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

As of August 31, 2013, 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):

	August 31, 2013			November 30, 2012
Non-recourse receivables assigned to factor	$	17,442		$	20,964
Client recourse receivables	182			24
Total receivables assigned to factor	17,624			20,988

Allowance for customer credits	(2,356		)	(2,442		)
Net loan balance from factored accounts receivable	(13,154		)	(14,166		)
Net loan balance from inventory advances	(5,512		)	(5,782		)
Due to factor	$	(3,398	)	$	(1,402	)

Non-factored accounts receivable	$	2,013		$	1,369
Allowance for customer credits	(271		)	(323		)
Allowance for doubtful accounts	(227		)	(234		)
Accounts receivable, net of allowance	$	1,515		$	812

Of the total amount of receivables sold by us as of August 31, 2013 and November 30, 2012, we hold the risk of payment of $182,000 and $24,000, respectively, in the event of non-payment by the customers.

CIT Commercial Services

As of August 31, 2013, our Joe’s Jeans Subsidiary was party to an accounts receivable factoring agreement and an inventory security agreement with CIT. The accounts receivable agreement gave us the ability to obtain cash by selling to CIT certain of our accounts receivable and the inventory security agreement gave us the ability to obtain advances for up to 50 percent of the value of certain eligible inventory. The accounts receivables were 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 permitted 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 had 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 were not encumbered.

As of August 31, 2013, the accounts receivable agreement could be terminated by CIT upon 60 days’ written notice or immediately upon the occurrence of an event of default as defined in the agreement. In June 2013, we entered into an amendment to the accounts receivable agreement that permitted us to terminate the accounts receivable agreement upon 30 days’ written notice prior to September 30, 2013, or thereafter upon 60 days’ written notice provided that the minimum factoring fees have been paid for the respective period, or if CIT fails to fund us for five consecutive days. The inventory agreement may be terminated once all obligations were paid under both agreements or if an event of default occurred as defined in the agreement.

As of August 31, 2013, we paid to CIT a factoring rate of 0.55 percent for accounts for which CIT had 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 had the credit risk. The interest rate associated with borrowings under the inventory lines and factoring facility was 0.25 percent plus the Chase prime rate. As of August 31, 2013, the Chase prime rate was 3.25 percent.

In the event we needed additional funds, we 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 cash availability on our inventory line of credit. As of August 31, 2013, we did not have any letters of credit outstanding.

In connection with the acquisition of Hudson that we completed on September 30, 2013, we entered into an Amended and Restated Factoring Agreement, in addition to a Revolving Credit Agreement with CIT and a Term Loan Credit Agreement with Garrison Loan Agency Services LLC, or Garrison. See “Note 11 – Subsequent Events” for a further discussion of the acquisition and new financing arrangements.