NOTE 15—STOCK-BASED COMPENSATION

On November 6, 2009, the Company's Board of Directors approved the Company's 2009 Equity Incentive Plan (the "2009 Plan") which became effective on the same day. A total of 6,200,000 shares of common stock, subject to increase on an annual basis, are reserved for issuance under the 2009 Plan. The 2009 Plan is administered by the Board of Directors or any committee designated by the Board of Directors, which has the authority to designate participants and determine the number and type of awards to be granted, the time at which awards are exercisable, the method of payment and any other terms or conditions of the awards. The 2009 Plan provides for the grant of stock options, including incentive stock options and nonqualified stock options, collectively, "options," stock appreciation rights, shares of restricted stock, or "restricted stock," rights to dividend equivalents and other stock-based awards, collectively, the "awards." The Board of Directors or the committee will, with regard to each award, determine the terms and conditions of the award, including the number of shares subject to the award, the vesting terms of the award, and the purchase price for the award. Awards may be made in assumption of or in substitution for outstanding awards previously granted by the Company or its affiliates, or a company acquired by the Company or with which it combines. Options outstanding generally vest over a three or four-year period and expire ten years from date of grant.

The following table summarizes the Company's stock-based compensation awards under the 2009 Plan during 2013, 2012 and 2011:

Date	Award Type	Exercise Price			Recipient

4^th Quarter 2013	Restricted Stock	$	2.23	35,316	Board of Directors
3^rd Quarter 2013	Restricted Stock	$	2.27	37,488	Board of Directors
3^rd Quarter 2013	Options	$	2.27	50,000	Various Employees
2^rd Quarter 2013	Restricted Stock	$	2.75	131,749	Board of Directors
4^th Quarter 2012	Options	$	3.10	1,185,000	Various Employees
3^rd Quarter 2012	Restricted Stock	$	4.27	9,182	Board of Directors
2^nd Quarter 2012	Restricted Stock	$	3.82	44,736	Board of Directors
4^th Quarter 2011	Restricted Stock	$	8.40	92,852	Board of Directors and Various Employees
4^th Quarter 2011	Options	$	8.11	100,000	Various Employees
3^rd Quarter 2011	Restricted Stock	$	11.99	11,258	Board of Directors
1^st Quarter 2011	Options	$	19.71	50,000	Various Employees

There were 1,870,933 shares available for grant under the 2009 Plan as of December 31, 2013.

In connection with the 50,000 options granted during the year ended December 31, 2013, 25% of the options vest on each of the first two anniversaries of the date of grant and 50% of the options vest on the third anniversary of the date of grant, subject to acceleration in certain circumstances.

The Company determined the fair value of the stock options issued in 2013 using the Black-Scholes option pricing model. The Company's assumptions about stock-price volatility were based on the historical implied volatilities of its common stock and those of other publicly traded options to buy stock with contractual terms closest to the expected life of options granted to the Company's employees. The expected term represents the estimated time until employee exercise is estimated to occur taking into account vesting schedules and using the Hull-White model. The risk-free interest rate for periods within the contractual life of the award is based on the U.S. Treasury 10 year zero-coupon strip yield in effect at the time of grant. The expected dividend yield was based on the assumption that no dividends are expected to be distributed in the near future.

In connection with the sale of the Company's QA business, the vesting of all options and restricted stock awards that were granted to QA business employees were accelerated upon the closing of the transaction. The total number of options and restricted stock awards subject to vesting acceleration were 179,490 and 47,585, respectively, resulting in an accelerated stock-based compensation charge of $1,203 to the Company that was recorded in discontinued operations during the third quarter of 2011. The Company cancelled the unexercised options in August 2012.

In connection with the Company's former debt agreements, the Company was allowed to repurchase equity interests owned by terminated employees in connection with the exercise of stock options or similar equity based incentives in an aggregate amount not to exceed $2,000 in any fiscal year. During 2011, there were 6,868 options with exercise prices between $10.00 and $12.81 per share that were net settled by the Company for the difference between the fair market value as of the date of the purchase and the respective exercise price of those options at a cost of $31. The options were subsequently cancelled and reinstated to the 2009 Plan for future issuance.

The following table presents the assumptions used to estimate the fair values of the stock options granted during the periods presented below:

	Year Ended December 31, 2013			Year Ended December 31, 2012			Year Ended December 31, 2011

Expected volatility		58.9	%		75.30	%	61.07%
Risk-free interest rates		2.50	%		0.60	%	1.20%
Expected term (in years)		7.4			4.4		4.6 to 5.0
Dividend yield		—			—		—
Weighted-average estimated fair value of options granted during the period	$	1.40		$	1.79		$6.10

The following table summarizes the stock option activity under the Company's 2009 Plan from December 31, 2010 through the year ended December 31, 2013:

	Options Outstanding

	Number of Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Term (in years)		Weighted- Average Grant-Date Fair Value		Aggregate Intrinsic Value(1)
Balance at December 31, 2010		3,319,355		$	11.59			$	4.75	$	(30,107	)
Options granted		150,000		$	11.98			$	6.10
Exercised		(59,606	)	$	10.00					$	(446	)
Cancelled/forfeited		(9,628	)	$	10.96


Balance at December 31, 2011		3,400,121		$	11.63			$	4.82	$	(30,975	)
Options granted		1,185,000		$	3.10			$	1.79
Exercised		—		$	—
Cancelled/forfeited		(655,211	)	$	11.84


Balance at December 31, 2012		3,929,910		$	9.03		7.75	$	3.84	$	(29,317	)
Options granted		50,000		$	2.27		7.41	$	1.40	$	(35	)
Exercised		—		$	—		—	$	—	$	—
Cancelled/forfeited		(208,605	)	$	5.43		—	$	2.85	$	—


Balance at December 31, 2013		3,771,305		$	9.13		6.71	$	3.87	$	(28,511	)




Vested and exercisable as of December 31, 2013		2,938,285		$	10.74		6.13	$	4.40	$	(26,944	)
Vested and exercisable as of December 31, 2013 and expected to vest thereafter		1,116,342		$	9.13		6.71	$	3.87	$	(28,511	)

(1): The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $1.57 of the Company's common stock on December 31, 2013.

During 2011, the total intrinsic value of the 59,606 options exercised (i.e., the difference between the market price on the date of exercise and the price paid by the employee to exercise the options) was $527.

As of December 31, 2013, there was $832 of unrecognized compensation cost related to outstanding stock option awards. This amount is expected to be recognized over a weighted-average remaining vesting period of 0.4 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from its expectations. The Company received proceeds of $0, $0 and $596, related to the exercise of stock options for the years ended December 31, 2013, 2012 and 2011, respectively.

The following table summarizes the restricted shares activity from December 31, 2010 through the year ended December 31, 2013:

	Unvested Restricted Shares

	Number of Shares			Weighted-Average Grant-Date Fair Value
Unvested at December 31, 2010		727,725		$	10.32
Granted		104,110		$	8.79
Vested		(404,831	)	$	10.13
Cancelled		(1,693	)	$	10.00


Unvested at December 31, 2011		425,311		$	10.08
Granted		53,918		$	3.90
Vested		(351,169	)	$	10.11
Cancelled		—		$	—


Unvested at December 31, 2012		128,060		$	7.46
Granted		204,553		$	2.64
Vested		(206,446	)	$	4.75
Cancelled		(11,506	)	$	8.11


Unvested at December 31, 2013		114,667		$	4.32




Expected to vest after December 31, 2013		114,667		$	4.32

As of December 31, 2013, there was $310 of unrecognized compensation cost related to unvested restricted shares. This amount is expected to be recognized over a weighted-average remaining vesting period of 1.2 years. To the extent the actual forfeiture rate is different from what the Company has anticipated, stock-based compensation related to these awards will be different from its expectations.

On November 9, 2010, the Company's Board of Directors adopted the STR Holdings, Inc. 2010 Employee Stock Purchase Plan ("ESPP") and reserved 500,000 shares of the Company's common stock for issuance thereunder. The ESPP was made effective upon its approval by the votes of the Company's stockholders on May 24, 2011 during the Company's annual meeting for the purpose of qualifying such shares for special tax treatment under Section 423 of the Internal Revenue Code of 1986, as amended.

Under the ESPP, eligible employees may use payroll withholdings to purchase shares of the Company's common stock at a 10% discount. The Company has established four offering periods in which eligible employees may participate. The first offering period commenced in the fourth quarter of 2011. The Company purchases the number of required shares each period based upon the employees' contribution plus the 10% discount. The number of shares purchased times the 10% discount is recorded by the Company as stock-based compensation. The Company recorded $1, $4 and $1 in stock-based compensation expense relating to the ESPP for the years ended December 31, 2013, 2012 and 2011, respectively. There were 480,557 shares available for purchase under the ESPP as of December 31, 2013.

Stock-based compensation expense was included in the following consolidated statements of comprehensive loss categories for continuing operations:

	Years Ended December 31,

	2013		2012		2011
Selling, general and administrative expense	$	1,872	$	3,466	$	4,400
Research and development expense	$	30	$	28	$	36


Total option exercise recognized tax benefit	$	—	$	—	$	4

Deferred Compensation

The Company has a deferred compensation arrangement with certain members of management which states upon the earlier of December 31, 2015, sale of the Company, or termination of employment for any reason, the members are entitled to bonus payments based upon a formula set forth in their respective employment agreements. The payments are tied to distribution amounts they would have received with respect to their former ownership in the predecessor Company if the assets were sold at fair market value compared to the value of the Company's stock price. The amount of the potential bonus payment is capped at $1,180. In accordance with ASC 718-30, the obligation should be remeasured quarterly at fair value. The Company determined fair value using observable current market information as of the reporting date. The most significant input to determine the fair value was determined to be the Company's common stock price which is a Level 2 input. Based upon the difference of the floor in the agreements and the Company's common stock price at November 15, 2013 for one terminated employee and December 31, 2013 for one active employee, $630 of accrued compensation is recorded in other current liabilities and $200 is recorded in other long-term liabilities in the Consolidated Balance Sheet.