NOTE 11—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 4,750,000 shares of common stock 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. There were 455,381 shares available for grant under the 2009 plan as of March 31, 2013.

The following table summarizes the options activity under the Company’s 2009 Plan for the three months ended March 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, 2012	3,929,910	$	9.03	7.75	$	3.84	$	(26,959	)
Options granted	—	$	—	—	$	—	$	—
Exercised	—	$	—	—	$	—	$	—
Canceled/forfeited	—	$	—	—	$	—	$	—
Balance at March 31, 2013	3,929,910	$	9.03	7.50	$	3.84	$	(26,959	)
Vested and exercisable as of March 31, 2013	2,651,513	$	11.37	6.63	$	4.59	$	(24,394	)
Vested and exercisable as of March 31, 2013 and expected to vest thereafter	3,929,910	$	9.03	7.50	$	3.84	$	(26,959	)

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $2.17 of the Company’s common stock on March 28, 2013.

As of March 31, 2013, there was $2,294 of unrecognized compensation cost related to outstanding employee stock option awards. This amount is expected to be recognized over a weighted—average remaining vesting period of approximately one year. 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 following table summarizes the restricted common stock activity of the Company for the three months ended March 31, 2013:

	Unvested Restricted Shares
	Number of Shares		Weighted— Average Grant—Date Fair Value
Unvested at December 31, 2012	128,060		$	7.46
Granted	—		$	—
Vested	(4,626	)	$	8.11
Canceled	—		$	—
Unvested at March 31, 2013	123,434		$	7.44
Expected to vest after March 31, 2013	123,434		$	7.44

As of March 31, 2013, there was $623 of unrecognized compensation cost related to employee and director unvested restricted common stock. This amount is expected to be recognized over a weighted—average remaining vesting period of approximately 1.7 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 during the year 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 multiplied by the 10% discount is recorded by the Company as stock—based compensation. The Company recorded $1 in stock—based compensation expense relating to the ESPP for the three months ended March 31, 2013. There were 486,099 shares available for purchase under the ESPP as of March 31, 2013.

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 to the members in the aggregate is $1,997. 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 as of March 31, 2013 which is a Level 1 input. Based upon the difference of the floor in the agreements and the Company’s common stock price at March 31, 2013, $161 of accrued compensation was reversed during the three months ended March 31, 2013, resulting in a liability of $1,003, which is reflected in other long—term liabilities.

Stock—based compensation expense was included in the following Condensed Consolidated Statements of Comprehensive Income categories for continuing operations:

	Three Months Ended March 31,
	2013		2012
Cost of sales	$	—	$	—
Selling, general and administrative expense	$	350	$	1,466
Research and development expense	$	4	$	8
Total option exercise recognized tax benefit	$	—	$	—