ACCOUNTING FOR STOCK-BASED COMPENSATION | 2. ACCOUNTING FOR STOCK-BASED COMPENSATION Stock-based compensation awards have been granted under the Community Health Systems, Inc. Amended and Restated 2009 Stock Option and Award Plan, which was amended and restated as of March 17, 2021 and approved by the Company’s stockholders at the annual meeting of stockholders held on May 11, 2021 The 2009 Plan provides for the grant of incentive stock options intended to qualify under Section 422 of the Internal Revenue Code (“IRC”) and for the grant of stock options which do not so qualify, stock appreciation rights, restricted stock, restricted stock units, performance-based shares or units and other share awards. Persons eligible to receive grants under the 2009 Plan include the Company’s directors, officers, employees and consultants. As of June 30, 2022, 6,906,176 shares of unissued common stock were reserved for future grants under the 2009 Plan. The following table reflects the impact of total compensation expense related to stock-based equity plans on the reported operating results for the respective periods (in millions): Three Months Ended Six Months Ended June 30, June 30, 2022 2021 2022 2021 Effect on (loss) income before income taxes $ (3 ) $ (5 ) $ (8 ) $ (13 ) Effect on net (loss) income $ (2 ) $ (4 ) $ (7 ) $ (10 ) At June 30, 2022, $45 million of unrecognized stock-based compensation expense related to outstanding unvested stock options, restricted stock and restricted stock units (the terms of which are summarized below) was expected to be recognized over a weighted-average period of 27 months. Of that amount, $7 million relates to outstanding unvested stock options expected to be recognized over a weighted-average period of 26 months and $38 million relates to outstanding unvested restricted stock and restricted stock units expected to be recognized over a weighted-average period of 27 months. There were no modifications to awards during the six months ended June 30, 2022 and 2021. To date, all options granted under the 2009 Plan have been “nonqualified” stock options for tax purposes. Generally, these options vest in one-third increments on each of the first three anniversaries of the award date and have a 10-year contractual term. The exercise price of all options granted under the 2009 Plan is equal to the fair value of the Company’s common stock on the option grant date. The fair value of stock options was estimated using the Black Scholes option pricing model with the following assumptions and weighted-average fair values during the three and six months ended June 30, 2022 and 2021: Three Months Ended June 30, Six Months Ended June 30, 2022 2021 2022 2021 Expected volatility N/A N/A 84.3% - 87.5% 84.3% - 88.9% Expected dividends N/A N/A — — Expected term N/A N/A 3 - 6 years 3 - 6 years Risk-free interest rate N/A N/A 1.5% - 1.6% 0.3% - 0.9% In determining the expected term, the Company examined concentrations of option holdings and historical patterns of option exercises and forfeitures, as well as forward-looking factors, in an effort to determine if there were any discernable employee populations. From this analysis, the Company identified two primary employee populations, one consisting of certain senior executives and the other consisting of substantially all other recipients. The expected volatility rate was estimated based on historical volatility. In determining expected volatility, the Company also reviewed the market-based implied volatility of actively traded options of its common stock and determined that historical volatility utilized to estimate the expected volatility rate did not differ significantly from the implied volatility. The expected term computation is based on historical exercise and cancellation patterns and forward-looking factors, where present, for each population identified. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of the grant. The pre-vesting forfeiture rate is based on historical rates and forward-looking factors for each population identified. The Company adjusts the estimated forfeiture rate to its actual experience. Options outstanding and exercisable under the 2009 Plan as of June 30, 2022, and changes during each of the three-month periods following December 31, 2021, was as follows (in millions, except share and per share data): Weighted- Aggregate Weighted- Average Intrinsic Average Remaining Value as of Exercise Contractual June 30, Shares Price Term 2022 Outstanding at December 31, 2021 2,301,753 $ 6.77 Granted 760,000 10.18 Exercised (56,500 ) 4.97 Forfeited and cancelled (151,002 ) 14.67 Outstanding at March 31, 2022 2,854,251 7.30 Granted — — Exercised — — Forfeited and cancelled — — Outstanding at June 30, 2022 2,854,251 $ 7.30 8.3 years $ — Exercisable at June 30, 2022 1,320,912 $ 5.63 7.5 years $ — The weighted-average grant date fair value of stock options granted during the six months ended June 30, 2022 and 2021 was $7.25 and $6.22, respectively. The aggregate intrinsic value (calculated as the number of in-the-money stock options multiplied by the difference between the Company’s closing stock price on the last trading day of the reporting period ($3.75) and the exercise price of the respective stock options) in the table above represents the amount that would have been received by the option holders had all option holders exercised their options on June 30, 2022. This amount changes based on the market value of the Company’s common stock. The aggregate intrinsic value of options exercised was less than $1 million during both of the six-month periods ended June 30, 2022 and 2021. No options were exercised during the three-month periods ended June 30, 2022 and 2021. The aggregate intrinsic value of options vested and expected to vest approximates that of the outstanding options. The Company has also awarded restricted stock under the 2009 Plan to employees of certain subsidiaries. With respect to time-based vesting restricted stock that has been awarded under the 2009 Plan, the restrictions on these shares have generally lapsed in one-third increments on each of the first three anniversaries of the award date. In addition, certain of the restricted stock awards granted to the Company’s senior executives have contained performance objectives required to be met in addition to any time-based vesting requirements. If the applicable performance objectives are not attained, these awards will be forfeited in their entirety. For performance-based awards, the performance objectives are measured cumulatively over a three-year Restricted stock outstanding under the 2009 Plan as of June 30, 2022, and changes during each of the three-month periods following December 31, 2021, was as follows: Weighted- Average Grant Shares Date Fair Value Unvested at December 31, 2021 4,995,314 $ 6.30 Granted 3,179,000 9.05 Vested (2,516,247 ) 5.62 Forfeited (30,000 ) 6.87 Unvested at March 31, 2022 5,628,067 8.61 Granted 41,000 5.00 Vested (17,000 ) 10.65 Forfeited (72,670 ) 9.77 Unvested at June 30, 2022 5,579,397 8.56 Restricted stock units (“RSUs”) have been granted to the Company’s non-management directors under the 2009 Plan. Each of the Company’s then serving non-management directors received grants under the 2009 Plan of 17,682 RSUs and 19,296 RSUs on March 1, 2022 and 2021, respectively. The March 2022 and 2021 grants had a grant date fair value of approximately $180,000 and $170,000, respectively. On June 1, 2022, a new non-management director received a grant of 17,682 RSUs with a grant date fair value of approximately $88,000. Vesting of these RSUs occurs in one-third increments on each of the first three anniversaries of the award date or upon the director’s earlier cessation of service on the board, other than for cause. Each non-management director may elect, prior to the beginning of the calendar year in which the award is granted, to defer the receipt of shares of the Company’s common stock issuable upon vesting until either his or her (i) separation from service with the Company or (ii) attainment of an age specified in advance by the non-management director. A total of three directors elected to defer the receipt of RSUs granted on March 1, 2022 to a future date and a total of four directors elected to defer the receipt of RSUs granted on March 1, 2021 to a future date. RSUs outstanding under the 2009 Plan as of June 30, 2022, and changes during each of the three-month periods following December 31, 2021, was as follows: Weighted- Average Grant Shares Date Fair Value Unvested at December 31, 2021 486,598 $ 6.17 Granted 159,138 10.18 Vested (151,058 ) 5.63 Forfeited — — Unvested at March 31, 2022 494,678 7.63 Granted 17,682 5.00 Vested — — Forfeited — — Unvested at June 30, 2022 512,360 7.54 |