obligations, including those associated with his obligations to TBG could increase with the result that he would devote even less time to the management of our business. In addition, Mr. Hart may not possess sufficient time for our business if the demands of managing our business increase substantially beyond current levels. In these events, our ability to fully implement our business plan could be adversely impacted until such time as we were able to hire a full-time chief financial officer.
A significant amount of our accounts payable and accrued expenses are due to a related party. The repayment of these obligations could create a conflict of interest which may not be resolved in our favor and may adversely impact our operations in future periods.
At December 31, 2015 we owed related parties $735,066 in accounts payable and accrued expenses. These obligations represented 72% of our total liabilities at December 31, 2015. Accounts payable related parties, represents amounts we owe TBG as compensation for services under the terms of a business advisory services agreement and accrued expenses related party represents amounts TBG has advanced us for working capital. These obligations are due on demand and we do not presently have sufficient capital to repay these obligations. Until such time, if ever, that we are able to raise additional working capital we expect the amounts due these related parties will continue to increase. Prospective investors should keep in mind that they will have no say in the
timing of the repayment of these related
party obligations. Assuming we are able to raise additional working capital, it is possible that the related parties may request that we reduce or repay these obligations at a time when the use of funds for that purpose are not in the best interests of our company. Actual or perceived conflicts of interest between TBG and our companys other stockholders could arise which the Board may not resolve in a manner which is in our best interests.
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There are no assurances we will be able to fully implement our business plan. In that event, our ability to continue as a going concern would be in jeopardy.
The success of our business plan depends on our ability to identify and close acquisitions of short-line railroads. While we believe our managements experience in our business provides a benefit to us in the identification, structure and closing of these proposed transactions, we will need to raise significant additional capital to fund the transactions. As we are a small company with a limited history of operations, our abilities to access the necessary capital are limited. If we are unable to fully implement our business plan, it is likely that our stockholders will lose their entire investment in our company.
If we are unable to attract and retain sufficient personnel, our ability to operate and grow our company will be in jeopardy.
We will be required to hire and retain skilled employees at all levels of our operations in a market where such qualified employees are in high demand and are subject to receiving competing offers. We believe that there is, and will continue to be, intense competition for qualified personnel in our industry, and there is no assurance that we will be able to attract or retain the personnel necessary for the management and development of our business. Turnover can also create distractions as we search for replacement personnel, which may result in significant recruiting, relocation, training and other costs, and can cause operational inefficiencies as replacement personnel become familiar with our business and operations. The inability to attract or retain employees currently or in the future may have a material adverse effect on our business, financial condition and results of operations.
Our management has limited experience in operating a public company.
Our executive officers and directors have limited experience in the management of a publicly traded company. Our management team may not successfully or effectively manage our transition to a public company that will be subject to significant regulatory oversight and reporting obligations under federal securities laws. Their limited experience in dealing with the increasingly complex laws pertaining to public companies could be a significant disadvantage to us in that it is likely that an increasing amount of their time will be devoted to these activities which will result in less time being devoted to the management and growth of our company. It is possible that we will be required to expand our employee base and hire additional employees, such as a chief financial officer experienced in public company financial reporting, to support our operations as a public company which will increase our operating costs in future periods.
RISKS RELATED TO OUR COMMON STOCK
The market for our common stock is extremely limited and sporadic.
Our common stock is quoted on the OTCQB tier of the OTC Markets under the symbol CRCX. The market for our common stock is extremely limited and sporadic and the last trade for our common stock was on March 22, 2016. Trading in stock quoted on the OTC Markets is often thin and characterized by wide fluctuations in trading prices, due to many factors that may have little to do with our operations or business prospects. This volatility could depress the market price of our common stock for reasons unrelated to operating performance. Moreover, the OTC Market is not a stock exchange, and trading of securities in the OTC Markets is often more sporadic than the trading of securities listed on a stock exchange such as Nasdaq or the NYSE MKT. Accordingly, stockholders may have difficulty reselling any of their shares.
The tradability of our common stock is limited under the penny stock regulations which may cause the holders of our common stock difficulty should they wish to sell the shares.
Because the quoted price of our common stock is less than $5.00 per share and we do not meet certain other exemptions, our common stock is considered a penny stock, and trading in our common stock is subject to the requirements of Rule 15g-9 under the Securities Exchange Act of 1934. Under this rule, broker/dealers who recommend low-priced securities to persons other than established customers and accredited investors must satisfy special sales practice requirements. The broker/dealer must make an individualized written suitability determination for the purchaser and receive the purchasers written consent prior to the transaction. SEC regulations also require additional disclosure in connection with any trades involving a penny stock, including the delivery, prior to any penny stock transaction, of a disclosure schedule explaining the penny stock market and its associated risks. These requirements severely limit the liquidity of securities in the secondary market because few broker or dealers are likely to undertake these compliance activities and this limited liquidity will make it more difficult for an investor to sell his shares of our common stock in the secondary market should the investor wish to liquidate the investment. In addition to the applicability of the penny stock rules, other risks associated with trading in penny stocks could also be price fluctuations and the lack of a liquid market.
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Our board of directors has the authority, without stockholder approval, to issue preferred stock with terms that may not be beneficial to common stockholders and with the ability to affect adversely stockholder voting power and perpetuate their control over us.
Our Articles of Incorporation allows us to issue shares of preferred stock without any vote or further action by our stockholders. Our board of directors has the authority to fix and determine the relative rights and preferences of preferred stock. As a result, our board of directors could authorize the issuance of a series of preferred stock that would grant to holders the preferred right to our assets upon liquidation, the right to receive dividend payments before dividends are distributed to the holders of common stock and the right to the redemption of the shares, together with a premium, prior to the redemption of our common stock.
The ability of our principal stockholders, including our CEO, to control our business may limit or eliminate minority stockholders ability to influence corporate affairs.
The principal holders of our common stock, including TBG and our CEO, have approximately 65% voting control. Because of their stock ownership, they are in a position to significantly influence membership of our board of directors, as well as all other matters requiring stockholder approval. The interests of our principal stockholders may differ from the interests of other stockholders with respect to the issuance of shares, business transactions with or sales to other companies, selection of other officers and directors and other business decisions. The minority stockholders have no way of overriding decisions made by our principal stockholders. This level of control may also have an adverse impact on the market value of our shares because our principal stockholders may institute or undertake transactions, policies or programs that result in losses may not take any steps to increase our visibility in the financial community and
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or may sell sufficient numbers of shares to significantly decrease our price per share.
Because we are not subject to compliance with rules requiring the adoption of certain corporate governance measures, our stockholders have limited protection against interested director transactions, conflicts of interest and similar matters.
The Sarbanes-Oxley Act of 2002, as well as the rules enacted by the SEC, the stock exchanges, including the New York Stock Exchange, NYSE MKT and the Nasdaq Stock Market require the implementation of various measures relating to corporate governance. These measures are designed to enhance the integrity of corporate management and the securities markets and apply to securities that are listed on those exchanges. Our common stock is quoted in the over the counter market and we are not presently required to comply with many of the corporate governance provisions. Because we chose to avoid incurring the substantial additional costs associated with voluntary compliance, we have not yet adopted these measures. We do not currently have independent audit or compensation committees. As a result, directors have the ability, among other things, to determine their own level of compensation. Until we comply with such corporate governance measures, regardless of whether such compliance is required, the absence of such standards of corporate governance may leave our stockholders without protections against interested director transactions, conflicts of interest, if any, and similar matters and investors may be reluctant to provide us with funds necessary to expand our operations as a result thereof.
Since we are a shell company, certain provisions of Federal securities laws would not be available to us and our stockholders would be unable to rely on Rule 144.
Rule 405 of the Securities Act of 1933 defines a "shell company" as a company with no or nominal operations and either (i) no or nominal assets, (ii) assets consisting solely of cash and cash equivalents, or (iii) assets consisting of any amount of cash and cash equivalents and nominal other assets. Shell companies are subject to expanded and accelerated reporting and disclosure obligations, and are not eligible to use certain forms of registration statements, among other restrictions. In addition, our stockholders would be unable to rely upon Rule 144 for the resale of unregistered shares of our common stock, including shares covered by our effective resale registration statement should that registration statement not remain current under the SEC rules, until Form 10 information has been on file for one year. The lack of availability of Rule 144 to our stockholders would limit their ability to resell our shares.
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We are an emerging growth company under the Jobs Act of 2012, and we cannot be certain if the reduced disclosure requirements applicable to emerging growth companies will make our common stock less attractive to investors.
We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012 , or the JOBS Act, and we may take advantage of certain exemptions from various reporting requirements that are applicable to other public companies that are not emerging growth companies including, but not limited to, not being required to comply with the auditor attestation requirements of Section 404 of the Sarbanes-Oxley Act of 2002, reduced disclosure obligations regarding executive compensation in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. In addition, Section 107 of the JOBS Act also provides that an emerging growth company can take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act of 1933 for complying with new or revised accounting standards. In other words, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We are choosing to take advantage of the extended transition period for complying with new or revised accounting standards. As a result of this election, our financial statements may not be comparable to other companies that comply with the effective dates of certain accounting standards for public companies. We cannot predict if investors will find our common stock less attractive because we may rely on these exemptions. If some investors find our common stock less attractive as a result, there may be a less active trading market for our common stock and our stock price may be more volatile, should a market for our stock develop of which there are no assurances.
Our status as an emerging growth company under the Jobs Act of 2012 may make it more difficult to raise additional capital as and when we need it.
Because of the exemptions from various reporting requirements provided to us as an emerging growth company and because we will have an extended transition period for complying with new or revised financial accounting standards, we may be less attractive to investors and it may be difficult for us to raise additional capital as and when we need it. Investors may be unable to compare our business with other companies in our industry if they believe that our financial accounting is not as transparent as other companies in our industry. If we are unable to raise additional capital as and when we need it, our financial condition and results of operations may be materially and adversely affected.