Last month, we discussed ITEX Corporation (ITEX) and noted that even though a couple of value investor groups hold significant percentages of the company, management seemed intent on protecting its own interests over those of shareholders. Last week, I had the opportunity to interview David Polonitza of The Polonitza Group, a group of shareholders that owns/controls 13% of ITEX’s shares:

What is the investment philosophy of The Polonitza Group?

“The Polonitza Group consists of a number of ITEX shareholders who believe certain strategic decisions and acquisitions made by the Company in recent years have strayed from the focus of expanding and supporting the company’s #1 asset, its franchisee network. We have made a number of proposals which we believe will improve the long term value of the ITEX Corporation.”

How would you characterize your relationship with ITEX’s Board of Directors? Have they been open to input, or do they see you as a threat to their positions? I see they have accepted some of your suggestions, such as authorizing a share repurchase plan…is this because of arm-twisting, or are they genuinely open to incorporating other ideas?

“Based upon communications we have received from members of ITEX’s Board of Directors, they do not seem to be interested in entering into a constructive dialogue with our group.”

Do you have contact with the other major outside shareholder of ITEX, value investor Sardar Biglari? Would you say his investor interests are aligned with yours?

“The Polonitza Group has no affiliation with Mr. Biglari or any of his entities but we welcome any suggestions made by ITEX members, franchisees, or other shareholders.”

Why should the readers be interested in ITEX stock? You’ve been on a buying spree of ITEX…what do you think shares of ITEX are worth?

“I cannot comment on ITEX’s stock price or my personal opinion on its value. In general, all shareholders, as part owners of any corporation, should take an interest in how a company operates and is governed.”

What are the top 1 or 2 things you would like to see management do that it is not currently doing, or what would you like to see management improve on? Your letter of March 23rd outlines a number of initiatives, but give us THE priority in your opinion.

“ITEX’s number one priority needs to be the success of its franchisee network. This includes ensuring franchisees increase their profitability while having the incentive to expand their operations. Acquisitions or initiatives not aimed at improving or expanding the franchisee network need to be carefully examined. Additionally, we believe that ITEX must do a better job at recruiting new franchisees into the system.

“The current economic environment is one that is beneficial to ITEX’s business model. I refer to a 1992 NY Times article that profiled ITEX and the barter industry during another significant recessionary period in the U.S. The ITEX broker in the story, who is still a franchisee today, stated that when times were good he had difficulties signing up new members, but as the economy declined, he had to turn some businesses away. Like some of ITEX’s competitors, we should be seeing a measurable increase in the overall number of members and transactions taking place within ITEX’s marketplace, but based on publicly available financial information, this is not taking place. We believe that this is in part due to decisions made by the company over the past few years that have resulted in the ITEX Corporation not being able to capitalize on all of its potential opportunities.

“The second priority is to improve ITEX Corporation’s corporate governance. As we detailed in our letter sent to ITEX’s Board, there presently exists outside business relationships between the three directors and their various companies.

“We also feel it is necessary for ITEX to hire a separate CFO in either a full-time or part-time capacity to allow the CEO to focus on his responsibilities while ensuring that the proper internal checks and balances exist.

Are you personally interested in being on the Board of ITEX?
“It is our belief that independent board members who do not have outside business relationships with one another will help to ensure good governance practices are in place while also introducing ideas and initiatives to improve the company.”

What do you see as some possible reasons (both negative and positive) that might make you sell your shares?

“I cannot comment on reasons we might buy or sell the stock.”
In addition to granting the interview, Mr. Polonitza also kindly agreed to answer follow-up questions from readers on the topic of ITEX. If you have any questions you would like to see answered by Mr. Polonitza, please post them in the comments section, and a follow-up interview will be posted on this site in the near future.