NOTE 14—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. Effective May 14, 2013, the 2009 Plan was amended to increase the number of shares subject to the Plan. As a result, a total of 6,200,000 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 1,894,749 shares available for grant under the 2009 plan as of September 30, 2013.

During the third quarter of 2013, the Company issued 50,000 options to purchase shares of the Company’s common stock at exercise price of $2.27 to one employee under the 2009 Plan. In connection with the grant, 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 following table presents the assumptions used to estimate the fair values of the stock options granted during the third quarter of 2013:

	Three Months Ended
	September 30, 2013
Risk-free interest rate	2.50		%
Expected volatility	58.9		%
Expected life (in years)	7.41
Forfeiture rate	—
Dividend yield	—
Weighted-average estimated fair value of options granted during the period	$	1.40

The fair value of the stock options issued were determined by the Company using the Black-Scholes option pricing model. The Company’s assumptions about stock-price volatility have been based exclusively on the implied volatilities 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.

The following table summarizes the options activity under the Company’s 2009 Plan for the nine months ended September 30, 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	$	(26,723	)
Options granted	50,000		$	2.27	7.41	$	1.40	$	(2	)
Exercised	—		$	—	—	$	—	$	—
Canceled/forfeited	(208,605	)	$	5.43	—	$	2.85	$	—
Balance at September 30, 2013	3,771,305		$	9.13	6.96	$	3.87	$	(26,022	)
Vested and exercisable as of September 30, 2013	2,665,008		$	11.42	6.13	$	4.62	$	(24,491	)
Vested and exercisable as of September 30, 2013 and expected to vest thereafter	3,771,305		$	9.13	6.96	$	3.87	$	(26,022	)

(1) The aggregate intrinsic value is calculated as the difference between the exercise price of the underlying awards and the closing stock price of $2.23 of the Company’s common stock on September 30, 2013.

As of September 30, 2013, there was $1,612 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 nine months ended September 30, 2013:

	Unvested Restricted Shares
	Number of Shares		Weighted– Average Grant–Date Fair Value
Unvested at December 31, 2012	128,060		$	7.46
Granted	169,237		$	2.64
Vested	(154,672	)	$	4.01
Canceled	—		$	—
Unvested at September 30, 2013	142,625		$	5.49
Expected to vest after September 30, 2013	142,625		$	5.49

As of September 30, 2013, there was $612 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 1.5 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 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 $0 and $1 in stock–based compensation expense relating to the ESPP for the three and nine months ended September 30, 2013, respectively. There were 482,021 shares available for purchase under the ESPP as of September 30, 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 September 30, 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 September 30, 2013, $18 of accrued compensation was booked during the three months ended September 30, 2013, resulting in a liability of $1,031, $747 which is reflected in other current liabilities and $284 is reflected in other long–term liabilities.

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

	Three Months Ended September 30,				Nine Months Ended September 30,
	2013		2012		2013		2012
Cost of sales	$	—	$	—	$	—	$	1
Selling, general and administrative expense	$	552	$	697	$	1,658	$	3,657
Research and development expense	$	11	$	7	$	19	$	24
Total option exercise recognized tax benefit	—		—		—		—