NOTE 3 — ACCOUNTS RECEIVABLE, INVENTORY ADVANCES AND DUE TO FACTOR

Our primary method to obtain the cash necessary for operating needs has been through the sale of accounts receivable pursuant to factoring agreements and advances under inventory security agreements with our factor, CIT Commercial Services, a unit of CIT Group Inc., or CIT.

As a result of these agreements, amounts due to factor consist of the following (in thousands):

	February 28, 2013			November 30, 2012

Non-recourse receivables assigned to factor	$	16,240		$	20,964
Client recourse receivables	8			24
Total receivables assigned to factor	16,248			20,988

Allowance for customer credits	(2,159		)	(2,442		)
Net loan balance from factored accounts receivable	(10,952		)	(14,166		)
Net loan balance from inventory advances	(5,045		)	(5,782		)
Due to factor	$	(1,908	)	$	(1,402	)

Non-factored accounts receivable	$	2,979		$	1,369
Allowance for customer credits	(277		)	(323		)
Allowance for doubtful accounts	(220		)	(234		)
Accounts receivable, net of allowance	$	2,482		$	812

Of the total amount of receivables sold by us as of February 28, 2013 and November 30, 2012, we hold the risk of payment of $8,000 and $24,000, respectively, in the event of non-payment by the customers.

CIT Commercial Services

Our Joe’s Jeans Subsidiary is party to an accounts receivable factoring agreement and an inventory security agreement with CIT. The accounts receivable agreement gives us the ability to obtain cash by selling to CIT certain of our accounts receivable and the inventory security agreement gives us the ability to obtain advances for up to 50 percent of the value of certain eligible inventory. The accounts receivables are sold for up to 85 percent of the face amount on either a recourse or non-recourse basis depending on the creditworthiness of the customer. CIT currently permits us to sell our accounts receivables at the maximum level of 85 percent and allows advances of up to $6,000,000 for eligible inventory. CIT has the ability, in its discretion at any time or from time to time, to adjust or revise any limits on the amount of loans or advances made to us pursuant to both of these agreements and to impose surcharges on our rates for certain of our customers. In addition, cross guarantees were executed by and among us and all of our parent and subsidiaries to guarantee each entity’s obligations. In connection with the agreements with CIT, certain assets are pledged to CIT, including all of the inventory, merchandise and/or goods, including raw materials through finished goods and receivables. However, our trademarks are not encumbered.

The accounts receivable agreement may be terminated by CIT upon 60 days’ written notice or immediately upon the occurrence of an event of default as defined in the agreement. The accounts receivable agreement may be terminated by us upon 60 days’ written notice prior to June 30, 2013, or earlier provided that the minimum factoring fees have been paid for the respective period, or if CIT fails to fund us for five consecutive days. In the event the agreement is not terminated, it automatically extends for an additional year. The inventory agreement may be terminated once all obligations are paid under both agreements or if an event of default occurs as defined in the agreement. We expect that the accounts receivable agreement and inventory agreement will renew under the same terms on July 1, 2013.

We pay to CIT a factoring rate of 0.55 percent for accounts for which CIT bears the credit risk, subject to discretionary surcharges, up to $40,000,000 of invoices factored, 0.50 percent over $40,000,000 of invoices factored and 0.35 percent for accounts for which we bear the credit risk. The interest rate associated with borrowings under the inventory lines and factoring facility is 0.25 percent plus the Chase prime rate. As of February 28, 2013, the Chase prime rate was 3.25 percent.

In the event we need additional funds, we have also established a letter of credit facility with CIT to allow us to open letters of credit for a fee of 0.25 percent of the letter of credit face value with international and domestic suppliers, subject to availability. As of February 28, 2013, we did not have any letters of credit outstanding.