NOTE 8 – SHARE-BASED COMPENSATION

In March 2016, shareholders approved a new equity incentive compensation plan (“the Plan”), under which incentive stock options, non-qualified stock options, stock grants, stock-based awards, restricted stock, restricted stock units, stock appreciation rights, performance units, performance stock, and other stock or cash awards may be granted. Shares to be issued under the Plan may be authorized and unissued shares, issued shares that have been reacquired by us (in the open-market or in private transactions), shares that are being held in the treasury, or a combination thereof. The maximum number of shares of common stock approved that may be issued under the Plan is four million shares. Awards may be granted to officers, employees, directors, consultants, advisors, and independent contractors of Photronics or its subsidiaries. In the event of a change in control (as defined in the Plan), the vesting of awards may be accelerated. The Plan, aspects of which are more fully described below, prohibits further awards from being issued under prior plans. We incurred total share-based compensation expenses of $3.2 million, $3.6 million, and $3.8 million in fiscal years 2018, 2017, and 2016, respectively. No share-based compensation cost was capitalized as part of an asset and no related income tax benefits were recorded during the fiscal years presented.

Stock Options

Option awards generally vest in one-to-four years, and have a ten year contractual term. All incentive and non-qualified stock option grants must have an exercise price no less than the market value of the underlying common stock on the date of grant. The grant date fair values of options are based on the closing price of our common stock on the date of grant, and are calculated using the Black-Scholes option pricing model. Expected volatility is based on the historical volatility of our common stock. We use historical option exercise behavior and employee termination data to estimate expected term, which represents the period of time that the options granted are expected to remain outstanding. The risk-free rate of return for the estimated term of the option is based on the U.S. Treasury yield curve in effect at the date of grant.

The weighted-average inputs and risk-free rate of return ranges used to calculate the grant date fair values of stock options issued during fiscal years 2018, 2017 and 2016 are presented in the following table:

	Year Ended
	October 31, 2018			October 29, 2017			October 30, 2016

Expected volatility		31.7	%		32.2	%		48.4	%

Risk-free rate of return		2.2 – 2.8	%		1.9 – 2.0	%		1.2 – 1.7	%

Dividend yield		0.0	%		0.0	%		0.0	%

Expected term	5.0 years			5.0 years			5.1 years

The table below presents a summary of stock options activity during fiscal year 2018 and information on stock options outstanding at October 31, 2018.

Options	Shares			Weighted- Average Exercise Price		Weighted- Average Remaining Contractual Life	Aggregate Intrinsic Value
Outstanding at October 29, 2017		3,345,235		$	8.01
Granted		269,000			8.62
Exercised		(823,311	)		5.27
Cancelled and forfeited		(367,364	)		10.19
Outstanding at October 31, 2018		2,423,560		$	8.68	5.8 years	$	3,977
Exercisable at October 31, 2018		1,612,945		$	7.93	4.8 years	$	3,524
Vested and expected to vest as of October 31, 2018		2,315,890		$	8.59	5.7 years	$	3,930

The weighted-average grant date fair value of options granted during fiscal years 2018, 2017 and 2016 were $2.76, $3.59 and $4.51, respectively. The total intrinsic value of options exercised during fiscal years 2018, 2017 and 2016 was $2.5 million, $1.9 million and $3.5 million, respectively.

We received cash from option exercises of $4.3 million, $2.4 million and $3.1 million in fiscal years 2018, 2017 and 2016, respectively. As of October 31, 2018, the total unrecognized compensation cost of unvested option awards was approximately $1.5 million. That cost is expected to be recognized over a weighted-average amortization period of 1.9 years.

Restricted Stock

We periodically grant restricted stock awards, the restrictions on which typically lapse over a service period of one-to-four years. The fair value of the awards are our closing stock prices on the dates of grant. There were 290,000, 317,750, and 115,225 restricted stock awards granted during fiscal years, 2018, 2017 and 2016. The weighted-average grant date fair values of restricted stock awards issued during fiscal years 2018, 2017 and 2016 were $8.62, $10.94 and $12.13, respectively. The total fair value of awards for which restrictions lapsed was $1.4 million, $1.2 million and $1.7 million during fiscal years 2018, 2017 and 2016, respectively. As of October 31, 2018, the total compensation cost for restricted stock awards not yet recognized was approximately $2.8 million. That cost is expected to be recognized over a weighted-average amortization period of 2.6 years.

A summary of restricted stock award activity during fiscal year 2018 and the status of our outstanding restricted stock awards as of October 31, 2018, is presented below:

Restricted Stock	Shares			Weighted-Average Fair Value at Grant Date

Outstanding at October 29, 2017		339,181		$	10.74
Granted		290,000			8.62
Vested		(163,664	)		9.88
Cancelled		(46,220	)		11.07
Outstanding at October 31, 2018		419,297		$	9.58
Expected to vest as of October 31, 2018		383,413		$	9.53

Employee Stock Purchase Plan

Our Employee Stock Purchase Plan ("ESPP") permits employees to purchase Photronics, Inc. common shares at 85% of the lower of the closing market price at the commencement or ending date of the Plan year (which is approximately one year). We recognize the ESPP expense during that same period. As of October 31, 2018, the maximum number of shares of common stock approved by our shareholders to be purchased under the ESPP was 1.5 million shares; approximately 1.4 million shares had been issued through October 31, 2018, and approximately 0.1 million shares were subject to outstanding subscriptions. As of October 31, 2018, the total compensation cost related to the ESPP not yet recognized was $0.1 million, which is expected to be recognized in fiscal 2019.