Home Payment processors CHEGG, INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

CHEGG, INC MANAGEMENT REPORT AND ANALYSIS OF FINANCIAL POSITION AND RESULTS OF OPERATIONS (Form 10-Q)

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You should read the following discussion of our financial condition and results
of operations in conjunction with our condensed consolidated financial
statements and the related notes included in Part I, Item 1, "Financial
Statements (unaudited)" of this Quarterly Report on Form 10-Q. In addition to
historical consolidated financial information, the following discussion contains
forward-looking statements that reflect our plans, estimates, and beliefs. Our
actual results could differ materially from those discussed in the
forward-looking statements. See the section titled "Note about Forward-Looking
Statements" for additional information. Factors that could cause or contribute
to these differences include those discussed below and elsewhere in this
Quarterly Report on Form 10-Q.

Insight

Millions of people all around the world Learn with Chegg. Our mission is to
improve learning and learning outcomes by putting students first. We support
life-long learners starting with their academic journey and extending into their
careers. The Chegg platform provides products and services to support learners
to help them better understand their academic course materials, and also
provides personal and professional development skills training, to help them
achieve their learning goals.

Students subscribe to our subscription services, collectively referred to as our
Chegg Services, which can be accessed internationally through our websites and
on mobile devices. Our primary Chegg Services include Chegg Study, Chegg
Writing, Chegg Math Solver, Chegg Study Pack, Busuu, Mathway and Thinkful. Our
Chegg Study subscription service provides "Expert Questions and Answers" and
step-by-step "Textbook Solutions," helping students with their course work. When
students need writing help, including plagiarism detection scans and creating
citations for their papers, they can use our Chegg Writing subscription service.
Our Chegg Math Solver and Mathway subscription services help students understand
math by providing a step-by-step math solver and calculator. We also offer our
Chegg Study Pack as a premium subscription bundle of our Chegg Study, Chegg
Writing, and Chegg Math Solver services, which also includes additional features
such as flashcards, concept videos, practice questions and quizzes, and
instructor-created materials through Uversity. Our Thinkful skills-based
learning platform offers professional courses focused on the most in-demand
technology skills. Required Materials includes our print textbook and eTextbook
offerings, which help students save money compared to the cost of buying new. We
offer an extensive print textbook library primarily for rent and also for sale
through our print textbook partners.

During the three and nine months ended September 30, 2022, we generated net
revenues of $164.7 million and $561.7 million, respectively. During the three
and nine months ended September 30, 2021, we generated net revenues of $171.9
million and $568.8 million, respectively.

In April 2022, we entered into definitive agreements with GT such that we will
continue to offer our Required Materials offering on our website and maintain
relationships with the students, however, GT has purchased our existing print
textbook library and will continue to make print textbook investments and
provide fulfillment logistics for print textbook transactions. We expect that we
will continue to fulfill eTextbook transactions through the end of 2022, at
which point GT will fulfill eTextbook transactions. We expect that our
partnership with GT provides an opportunity to grow faster with higher margins.
As a result of the partnership with GT, revenues from print textbook
transactions will consist of a revenue share of the total transactions
recognized immediately rather than the total amounts recognized ratably over the
rental term, generally a two- to five-month period. Revenues from eTextbook
transactions will continue to be recognized at the gross amount ratably over the
customer's contractual period, generally a two- to five-month period, through
the expected transition period, at which point they will be recognized as a
revenue share immediately. After the transition to GT, we will no longer incur
significant costs of revenue such as order fulfillment fees primarily related to
shipping and fulfillment, publisher content fees for eTextbooks after transition
to GT at the end of 2022, and print textbook depreciation and write off expense.
We will continue to incur costs of revenue such as payment processing fees and
employee related costs as well as ongoing operating expenses such as platform
infrastructure maintenance and transition costs.

In January 2022, we completed our acquisition of Busuu Online S.L. (Busuu), an
online language learning company that offers a comprehensive solution through a
combination of self-paced lessons, live classes with expert tutors and the
ability to learn and practice with members of the Busuu language learning
community.

Our long-term strategy is centered upon our ability to utilize Chegg Services to
increase student engagement with our learning platform. We plan to continue to
invest in the expansion of our Chegg Services to provide a more compelling and
personalized solution and deepen engagement with students. In addition, we
believe that the investments we have made to achieve our current scale will
allow us to drive increased operating margins over time that, together with
increased contributions of Chegg Services, will enable us to sustain
profitability and remain cash-flow positive in the long-term. Our
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ability to achieve these long-term objectives is subject to numerous risks and
uncertainties. These include our ability to attract, retain, and increasingly
engage the student population, reduced traffic to our services, and other
factors, such as the COVID-19 pandemic and global macroeconomic conditions,
which continue to evolve and affect our business and results of operations.
Further, the education industry has experienced a slowdown as a result of
decreased enrollments, which have not returned to pre-pandemic levels.
Employment opportunities, compensation and other factors have led to steadily
decreasing enrollments. Moreover, those students who have enrolled have been
taking fewer and less rigorous classes and receiving less graded assignments. As
a result, we are experiencing a deceleration in the growth rates of our services
and revenues that may continue. These risks and uncertainties are described in
greater detail in Part I, Item 1A, "Risk Factors" in our Annual Report on Form
10-K for the fiscal year ended December 31, 2021.

We have presented revenues for our two product lines, Chegg Services and
Required Materials, based on how students view us and the utilization of our
products by them. More detail on our two product lines is discussed in the next
two sections titled "Chegg Services" and "Required Materials."

Services Chegg

Our Chegg Services product line for students primarily includes Chegg Study,
Chegg Writing, Chegg Math Solver, Chegg Study Pack, Busuu, Mathway, and
Thinkful. Students typically pay to access Chegg Services on a monthly basis. We
also work with leading brands to provide students with discounts, promotions,
and other products that, based on student feedback, delight them.

Overall, Chegg Services revenue represented 97% and 95% of net revenue in the three and nine months ended September 30, 2022respectively, and 85% during the three and nine month periods ended September 30, 2021.

Materials needed

Our Required Materials product line includes revenues from print textbooks and
eTextbooks. Subsequent to April 2022, we no longer recognize operating lease
income from print textbooks that we own ratable on a gross basis. In relation to
print textbooks owned by GT, we recognize revenues immediately on a net basis,
representing the margin earned, based on our role in the transaction as an agent
as we have concluded that we do not control the use of the print textbooks, and
therefore record only the net revenue share we earn. Additionally, Required
Materials includes revenues from eTextbooks, which are primarily recognized
ratably over the customer's contractual period, generally a two- to five-month
period.

In the aggregate, Required Materials revenues were 3% and 5% of net revenues
during the three and nine months ended September 30, 2022, respectively, and 15%
during both the three and nine months ended September 30, 2021.

Seasonality of our business

Revenues from Chegg Services and eTextbooks are primarily recognized ratably
over the term a student subscribes to our Chegg Services or has access to an
eTextbook. This has generally resulted in our highest revenues and profitability
in the fourth quarter as it reflects more days of the academic year. Certain
variable expenses, such as marketing expenses, remain highest in the first and
third quarters such that our profitability may not provide meaningful insight on
a sequential basis. As a result of these factors, the most concentrated periods
for our revenues and expenses do not necessarily coincide, and comparisons of
our historical quarterly results of operations on a sequential basis may not
provide meaningful insight into our overall financial performance.

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Results of Operations

The following table summarizes our historical condensed consolidated income statements (in thousands, except as a percentage of total net revenues):

                                                              Three Months Ended                                                    Nine Months Ended
                                                                 September 30,                                                        September 30,
                                                    2022                               2021                              2022                              2021
Net revenues                            $ 164,739             100  %       $ 171,942             100  %       $ 561,704            100  %       $ 568,798            100  %
Cost of revenues(1)                        45,203              27             67,102              39            145,972             26            199,194             35
Gross profit                              119,536              73            104,840              61            415,732             74            369,604             65
Operating expenses:
Research and development(1)                45,426              28             43,269              25            150,321             27            130,995             23
Sales and marketing(1)                     31,803              19             27,239              16            109,580             20             75,139             13
General and administrative(1)              53,742              33             33,971              20            154,547             27            111,560             20

Total operating expenses                  130,971              80            104,479              61            414,448             74            317,694             56
(Loss) income from operations             (11,435)             (7)               361               -              1,284              -             51,910              9
Total interest expense, net and other
income (expense), net                      95,733              58              7,037               4            100,509             18            (71,881)           (13)
Income (loss) before benefit from
(provision for) income taxes               84,298              51              7,398               4            101,793             18            (19,971)            (4)
Benefit from (provision for) income
taxes                                     167,264             102               (747)              -            162,987             29             (5,793)            (1)
Net income (loss)                       $ 251,562             153  %       $   6,651               4  %       $ 264,780             47  %       $ (25,764)            (5) %

(1) Includes share-based compensation
expense as follows:
Cost of revenues                        $     653                          $     393                          $   1,945                         $   1,174
Research and development                    9,172                              8,917                             30,954                            25,976
Sales and marketing                         2,771                              3,051                             11,176                             9,625
General and administrative                 21,574                             12,151                             54,266                            39,382
Total share-based compensation expense  $  34,170                          $  24,512                          $  98,341                         $  76,157



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Three and Nine Months Ended September 30, 2022 and 2021

Net income

The following table sets forth our total net revenues for the periods shown for
our Chegg Services and Required Materials product lines (in thousands, except
percentages):

                                        Three Months Ended                     Change
                                          September 30,
                                       2022           2021                  $            %
               Chegg Services       $ 159,264      $ 146,790            $ 12,474         8  %
               Required Materials       5,475         25,152             (19,677)      (78)
               Total net revenues   $ 164,739      $ 171,942            $ (7,203)       (4)



                                 Nine Months Ended September 30,                         Change
                                       2022                     2021                  $            %
     Chegg Services       $        533,152                   $ 482,654            $ 50,498        10  %
     Required Materials             28,552                      86,144             (57,592)      (67)
     Total net revenues   $        561,704                   $ 568,798            $ (7,094)       (1)



Chegg Services revenues increased $12.5 million, or 8% and $50.5 million, or 10%
during the three and nine months ended September 30, 2022, compared to the same
periods in 2021. The increase was primarily due to an increased global brand
awareness and penetration, including our acquisition of Busuu, which closed in
January 2022, and increased students subscribing to the Chegg Study Pack. Chegg
Services revenues were 97% and 95% of net revenues during the three and nine
months ended September 30, 2022, respectively, and 85% of net revenues during
both the three and nine months ended September 30, 2021. Required Materials
revenues decreased $19.7 million, or 78% and $57.6 million or 67%, during the
three and nine months ended September 30, 2022 compared to the same periods in
2021. The decrease was primarily due to lower revenues from print textbooks as a
result of our partnership with GT beginning in April 2022 and lower unit volumes
driven by decreased college enrollments. Required Materials revenues were 3% and
5% of net revenues during the three and nine months ended September 30, 2022,
respectively, and 15% of net revenues during both the three and nine months
ended September 30, 2021.

As a result of our partnership with GT, we expect Required Material revenues to
continue to decrease throughout 2022 due to recognizing a revenue share of the
total transaction amount rather than the total transaction amount.

Revenue cost

The following table shows our cost of sales for the periods indicated (in thousands, except percentages):

                                                                Three Months Ended
                                                                   September 30,                                 Change
                                                              2022               2021                      $                 %
Cost of revenues(1)                                       $   45,203          $ 67,102                $ (21,899)            (33) %

(1) Includes stock-based compensation expense of: $653

  $    393                $     260              66  %



                                                          Nine Months Ended September 30,                         Change
                                                              2022                2021                      $                 %
Cost of revenues(1)                                       $  145,972          $ 199,194                $ (53,222)            (27) %

(1) Includes stock-based compensation expense of: $1,945

  $   1,174                $     771              66  %



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As a result of our partnership with GT, cost of revenues decreased due to lower
order fulfillment fees, net change in the gain on textbook library, lower print
textbook depreciation expense, and lower cost of textbooks purchased by
students. We expect cost of revenues to continue to decrease throughout 2022 and
gross margins to improve as we continue the partnership.

Cost of revenues decreased $21.9 million, or 33%, during the three months ended
September 30, 2022, compared to the same period in 2021. The decrease was
primarily attributable to lower order fulfillment fees of $11.7 million driven
by lower unit volumes, lower cost of textbooks purchased by students of
$5.6 million, net change in the gain on textbook library of $4.5 million, lower
transitional logistic charges of $2.7 million, and lower print textbook
depreciation expense of $2.4 million, partially offset by higher other
depreciation and amortization expense of $4.0 million, and incremental cost of
tutors, as a result of our acquisition of Busuu, of $2.0 million. Gross margins
increased to 73% during the three months ended September 30, 2022, from 61%
during the same period in 2021.

Cost of revenues decreased $53.2 million, or 27%, during the nine months ended
September 30, 2022, compared to the same period in 2021. The decrease was
primarily attributable to lower order fulfillment fees of $33.8 million driven
by lower unit volumes, net change in the gain on textbook library of
$13.7 million, driven by the sale of print textbooks to GT in April 2022 and
lower write-downs, lower cost of textbooks purchased by students of
$10.6 million, lower print textbook depreciation expense of $7.4 million, lower
transitional logistic charges of $5.4 million, lower customer support fees of
$1.6 million, partially offset by higher other depreciation and amortization
expense of $11.6 million, incremental cost of tutors, as a result of our
acquisition of Busuu, of $6.7 million and higher web hosting fees of
$2.1 million. Gross margins increased to 74% during the nine months ended
September 30, 2022, from 65% during the same period in 2021.


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Operating Expenses

The following table shows our total operating expenses for the periods indicated (in thousands, except percentages):

                                                        Three Months Ended
                                                          September 30,                        Change
                                                       2022           2021                  $           %
Research and development(1)                         $  45,426      $  43,269            $  2,157        5  %
Sales and marketing(1)                                 31,803         27,239               4,564       17
General and administrative(1)                          53,742         33,971              19,771       58

Total operating expenses                            $ 130,971      $ 104,479            $ 26,492       25  %

(1) Includes share-based compensation expense of:
Research and development                            $   9,172      $   8,917            $    255        3  %
Sales and marketing                                     2,771          3,051                (280)      (9)
General and administrative                             21,574         12,151               9,423       78
Share-based compensation expense                    $  33,517      $  24,119            $  9,398       39  %



                                                               Nine Months Ended September 30,                        Change
                                                                   2022                2021                      $                %
Research and development(1)                                    $  150,321          $ 130,995                $ 19,326              15  %
Sales and marketing(1)                                            109,580             75,139                  34,441              46
General and administrative(1)                                     154,547            111,560                  42,987              39

Total operating expenses                                       $  414,448          $ 317,694                $ 96,754              30  %

(1) Includes share-based compensation expense of:
Research and development                                       $   30,954          $  25,976                $  4,978              19  %
Sales and marketing                                                11,176              9,625                   1,551              16
General and administrative                                         54,266             39,382                  14,884              38
Share-based compensation expense                               $   96,396          $  74,983                $ 21,413              29  %



The increases in personnel-related operating expenses shown below during the three and nine-month periods ended September 30, 2022compared to the same periods in 2021, are largely driven by the increase in the number of employees following our acquisition of Busu.

Research and development

Research and development expenses increased $2.2 million, or 5%, during the
three months ended September 30, 2022 compared to the same period in 2021. The
increase was primarily attributable to higher employee-related expenses,
including share-based compensation expense, of $3.2 million. Research and
development expenses as a percentage of net revenues were 28% during the three
months ended September 30, 2022 compared to 25% during the same period in 2021.

Research and development expenses increased $19.3 million, or 15%, during the
nine months ended September 30, 2022 compared to the same period in 2021. The
increase was primarily attributable to higher employee-related expenses,
including share-based compensation expense, of $13.7 million and higher
technology expenses to support our research and development of $5.3 million.
Research and development expenses as a percentage of net revenues were 27%
during the nine months ended September 30, 2022 compared to 23% during the same
period in 2021.

Sales and Marketing

Sales and marketing expenses increased by $4.6 million, or 17%, during the three
months ended September 30, 2022, compared to the same period in 2021. The
increase was primarily attributable to higher other depreciation and
amortization expense of $2.5 million and higher employee-related expenses,
including share-based compensation expense, of $2.1 million. Sales and marketing
expenses as a percentage of net revenues were 19% during the three months ended
September 30, 2022 compared to 16% during the same period in 2021.

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Sales and marketing expenses increased by $34.4 million, or 46%, during the nine
months ended September 30, 2022, compared to the same period in 2021. The
increase was primarily attributable to increased international marketing spend,
including incremental marketing spend from Busuu, of $15.7 million, higher
employee-related expenses, including share-based compensation expense, of
$8.1 million, and higher other depreciation and amortization expense of
$7.3 million. Sales and marketing expenses as a percentage of net revenues were
20% during the nine months ended September 30, 2022 compared to 13% during the
same period in 2021.

General and Administrative

General and administrative expenses increased $19.8 million, or 58%, during the
three months ended September 30, 2022 compared to the same period in 2021. The
increase was primarily due to higher employee-related expenses, including
share-based compensation expense, of $15.7 million, and higher professional fees
of $2.1 million. General and administrative expenses as a percentage of net
revenues were 33% during the three months ended September 30, 2022 compared to
20% during the same period in 2021.

General and administrative expenses increased $43.0 million, or 39%, during the
nine months ended September 30, 2022 compared to the same period in 2021. The
increase was primarily due to higher employee-related expenses, including
share-based compensation expense, of $31.7 million, higher professional fees of
$5.1 million, and an impairment of lease related assets of $3.4 million. General
and administrative expenses as a percentage of net revenues were 27% during the
nine months ended September 30, 2022 compared to 20% during the same period in
2021.

Interest expense and other income (expenses), net

The following table sets forth our interest expense and other income (expense), net, for the periods indicated (in thousands, except percentages):

                                                              Three Months Ended
                                                                 September 30,                                Change
                                                            2022               2021                      $                %
Interest expense, net                                   $   (1,525)         $ (1,633)               $    108              (7) %
Other income (expense), net                                 97,258             8,670                  88,588                n/m
Total interest expense, net and other income (expense),
net                                                     $   95,733          $  7,037                $ 88,696                n/m


                                                        Nine Months Ended September 30,                         Change
                                                            2022                2021                      $                 %
Interest expense, net                                   $   (4,738)         $  (5,263)               $     525             (10) %
Other income (expense), net                                105,247            (66,618)                 171,865                n/m

Total interest expense, net and other income (expense), net

                                                     $  100,509          $ (71,881)               $ 172,390                n/m


______________________________________

*n/m – not significant


Interest expense, net remained relatively flat during the three months ended
September 30, 2022 compared to the same period in 2021, and decreased
$0.5 million, or 10%, during the nine months ended September 30, 2022, compared
to the same period in 2021, primary due to the full redemption of the 2023 notes
in 2021.

Other income (expense), net increased $88.6 million during the three months
ended September 30, 2022 compared to the same period in 2021 primarily due to
the $93.5 million gain on early extinguishment of a portion of the 2026 notes
and $2.3 million increase in interest income partially offset by the absence of
the $7.2 million gain on the sale of the strategic equity investment. Other
income (expense), net increased $171.9 million during the nine months ended
September 30, 2022, compared to the same period in 2021, primarily due to the
$93.5 million gain on early extinguishment of a portion of the 2026 notes, the
absence of the $78.2 million loss on early extinguishment of debt of a portion
of the 2025 notes, the $7.1 million net loss on the change in fair value of
derivative instruments, the $4.6 million gain on foreign currency remeasurement
of purchase consideration related to our acquisition of Busuu, and $1.9 million
increase in interest income partially offset by the absence of the $12.5 million
gain on the sale of the strategic equity investments.

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Benefit from (Provision for) Income Taxes

The following tables show our benefit (provision for) income taxes for the periods indicated (in thousands, except percentages):

                                                    Three Months Ended
                                                      September 30,                        Change
                                                     2022           2021                 $           %
    Benefit from (provision for) income taxes   $    167,264      $ (747)           $ 168,011        n/m


                                                        Nine Months Ended September 30,                        Change
                                                            2022               2021                      $                 %
Benefit from (provision for) income taxes               $  162,987          $ (5,793)               $ 168,780                 n/m


______________________________________

*n/m – not significant

Benefit from (provision for) income taxes decreased $168.0 million and
$168.8 million, during the three and nine months ended September 30, 2022
compared to the same periods in 2021 primarily due to the release of the
valuation allowance against a substantial amount of our U.S. and certain state
jurisdictions deferred tax assets. See Note 12, "Income Taxes," of our
accompanying Notes to Condensed Consolidated Financial Statements included in
Part I, Item 1, "Financial Statements (unaudited)" of this Quarterly Report on
Form 10-Q for additional information.

Cash and capital resources

As of September 30, 2022, our principal sources of liquidity were cash, cash
equivalents, and investments totaling $1.2 billion, which were held for working
capital purposes. The substantial majority of our net revenues are from
e-commerce transactions with students, which are settled immediately through
payment processors, as opposed to our accounts payable, which are settled based
on contractual payment terms with our suppliers.

In June 2022, our board of directors approved a $1.0 billion increase to our
existing securities repurchase program authorizing the repurchase of up to
$2.0 billion of our common stock and/or convertible notes, through open market
purchases, block trades, and/or privately negotiated transactions or pursuant to
Rule 10b5-1 plans, in compliance with applicable securities laws and other legal
requirements. The timing, volume, and nature of the repurchases will be
determined by management based on the capital needs of the business, market
conditions, applicable legal requirements, and other factors. We've entered into
accelerated share repurchase programs to repurchase 19,965,836 shares of our
common stock for $600.0 million and open market repurchases of 1,146,803 shares
of our common stock for $23.1 million. Additionally, we've repurchased
$500.0 million principal amount of the 2026 notes, $100.0 million principal
amount of the 2025 notes, and $57.4 million principal amount of the 2023 notes
in privately-negotiated transactions for aggregate consideration of
$734.4 million. As of September 30, 2022, we had $642.6 million remaining under
the repurchase program, which has no expiration date and will continue until
otherwise suspended, terminated or modified at any time for any reason by our
board of directors.

In February 2021, we completed an equity offering in which we raised net
proceeds of $1,091.5 million, after deducting underwriting discounts and
commissions and offering expenses (2021 equity offering). In August 2020 and
March/April 2019, we closed offerings of our 2026 notes and 2025 notes,
generating net proceeds of approximately $984.1 million and $780.2 million,
respectively, in each case after deducting the initial purchasers' discount and
estimated offering expenses payable by us. The 2026 notes and 2025 notes mature
on September 1, 2026 and March 15, 2025, respectively, unless converted,
redeemed or repurchased in accordance with their terms prior to such dates.

As of September 30, 2022, we have incurred cumulative losses of $72.4 million
from our operations and we may incur additional losses in the future. Our
operations have been financed primarily by our initial public offering of our
common stock (IPO), our 2017 follow-on public offering, our convertible senior
notes offerings, our 2021 equity offering, and cash generated from operations.

Besides the acquisition $500.0 million overall principal amount of the 2026 notes, there have been no material changes in our commitments under contractual obligations, as indicated in part II, point 7 “Management report and analysis of the financial situation and results of ‘operating’ contained in our Annual Report on Form 10-K for the year ended December 31, 2021.

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We believe that our existing sources of liquidity will be sufficient to fund our
operations and debt service obligations for at least the next 12 months. Our
future capital requirements will depend on many factors, including our rate of
revenue growth, our investments in research and development activities, our
acquisition of new products and services, and our sales and marketing
activities. To the extent that existing cash and cash from operations are
insufficient to fund our future activities, we may need to raise additional
funds through public or private equity or debt financing. Additional funds may
not be available on terms favorable to us or at all. If adequate funds are not
available on acceptable terms, or at all, we may be unable to adequately fund
our business plans and it could have a negative effect on our business,
operating cash flows and financial condition.

Most of our cash, cash equivalents, and investments are held in the United
States. As of September 30, 2022, our foreign subsidiaries held an insignificant
amount of cash in foreign jurisdictions. We currently do not intend or foresee a
need to repatriate these foreign funds; however, as a result of the Tax Cuts and
Jobs Act, we anticipate the U.S. federal impact to be minimal if these foreign
funds are repatriated. In addition, based on our current and future needs, we
believe our current funding and capital resources for our international
operations are adequate.

The following table presents our cash flows (in thousands):

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