In order to push the venture forward, X Wine is looking to raise capital through a convertible note subject to a 25% discount to the company’s future value. For the first $100,000 invested into the deal, the company is asking for investors to accept a pre-money valuation of $2 million. This will increase to $4 million for all other investors. In the meantime, the note will continue to accrue a 10% annual interest rate. This pricing — even at the full $4 million — is quite low, especially for a company with some revenue history behind it. Thus, X Wine Railroad’s price score is its strongest across all five metrics.

The market opportunity for X Wine Railroad is difficult to dissect. There is no reliable data specifically on the railroad wine tasting market or even the broader wine tasting market. Insomuch as wine is concerned, though, California is the space to play in. The total value of wine sales from output in the state totaled $43.6 billion in 2019. This was up 6% compared to one year earlier. Annually, California ships $1.36 billion worth of wine, representing 95% of all US wine exports and amounting to 41 million cases. That amount still leaves 201 million cases for domestic consumption.

There are some issues facing the industry though. According to one source, there’s an oversupply in the industry, which could lead to some wineries closing down over time. There’s also a change in consumer preferences occurring over time. Millennials, for instance, are far more likely than older generations to consume cannabis, beer, and liquor. As a result, millennials actually consume less wine than older generations do. What’s more is the fact that peak wine consumption for most people comes between the ages of 58 and 61. The average baby boomer in 2021 will be 66 years old, and as they retire they are becoming more frugal just like their millennial counterparts. This shrinking demographic of wine drinkers will further limit the potential audience for X Wine’s trips. Due to the highly localized and specific market niche that X Wine is targeting, the company’s market score is its lowest across all five metrics.

At this point in time, there are three key members on the X Wine Railroad team. The first of these is Michael Barron, the company’s Chairman and CEO. At present, Barron is also the Chairman and CEO of United Rail / Las Vegas Xpress. This is a party excursion / charter train between Los Angeles and Las Vegas. While working for that business, Barron has garnered valuable leadership and financing experience. In fact, that firm has raised around $50 million to secure their route. In the past, Barron was also the CEO of three different mortgage-related businesses. One of these was Liberty Capital Asset Management. That company focused on the acquisition and management of defaulted mortgage loan pools. The second was Shearson Home Loans, a $1.3 billion mortgage bank with 237 offices across 33 states. In both of these, he was also the company President. The third, where he held only the position of CEO, was Virtual Mortgage Network. None of these have any real relevance with regards to his current work beyond demonstrating robust leadership experience.

Dianne David is next in line as X Wine Railroad’s President. Prior to working there, she was the President of Las Vegas Xpress. She has also served as Director of Asset Development at X Rail Enterprises. There, her work revolved around the maintenance of rail stations and the company’s passenger fleet. She also worked alongside Barron at Liberty Capital Asset Management and at Shearson Home Loans. At both firms she was the company’s Vice President. The third key person at X Wine Railroad is Wanda Witoslawski. At present, she is the business’ CFO. In the past, she served as CFO of both United Rail and Las Vegas Xpress. She also worked as a Controller at Liberty Asset Capital Management.

It is clear that the roles all three individuals played at rail-oriented companies do add value and much needed industry experience. Thus, the team score for X Wine Railroad is above average.

On the topic of differentiation, there’s a lot that needs to be discussed. Conceptually, X Wine Railroad is not a difficult business to set up or run. Investors may think that the company having a specific route makes it immune to competition, but that would only be true if the company owned that route. Instead, the business piggybacks off of Amtrak. Back in 2018, Amtrak would connect third-party cars to its system and haul them for a fee. In 2019, the company stopped doing this. Between that and COVID-19 in 2020, X Wine Railroad had to take a two-year break from generating revenue. The company has since worked out a deal with Amtrak using that company’s own railcars, but there exists a differentiation problem even here. Amtrak offers its own program for wine tasting through Amtrak Vacations. Packages start at $1,899 per person, but are for nine days as opposed to X Wine Railroad’s one. Two of those days also involve the services of one of X Wine Railroad’s other competitors: Napa Valley Wine Train. There are also plenty of other options that don’t involve railroads. One example is Beau Wine Tours, which provides wine tours across the state using luxury vehicles. Due to the difficulty the company has in truly distinguishing itself from its peers, X Wine Railroad’s differentiators score is below average.

Performance is particularly tricky with a firm like X Wine Railroad. In 2018, for instance, the business did really well. According to management, the firm generated revenue of $1.04 million. Its profits for 2018 totaled $625,054, and its operating cash flow was $11,170. In 2019, though, the Amtrak issue caused revenue to come in at $0. As a result, the company generated a loss of $102,458, and its operating cash outflow was $11,600. Financials have not been provided for 2020 yet. But from what management said about resuming operations this April, it’s safe to say that last year looked very much like 2019. This inconsistency is a big red flag, but it’s also understandable. What’s more worrisome is that the company’s reliance on Amtrak complicates things. At present, Amtrak looks to be a competitor as well as a service provider. 

Another issue on performance is that the company’s 2018 income statement is likely incorrect. The gulf between earnings and operating cash flow is the first tell on the matter. Looking at the firm’s cash flow statement, we see that the bulk of the difference went to two different asset categories. These were the firm’s other current assets and other assets. These amounts were $210,585 and $328,500, respectively. The other current assets category relates to accounts receivable. Sadly, we don’t know much about these receivables, so it’s hard to tell if the accounting there is right or not. For a business that generates sales from tickets sold, though, it’s hard to imagine that receivables would be long-lived. And yet, they are. By the end of 2019, accounts receivable had declined only modestly to $349,573. What kind of receivables in a ticket-based business would take so long to unwind?

The bigger issue, though, is the amount that went to other assets. Based on the data provided, the only ‘other assets’ the $328,500 could have gone to would be Goodwill. That is a long-term asset, not a short-term one. As such, it does not get reflected in changes to working capital. Instead, cash brought in would flow out as an investing activity. This may be appropriate for that cash, but in the best case it’s in the wrong part of the cash flow statement.

Although not all of the above issues were captured by our ratings algorithm, X Wine Railroad’s performance score is still below average.

At present, there are some bearish items for investors to consider here. X Wine Railroad’s lack of differentiation is one. The financial statement issues disclosed are another. Inconsistent revenue caused by disruptions that could, in theory, happen again, also need to be considered. The market is difficult to understand, and it’s clear there are already strong players in the space. One of these is even a firm that X Wine relies on for its existence. Additionally, the company faces major limits on scalability, since the concept seems to be very specific to California.

Just as there are bearish indicators, there are bullish ones too. For starters, you have the low price X Wine Railroad is asking investors to accept. The company also has a decent management team in place that has some relevant experience. When the company was operating, its revenue looked robust. And if it can expand into five markets, the potential for shareholders down the road could be significant. The firm is also operating in the prime market that exists in the US. There is a certain benefit to existing in the area of peak performance.

Taking all of the data we collected together, it’s clear that X Wine Railroad is an intriguing company. No, it will never be a multi-billion-dollar firm. It’s not that kind of business. If it succeeds, it could go on to be worth many, many millions of dollars, but the tradeoff is the expected stability of the business model. This point is emphasized by what happened the past two years. But if management can secure the firm and guarantee that the business remains operational, it could be appealing. Even so, there are risks involved, and because of the degree of them, X Wine Railroad is a Neutral Deal.

For questions regarding the KingsCrowd staff pick or ratings for this company, please reach out to support@kingscrowd.com. 

Analysis written by Daniel Jones.