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Stock-Based Compensation

6 Months Ended

Apr. 30, 2023

Stock-Based Compensation

Stock-Based Compensation

6.	Stock-Based Compensation

In April 2011, our shareholders approved the Calavo Growers, Inc. 2011 Management Incentive Plan (the “2011 Plan”). All directors, officers, employees and consultants (including prospective directors, officers, employees and consultants) of Calavo and its subsidiaries are eligible to receive awards under the 2011 Plan. Shares were issuable under the 2011 Plan through December 2020. On April 21, 2021, the shareholders of Calavo approved the Calavo Growers, Inc. 2020 Equity Incentive Plan (the “2020 Plan”). This is a five-year plan with up to 1,500,000 shares that are issuable pursuant to awards that may be made through December 9, 2025.

Restricted Stock Awards

On November 3, 2022, our former Chief Executive Officer (CEO) entered into an amendment to his employment agreement, which changed $100,000 of his guaranteed STIP cash bonus for fiscal 2022 to $100,000 worth of unrestricted Calavo common stock. On December 22, 2022, our CEO was granted 3,321 shares of unrestricted common stock. The closing share price of our common stock at the grant date was $30.12.

On December 1, 2022, our ten directors were granted 3,478 restricted shares each (for a total of 34,780 shares). These shares have full voting rights and participate in dividends as if unrestricted. The closing share price of our stock on such grant date was $34.51. As of November 1, 2023, these shares will vest and become unrestricted subject to the continued service of the director. The total recognized stock-based compensation expense for these grants was $0.3 million for the three months ended April 30, 2023. The total recognized stock-based compensation expense for these grants was $0.5 million for the six months ended April 30, 2023.

On March 7, 2023, our former CEO was terminated. As part of his Separation Agreement, the remaining 19,329 restricted shares that were granted as part of his original employment agreement were immediately vested. The total stock-based compensation expense recognized was $0.8 million for the three and six months ended April 30, 2023.

A combined summary of restricted stock award activity, related to our 2011 and 2020 Plans, is as follows (in thousands, except for per share amounts):


				Weighted-Average			Aggregate
		Number of Shares		Grant Price			Intrinsic Value
Outstanding at October 31, 2022		62		$	42.88
Vested		(60)		$	41.36
Granted		38		$	34.13
Outstanding at April 30, 2023		40		$	35.54		$	1,269

The total recognized stock-based compensation expense for restricted stock was $1.2 million and $0.8 million for the three months ended April 30, 2023 and 2022. The total recognized stock-based compensation expense for restricted stock

was $1.7 million and $1.4 million for the six months ended April 30, 2023 and 2022. Total unrecognized stock-based compensation expense totaled $0.7 million as of April 30, 2023 and will be amortized through fiscal year 2024.

Restricted Stock Units (RSUs) and Performance Restricted Stock Units (PRSUs)

On December 1, 2022, we issued RSUs and PRSUs for officers and other members of management as part of our long-term incentive plan. The RSUs are time-based and vest annually in equal amounts over a three-year period. The PRSUs are based on three-year cumulative performance targets of net sales, adjusted EBITDA and return on invested capital and vest entirely at the third anniversary. We granted 66,325 RSUs and 66,325 PRSUs at a grant stock price of $34.51.

Based on our current projections, we recognized approximately $0.5 million and $0.9 million of stock-based compensation for the three and six months ended April 30, 2023 for all RSUs and PRSUs. As of April 30, 2023, there was $2.7 million of unrecognized stock-based compensation costs related to non-vested RSUs and PRSUs, which the Company expects to recognize over a weighted-average period of 2.5 years. The total fair value of the restricted stock units at April 30, 2023, is approximately $5.0 million.

On March 7, 2023, our former CEO was terminated. As part of his Separation Agreement, 7,421 RSUs and 13,687 PRSUs immediately vested. The total stock-based compensation expense recognized was $0.5 million for the three and six months ended April 30, 2023. With his termination 8,574 PRSUs and 11,285 RSUs were forfeited.

The summary of RSU activity, related to our 2020 Plan, is as follows (in thousands, except for per share amounts):


		Number of Shares		Weighted-Average			Aggregate
		Represented		Grant Price			Intrinsic Value
Outstanding at October 31, 2022		52		$	39.17
Vested		(19)			36.87
Forfeited		(14)		$	35.53
Granted		66		$	34.51
Outstanding at April 30, 2023		85		$	36.65		$	2,731

The summary of PRSU activity, related to our 2020 Plan, is as follows (in thousands, except for per share amounts):


		Number of Shares		Weighted-Average			Aggregate
		Represented		Grant Price			Intrinsic Value
Outstanding at October 31, 2022		31		$	37.49
Vested		(14)		$	36.35
Forfeited		(11)		$	35.35
Granted		66		$	34.51
Outstanding at April 30, 2023		72		$	35.25		$	2,276

Stock Options

Stock options are granted with exercise prices of not less than the fair market value at grant date, generally vest over one to five years and generally expire two to five years after the vest date. We settle stock option exercises with newly issued shares of common stock.

We measure compensation cost for all stock-based awards at fair value on the date of grant and recognize compensation expense in our consolidated statements of operations over the service period that the awards are expected to vest. We measure the fair value of our stock-based compensation awards on the date of grant.

In March 2023, the Company agreed to award our newly appointed CEO a stock option to purchase 500,000 shares of the Company’s common stock pursuant to the 2020 Equity Incentive Plan, which will vest in the following four tranches upon satisfaction of the milestones described below (the “Milestones”):

(i) 200,000 shares subject to the option shall vest and become exercisable on March 10, 2024;

(ii) 100,000 shares subject to the option shall vest and become exercisable (1) if the closing price per share of the Company’s common stock, as reported by The Nasdaq Stock Market, is greater than or equal to $50.00 (the “Target Share Price”), and (2) the average closing price per share of the Company’s common stock for any thirty (30) day period following achievement of the Target Share Price (the “Thirty-day Average Share Price”), is greater than or equal to $50.00, as reported by Nasdaq;

(iii) 100,000 shares subject to the option shall vest and become exercisable (1) upon achievement of the Target Share Price, and (2) the Thirty-day Average Share Price is greater than or equal to $60.00, as reported by Nasdaq; and

(iv) 100,000 shares subject to the option shall vest and become exercisable (1) upon achievement of the Target Share Price, and (2) the Thirty-day Average Share Price is greater than or equal to $70.00, as reported by Nasdaq;

provided, however, that satisfaction of each Milestone is subject to our newly appointed CEO continuing as the President and CEO of the Company through each vesting event; and provided further that regardless of when he achieves the Milestones set forth in subsections (ii) through (iv) above, the applicable tranche shall only vest on or after March 10, 2024.

We measure the fair value of our stock option awards on the date of grant. The following assumptions were used in the estimated grant date fair value calculations for stock options:


		March 2023
Risk-free interest rate		4.31	%
Expected volatility		35.0	%
Dividend yield		1.6	%
Expected life (years)		3.0

The expected stock price volatility rates were based on the historical volatility of our common stock. The risk free interest rate was based on the U.S. Treasury yield curve in effect at the time of grant for periods approximating the expected life of the option. The expected life represents the average period of time that options granted are expected to be outstanding, as calculated using the simplified method described in the Securities and Exchange Commission’s Staff Accounting Bulletin No. 107.

The Black-Scholes-Merton and lattice-based option valuation models were developed for use in estimating the fair value of traded options that have no vesting restrictions and are fully transferable. Because options held by our directors and employees have characteristics significantly different from those of traded options, in our opinion, the existing models do not necessarily provide a reliable single measure of the fair value of these options.

Based on the above details and assumptions, we valued these options at $1.8 million. We will amortize this amount over three years, which is the estimated employment term of our newly appointed CEO. We recognized $0.1 million of stock-based compensation during the three and six months ended April 30, 2023. The exercise price of these options are $24.39, which was the stock price on the day of the grant.

A summary of stock option activity, related to our 2011 and 2020 Plans, is as follows (in thousands, except for weighted-average exercise price):


				Weighted-Average			Aggregate
				Exercise			Intrinsic
		Number of Shares		Price			Value
Outstanding at October 31, 2022		27		$	44.67
Exercised		(2)		$	23.48
Granted		500		$	24.39
Outstanding at April 30, 2023		525		$	25.44		$	3,423
Exercisable at April 30, 2023		15		$	51.30		$	—

At April 30, 2023, outstanding and exercisable stock options had a weighted-average remaining contractual term of 2.0 years. We recognized $0.1 million of stock-based compensation during each of the three and six months ended April 30, 2023 related to stock options. Total unrecognized stock-based compensation expense totaled $1.8 million as of April 30, 2023 and will be amortized through fiscal year 2026.