NOTE 5—INVENTORIES

Inventories consist of the following:

	September 30, 2014			December 31, 2013
Finished goods	$	2,768		$	2,938
Raw materials	7,400			6,064
Reserve	(463		)	(445		)
Inventories, net	$	9,705		$	8,557

On January 13, 2014, the Company’s indirect subsidiary, STR Solar (Hong Kong), Limited, entered into a Contract Manufacturing Agreement (the “Agreement”) with ZheJiang FeiYu Photo-Electrical Science & Technology Co., Ltd. (“FeiYu”) and Zhejiang Xiesheng Group Co., Ltd., the parent corporation of FeiYu. Pursuant to the Agreement, the Company will purchase certain solar encapsulant products manufactured by FeiYu to the Company’s specifications. The Company will supply FeiYu with all of the proprietary information and assistance necessary to manufacture the products.

As part of the Agreement, the Company transferred $2,502 of raw material inventory to FeiYu. FeiYu was obligated to pay for the raw material inventory over the term of the Agreement with half being due on December 31, 2014 and the remaining half being due on December 31, 2015. During the second quarter of 2014, the Company elected to supply FeiYu with raw materials so that FeiYu provides encapsulant products to the Company under a tolling arrangement rather than as a contract manufacturer. As part of this modification to the existing relationship with FeiYu, approximately $1,472 of raw material inventory was transferred back to the Company for use at the Company’s China manufacturing facility which is scheduled to begin production during the fourth quarter of this year. The remaining inventory was used by FeiYu to manufacture encapsulant products for the Company.