UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. -2054920549

FORM 10-Q

☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended January 26,April 27, 2019
☐
☐ Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from __________ to __________

Commission File Number 1-9065

ECOLOGY AND ENVIRONMENT INC.
(Exact name of registrant as specified in its charter)

New York 16-0971022
(State or other jurisdiction of incorporation or organization) (IRS Employer Identification Number)
   
368 Pleasant View Drive  
Lancaster, New York 14086
(Address of principal executive offices) (Zip code)

(716)  684-8060
(Registrant'sRegistrant’s telephone number, including area code)

Not Applicable
   (Former(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Sectionsection 12(b) of the Act:Act

Title of each class
Trading
Symbol(s)
Name of each exchange on which registered
Class A Common Stock par value $.01 per shareEEINasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.   Yes ☑ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulations S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).   Yes   ☐  No ☑

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company (as defined in Exchange Act Rule 12b-2). (Check one):

 Large accelerated filer☐Accelerated filer☐
 Non-accelerated filer (Do not check if a smaller reporting company)☐Smaller reporting company☑
  
Emerging growth company☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes   ☐  No  ☑

At April 30,May 31, 2019, 3,110,1303,114,400 shares of Registrant'sRegistrant’s Class A Common Stock (par value $.01) and 1,205,0051,200,735 shares of Registrant’s Class B Common Stock (par value $.01) were outstanding.

EXPLANATORY NOTE REGARDING RESTATEMENTS

As previously disclosed in the Current Report on Form 8-K filed by Ecology and Environment Inc. (“EEI” or the “Company”) with the Securities and Exchange Commission (the “SEC”) on December 12, 2018, the Audit Committee of the Board of Directors (the “Audit Committee”) concluded that the Company’sCompany’s consolidated financial statements and related reports filed with the SEC for periods ended prior to July 31, 2018 should no longer be relied upon due to errors related to accounting for EEI’sEEI’s investment in Gestion Ambiental Consultores S.A. (“GAC”(“GAC”) since 1999.  The Company had previously included GAC’sGAC’s financial statements in consolidated financial statements filed with the SEC prior to July 31, 2018.  In December 2018, the Company determined that, although it had a majority ownership interest in GAC, it did not have a controlling interest in GAC’sGAC’s operations due to lack of continuous control over the activities of GAC’sGAC’s board of directors and senior management team.  As a result, the Company’sCompany’s net investment in GAC should have been accounted for using the equity method of accounting.

The financial statements included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018, as filed with the Securities and Exchange Commission on May 31, 2019,  included a restated consolidated balance sheet at July 31, 2017, and restated consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for the fiscal years ended July 31, 2017 and 2016.  ThisThe unaudited condensed consolidated financial statements included in the Company’s Quarterly Report on Form 10-Q includesfor the fiscal quarter ended October 27, 2018 filed on May 31, 2019 included restated unaudited condensed consolidated statements of operations, comprehensive income and cash flows for the three months ended October 28, 2017.  The unaudited condensed consolidated financial statements included in the Company’s Quarterly Report on Form 10-Q for the fiscal quarter ended January 26, 2019 filed on May 31, 2019 included restated unaudited condensed consolidated statements of operations and comprehensive income for the three and six months ended January 27, 2018 and a restated unaudited condensed consolidated statement of cash flows for the six months ended January 27, 2018.  In addition, tablesThis Quarterly Report on Form 10-Q includes restated unaudited condensed consolidated statements of operations and comprehensive income for the three and nine months ended April 28, 2018 and a restated unaudited condensed consolidated statement of cash flows for the nine months ended April 28, 2018.  Tables related to revenues, operating expenses and income taxes for the three and sixnine months ended January 27,April 28, 2018 included in Item 2 of this Quarterly Report on Form 10-Q have also been restated.

Collectively, the adjustments necessary to deconsolidate GAC’sGAC’s unaudited financial statements and correctly account for the Company’sCompany’s investment in GAC under the equity method of accounting are referred to as the “GAC“GAC Deconsolidation Adjustments.Adjustments.”  In addition to the GAC Deconsolidation Adjustments, previously filed financial statements for the quarterthree and nine months ended OctoberApril 28, 20172018 were also adjusted for correction ofto correct other errors in the financial statements and disclosures that were deemed to be immaterial on an individual basis and in the aggregate for the quarter (the “Out“Out of Period Adjustments”Adjustments”).  Specific impacts of the GAC Deconsolidation Adjustments and Out of Period Adjustments on various financial statement line items are summarized in Note 2 of the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Internal Controls and Disclosure Controls Considerations

In connection with control deficiencies related to the errors outlined above, and other control deficiencies identified by management, our Acting Principal Executive Officer (the “Acting PEO”“Acting PEO”) and Acting Chief Financial Officer (the “Acting CFO”“Acting CFO”) determined that there were deficiencies in our internal control over financial reporting that, in the aggregate, represented material weaknesses at July 31, 2018.  Accordingly, our Acting PEO and Acting CFO have concluded that the Company’sCompany’s disclosure controls and procedures and internal control over financial reporting were not effective at July 31, 2018.  Refer to Part I, Item 4 of this Quarterly Report on Form 10-Q for a description of the control deficiencies identified by management and management’smanagement’s plan to remediate those deficiencies.

Page 2 of 38 of 37
PART I – FINANCIAL INFORMATION

Item 1.Financial Statements

Ecology and Environment Inc.
Condensed Consolidated Balance Sheets
Unaudited
(amounts in thousands, except share data)

 
January 26,
2019
  
July 31,
2018
 
       
April 27,
2019
  
July 31,
2018
 
Assets            
      
Current assets:            
Cash and cash equivalents $11,017  $13,496  
$
9,646
  
$
13,496
 
Investment securities available for sale  1,512   1,497  
1,545
  
1,497
 
Contract receivables, net  25,946   25,615  
24,769
  
25,615
 
Income tax receivable  1,627   1,230  
1,560
  
1,230
 
Other current assets  2,539   1,752   
1,825
   
1,752
 
              
Total current assets  42,641   43,590  
39,345
  
43,590
 
              
Property, buildings and equipment, net of accumulated depreciation of $17,250 and $16,799, respectively  3,589   3,870 
Property, buildings and equipment, net of accumulated depreciation of $16,967 and $16,799, respectively 
3,397
  
3,870
 
Deferred income taxes  788   789  
831
  
789
 
Equity method investment  2,289   2,058  
2,005
  
2,058
 
Other assets  2,222   2,522  
2,491
  
2,522
 
                
Total assets $51,529  $52,829  
$
48,069
  
$
52,829
 
        
Liabilities and Shareholders' Equity        
        
Liabilities and Shareholders’ Equity      
Current liabilities:              
Accounts payable $6,108  $5,635  
$
3,929
  
$
5,635
 
Lines of credit  222   -  
620
  
-
 
Accrued payroll costs  4,915   6,066  
5,097
  
6,066
 
Current portion of long-term debt and capital lease obligations  45   54  
39
  
54
 
Customer deposits
  2,851   3,191  
2,818
  
3,191
 
Other accrued liabilities  1,435   1,382   
1,561
   
1,382
 
              
Total current liabilities  15,576   16,328  
14,064
  
16,328
 
              
Income taxes payable  -   -  
-
  
-
 
Deferred income taxes  -   -  
-
  
-
 
Long-term debt and capital lease obligations  34   54  
23
  
54
 
Commitments and contingencies (Note 13)  -   -  
-
  
-
 
              
Shareholders' equity:        
Shareholders’ equity:      
Preferred stock, par value $.01 per share (2,000,000 shares authorized; no shares issued)  -   -  
-
  
-
 
Class A common stock, par value $.01 per share (6,000,000 shares authorized; 3,102,654 and 3,041,911 shares issued, respectively)  31   30 
Class B common stock, par value $.01 per share; (10,000,000 shares authorized; 1,291,071 and 1,351,814 shares issued, respectively)  13   14 
Class A common stock, par value $.01 per share (6,000,000 shares authorized; 3,188,720 and 3,041,911 shares issued, respectively) 
32
  
30
 
Class B common stock, par value $.01 per share; (10,000,000 shares authorized; 1,205,005 and 1,351,814 shares issued, respectively) 
12
  
14
 
Capital in excess of par value  17,629   17,558  
17,662
  
17,558
 
Retained earnings  20,539   20,973  
18,645
  
20,973
 
Accumulated other comprehensive loss  (1,893)  (1,885) 
(1,879
)
 
(1,885
)
Treasury stock, at cost (Class A common: 13,789 and 15,789 shares, respectively; Class B common: 64,801 shares at both dates)  (884)  (907)
Treasury stock, at cost (Class A common: 78,590 shares and 15,789 shares, respectively; Class B common: 0 shares and 64,801 shares, respectively)  
(884
)
  
(907
)
              
Total Ecology and Environment, Inc. shareholders' equity  35,435   35,783 
Total Ecology and Environment Inc. shareholders’ equity 
33,588
  
35,783
 
Noncontrolling interests  484   664   
394
   
664
 
              
Total shareholders' equity  35,919   36,447 
Total shareholders’ equity  
33,982
   
36,447
 
              
Total liabilities and shareholders' equity $51,529  $52,829 
Total liabilities and shareholders’ equity 
$
48,069
  
$
52,829
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 3 of 38 of 37
Ecology and Environment Inc.
Condensed Consolidated Statements of Operations
Unaudited
(amounts in thousands, except share data)

 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
January 26,
2019
  
January 27,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
                        
Gross revenue $20,252  $21,289  $42,004  $47,394  
$
21,775
  
$
20,677
  
$
63,780
  
$
68,071
 
                            
Cost of professional services and other direct operating expenses  7,774   7,966   15,908   16,584  
8,810
  
7,910
  
24,718
  
24,494
 
Subcontract costs  3,619   4,429   8,193   10,778  
2,992
  
2,640
  
11,185
  
13,418
 
Selling, general and administrative expenses  9,452   9,483   18,652   19,265  
10,504
  
9,949
  
29,156
  
29,213
 
Depreciation and amortization  264   259   541   519   
243
   
282
   
784
   
801
 
                            
(Loss) income from operations  (857)  (848)  (1,290)  248  
(774
)
 
(104
)
 
(2,063
)
 
145
 
                            
Income from equity method investment  171   221   231   239  
64
  
137
  
295
  
376
 
Net interest income (expense)  45   (4)  98   (2) 
32
  
58
  
130
  
56
 
Net foreign exchange gain (loss)  (15)  (25)  8   (20) 
(7
)
 
11
  
2
  
(10
)
Other income (expense)  (19)  12   9   12   
(42
)
  
25
   
(35
)
  
37
 
                            
(Loss) income before income tax provision  (675)  (644)  (944)  477  
(727
)
 
127
  
(1,671
)
 
604
 
Income tax (benefit) provision  (365)  (116)  (519)  317 
Income tax provision (benefit)  
227
   
(38
)
  
(292
)
  
279
 
                            
Net (loss) income  (310)  (528)  (425)  160  
(954
)
 
165
  
(1,379
)
 
325
 
                            
Net loss (income) attributable to noncontrolling interests  1   9   (4)  (91)
Net income attributable to noncontrolling interests  
(76
)
  
(96
)
  
(80
)
  
(187
)
                            
Net (loss) income attributable to Ecology and Environment Inc. $(309) $(519) $(429) $69  
$
(1,030
)
 
$
69
  
$
(1,459
)
 
$
138
 
                            
Net (loss) income per common share: basic and diluted $(0.07) $(0.12) $(0.10) $0.02  
$
(0.24
)
 
$
0.02
  
$
(0.34
)
 
$
0.03
 
                            
Weighted average common shares outstanding: basic and diluted  4,315,135   4,301,604   4,314,543   4,301,604   
4,315,135
   
4,301,604
   
4,314,742
   
4,301,604
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 4 of 38 of 37
Ecology and Environment Inc.
Condensed Consolidated Statements of Comprehensive Income
Unaudited
(amounts in thousands)

 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
January 26,
2019
  
January 27,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
                        
Net (loss) income including noncontrolling interests $(310) $(528) $(425) $160  
$
(954
)
 
$
165
  
$
(1,379
)
 
$
325
 
Foreign currency translation adjustments  47   51   (80)  37  
11
  
(37
)
 
(69
)
 
-
 
Unrealized investment losses, net  -   (13)  -   (16)  
-
   
(10
)
  
-
   
(26
)
                
Comprehensive (loss) income  (263)  (490)  (505)  181  
(943
)
 
118
  
(1,448
)
 
299
 
                
Comprehensive (income) loss attributable to noncontrolling interests  8   (29)  63   (123)  
(73
)
  
(62
)
  
(10
)
  
(185
)
                            
Comprehensive (loss) income attributable to Ecology and Environment, Inc. $(255) $(519) $(442) $58 
Comprehensive (loss) income attributable to Ecology and Environment Inc. 
$
(1,016
)
 
$
56
  
$
(1,458
)
 
$
114
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 5 of 38 of 37
Ecology and Environment Inc.
Condensed Consolidated Statements of Cash Flows
Unaudited
(amounts in thousands)

 Six Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
Cash flows from operating activities:            
Net (loss) income $(425) $160  
$
(1,379
)
 
$
325
 
Adjustments to reconcile net income to net cash provided by operating activities:              
Depreciation and amortization  541   519  
784
  
801
 
Provision for deferred income taxes  (6)  (92) 
(53
)
 
(61
)
Share based compensation expense  127   70  
127
  
94
 
Gain on sale of assets and investment securities  (2)  (1) 
(40
)
 
(19
)
Net provision for (recovery of) contract adjustments  137   (35)
Net bad debt (recovery) expense  (187)  (98)
Net recoveries of contract adjustments 
(2
)
 
(60
)
Net bad debt recoveries 
(96
)
 
(63
)
Changes in:              
- contract receivables  (247)  6,823  
795
  
7,773
 
- other current assets  (916)  (150) 
(216
)
 
72
 
- income tax receivable  (381)  668  
(342
)
 
266
 
- equity method investment  (231)  (239) 
53
  
(376
)
- other non-current assets  277   36  
3
  
254
 
- accounts payable  1,322   (1,485) 
(809
)
 
(2,668
)
- accrued payroll costs  (1,162)  (740) 
(921
)
 
(1,539
)
- income taxes payable  -   302  
-
  
286
 
- customer deposits
  (345)  558  
(331
)
 
636
 
- other accrued liabilities  43   (216)  
210
   
(295
)
Net cash (used in) provided by operating activities  (1,455)  6,080   
(2,217
)
  
5,426
 
              
Cash flows from investing activities:              
Purchase of property, buildings and equipment  (259)  (415) 
(371
)
 
(654
)
Proceeds from sale of equipment  2   1  
69
  
19
 
(Purchase) sale of investment securities  (16)  7   
(24
)
  
(23
)
Net cash used in investing activities  (273)  (407)  
(326
)
  
(658
)
              
Cash flows from financing activities:              
Dividends paid  (863)  (860) 
(1,726
)
 
(1,721
)
Repayment of debt  (29)  (358) 
(43
)
 
(373
)
Net borrowings under lines of credit  210   66 
Net borrowings (repayments) under lines of credit 
632
  
(356
)
Distributions to noncontrolling interests  (116)  (192)  
(177
)
  
(322
)
Net cash used in financing activities  (798)  (1,344)  
(1,314
)
  
(2,772
)
              
Effect of exchange rate changes on cash and cash equivalents  49   5   
(3
)
  
(46
)
              
Net (decrease) increase in cash, cash equivalents and restricted cash  (2,477)  4,334  
(3,860
)
 
1,950
 
Cash, cash equivalents and restricted cash at beginning of period  13,746   13,135   
13,746
   
13,135
 
              
Cash, cash equivalents and restricted cash at end of period $11,269  $17,469  
$
9,886
  
$
15,085
 
              
Supplemental disclosure of cash flow information:              
Cash paid during the period for:              
Interest $8  $31  
$
21
  
$
36
 
Income taxes  300   12  
331
  
87
 
Supplemental disclosure of non-cash items:              
Proceeds from capital lease obligations  -   33  
-
  
59
 

The accompanying notes are an integral part of these condensed consolidated financial statements.

Page 6 of 38 of 37
 Ecology and Environment Inc.
Notes to Condensed Consolidated Financial Statements
Unaudited

1.
Organization and Basis of Presentation

Ecology and Environment Inc., (“EEI”) was incorporated in 1970 as a global broad-based environmental consulting firm whose underlying philosophy is to provide professional services worldwide so that sustainable economic and human development may proceed with acceptable impact on the environment.  During the sixnine months ended January 26,April 27, 2019, EEI and its subsidiaries (collectively, the “Company”) included six active wholly-owned and majority-owned operating subsidiaries located in four countries (the United States of America (the “U.S.”), Brazil, Peru, and Ecuador), and one majority-owned equity investment in Chile.  During the three months ended April 26, 2019, the Company sold its majority interest in its subsidiary in Ecuador, which is not expected to have a material impact on its consolidated results of operations, financial position or cash flows for future reporting periods.  The Company’s staff is comprised of individuals representing numerous scientific, engineering, health, and social disciplines working together in multidisciplinary teams to provide innovative environmental solutions.  The majority of employees hold bachelor’s and/or advanced degrees in such areas as chemical, civil, mechanical, sanitary, soil, structural and transportation engineering, biology, geology, hydrogeology, ecology, urban and regional planning and oceanography.  The Company’s client list includes governments, industries, multinational corporations, organizations, and private companies.

The Company prepared the accompanying unaudited condensed consolidated financial statements pursuant to the rules and regulations of the U.S. Securities and Exchange Commission (the “SEC”).  The financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair presentation of such information.  All such adjustments are of a normal recurring nature.

Although the Company believes that the disclosures are adequate to make the information presented not misleading, certain information and note disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”), including a description of significant accounting policies, have been condensed or omitted pursuant to SEC rules and regulations.  Therefore, these financial statements should be read in conjunction with the consolidated financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018 filed with the SEC (the “2018 Annual Report”).  Other than new or revised accounting policies resulting from the adoption of new accounting pronouncements described in Note 3 of these condensed consolidated financial statements, the accounting policies followed by the Company for preparation of the consolidated financial statements included in the 2018 Annual Report were also followed for this quarterly report.  The condensed consolidated results of operations for the three and sixnine months ended January 26,April 27, 2019 are not necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2019.

2.
Restatement of Unaudited Condensed Consolidated Financial Statements

As previously disclosed in the Current Report on Form 8-K filed by the Company with the SEC on December 12, 2018, the Audit Committee of the Board of Directors (the “Audit Committee”) determined that the Company’sCompany’s previously issued financial statements for quarterly periods prior to July 31, 2018 can no longer be relied upon due to errors related to accounting for EEI’sEEI’s investment in Gestion Ambiental Consultores S.A. (“GAC”(“GAC”) since 1999.  The Company intends to prospectively amend financial statements included in the Company’s Annual Report on Form 10-K for the quartersfiscal year ended October 28,July 31, 2018 included a restated consolidated balance sheet at July 31, 2017, Januaryand restated consolidated statements of operations, comprehensive income, cash flows and shareholders’ equity for the fiscal years ended July 31, 2017 and 2016 (the “Restated Annual Financial Statements”).  The Company’s Quarterly Reports on Forms 10-Q for the periods ended October 27, 2018 and April 28, 2018 when it files its Quarterly Reports on Form 10-Q for the corresponding quarters during the fiscal year ending July 31, 2019.  As a result, the accompanying unaudited condensed consolidated financial statements includeJanuary 26, 2019 included restated unaudited condensed consolidated statements of operations, comprehensive income and cash flows and shareholders’ equity for the fiscal quarterthree months ended October 28, 2017 and the three and six months ended January 27, 2018 (the “Restated Unaudited Condensed Consolidated Financial Statements”).  This Quarterly Report on Form 10-Q includes restated unaudited condensed consolidated statements of operations, comprehensive income and cash flows for the three and nine months ended April 28, 2018.  Tables related to revenues, operating expenses and income taxes for the three and nine months ended April 28, 2018 included in Item 2 of this Quarterly Report on Form 10-Q have also been restated.

The Company had previously included GAC’sGAC’s financial statements in consolidated financial statements filed with the SEC prior to July 31, 2018.  In December 2018, the Company determined that, although it had a majority ownership interest in GAC, it did not have a controlling interest in GAC’sGAC’s operations due to lack of continuous control over the activities of GAC’sGAC’s board of directors and senior management team.  As a result, the Company’sCompany’s net investment in GAC should have been accounted for using the equity method of accounting.

Page 7 of 38
Collectively, the adjustments necessary to deconsolidate GAC’sGAC’s unaudited financial statements and correctly account for the Company’sCompany’s investment in GAC under the equity method of accounting are referred to as the “GAC“GAC Deconsolidation Adjustments.Adjustments.”  For the three months ended January 27,April 28, 2018, the GAC Deconsolidation Adjustments resulted in decreases of $3.2$2.8 million, $0.3 million and $0.3less than $0.1 million in consolidated gross revenue, and income before income tax provision respectively, and had no impact on net income attributable to EEI.EEI, respectively.  For the sixnine months ended January 27,April 28, 2018, the GAC Deconsolidation Adjustments resulted in decreases of $5.3$8.1 million, $0.7 million and $0.4less than $0.1 million in consolidated gross revenue, and income before income tax provision and had no impact on net income attributable to EEI.EEI, respectively.

Page 7 of 37
In addition to the GAC Deconsolidation Adjustments, previously filed financial statements for the quarterthree and sixnine months ended OctoberApril 28, 20172018 were also adjusted for correction ofto correct other errors in the financial statements and disclosures that were deemed to be immaterial on an individual basis and in the aggregate for those reporting periods (the “Out“Out of Period Adjustments”Adjustments”).  For the three months ended January 27,April 28, 2018, the Out of Period Adjustments resulted in decreases of $0.6$0.2 million, and less than $0.1 million and $0.1 million of consolidated gross revenue, and income before income tax provision respectively, and an increase of $0.2 million of net income attributable to EEI.EEI, respectively.  For the sixnine months ended January 27,April 28, 2018, the Out of Period Adjustments resulted in increases of $0.5$0.3 million, less than $0.1 million and $0.3 million of consolidated gross revenue, income before income tax provision and net income attributable to EEI, respectively.respectively.

The “As Previously Reported” amounts in the tables below represent the amounts reported in the Company’s Quarterly Report on Form 10-Q for the quarterly period ended January 26,April 28, 2018, filed with the SEC on March 13,June 12, 2018.

Page 8 of 38
Ecology and Environment Inc.
Condensed Consolidated Statements of Operations
(amounts in thousands, except share data)


 Three Months Ended January 27, 2018  Three Months Ended April 28, 2018 
 
As
Previously
Reported
  
GAC
Deconsolidation
Adjustments
  
Out of Period
Adjustments
  Restated  
As
Previously
Reported
  
GAC
Deconsolidation
Adjustments
  
Out of Period
Adjustments
  Restated 
                        
Gross revenue $25,083  $(3,154) $(640) $21,289  
$
23,728
  
$
(2,828
)
 
$
(223
)
 
$
20,677
 
                            
Direct cost of professional services and other direct operating expenses  9,078   (1,112)  -   7,966  
8,793
  
(883
)
 
-
  
7,910
 
Subcontract costs  5,769   (731)  (609)  4,429  
3,585
  
(733
)
 
(212
)
 
2,640
 
Selling, general and administrative expenses  10,228   (745)  -   9,483  
10,700
  
(751
)
 
-
  
9,949
 
Depreciation and amortization  268   (9)  -   259   
291
   
(9
)
  
-
   
282
 
                            
Income (loss) from operations  (260)  (557)  (31)  (848) 
359
  
(452
)
 
(11
)
 
(104
)
                            
Income from equity method investment  -   221   -   221  
-
  
137
  
-
  
137
 
Net interest income (expense)  (9)  5   -   (4) 
52
  
6
  
-
  
58
 
Net foreign exchange (loss) gain  (29)  4   -   (25) 
15
  
(4
)
 
-
  
11
 
Other income (expense)  12   -   -   12   
24
   
1
   
-
   
25
 
                            
Income (loss) before income tax provision  (286)  (327)  (31)  (644) 
450
  
(312
)
 
(11
)
 
127
 
Income tax provision  311   (148)  (279)  (116)  
43
   
(121
)
  
40
   
(38
)
                            
Net (loss) income  (597)  (179)  248   (528) 
407
  
(191
)
 
(51
)
 
165
 
                            
(Income) loss attributable to noncontrolling interests  (171)  179   1   9   
(243
)
  
147
   
-
   
(96
)
                            
Net (loss) income attributable to Ecology and Environment Inc. $(768) $-  $249  $(519) 
$
164
  
$
(44
)
 
$
(51
)
 
$
69
 
                            
Net (loss) income per common share: basic and diluted $(0.18)         $(0.12) 
$
0.04
        
$
0.02
 
                            
Weighted average common shares outatanding: basic and diluted  4,301,604           4,301,604   4,301,604         4,301,604 

Page 8Page 9 of 38 of 37

 Six Months Ended January 27, 2018  Nine Months Ended April 28, 2018 
 
As
Previously
Reported
  
GAC
Deconsolidation
Adjustments
  
Out of Period
Adjustments
  Restated  
As
Previously
Reported
  
GAC
Deconsolidation
Adjustments
  
Out of Period
Adjustments
  Restated 
                        
Gross revenue $52,165  $(5,266) $495  $47,394  
$
75,892
  
$
(8,093
)
 
$
272
  
$
68,071
 
                            
Direct cost of professional services and other direct operating expenses  18,559   (1,975)
  -   16,584  
27,352
  
(2,858
)
 
-
  
24,494
 
Subcontract costs  11,498   (1,190)
  470   10,778  
15,082
  
(1,921
)
 
257
  
13,418
 
Selling, general and administrative expenses  20,737   (1,472)
  -   19,265  
31,438
  
(2,225
)
 
-
  
29,213
 
Depreciation and amortization  537   (18)
  -   519   
827
   
(26
)
  
-
   
801
 
                            
Income (loss) from operations  834   (611)  25   248  
1,193
  
(1,063
)
 
15
  
145
 
                            
Income from equity method investment  -   239   -   239  
-
  
376
  
-
  
376
 
Net interest income (expense)  (14)  12   -   (2) 
39
  
17
  
-
  
56
 
Net foreign exchange (loss) gain  (26)  6   -   (20) 
(12
)
 
2
  
-
  
(10
)
Other income (expense)  12   -   -   12   
36
   
1
   
-
   
37
 
                            
Income (loss) before income tax provision  806   (354)  25   477  
1,256
  
(667
)
 
15
  
604
 
Income tax provision  755   (160)  (278)  317   
797
   
(280
)
  
(238
)
  
279
 
                            
Net (loss) income  51   (194)  303   160  
459
  
(387
)
 
253
  
325
 
                            
(Income) loss attributable to noncontrolling interests  (286)  194   1   (91)  
(530
)
  
342
   
1
   
(187
)
                            
Net (loss) income attributable to Ecology and Environment Inc. $(235) $-  $304  $69  
$
(71
)
 
$
(45
)
 
$
254
  
$
138
 
                            
Net (loss) income per common share: basic and diluted $(0.05)         $0.02  
$
(0.02
)
       
$
0.03
 
                            
Weighted average common shares outatanding: basic and diluted  4,301,604           4,301,604   4,301,604         4,301,604 

Page 9 of 37
Ecology and Environment Inc.
Condensed Consolidated Statements of Comprehensive Income
(amounts in thousands)

  Three Months Ended January 27, 2018 
  
As
Previously
Reported
  
GAC
Deconsolidation
Adjustments
  
Out of Period
Adjustments
  Restated 
             
Net income including noncontrolling interests $(597) $(179) $248  $(528)
Foreign currency translation adjustments  166   (115)  -   51 
Unrealized investment (losses) gains, net  (13)  -   -   (13)
                 
Comprehensive income  (444)  (294)  248   (490)
Comprehensive (income) loss attributable to noncontrolling interests  (264)  235   -   (29)
                 
Comprehensive income attributable to EEI $(708) $(59) $248  $(519)

 Six Months Ended January 27, 2018  Three Months Ended April 28, 2018 
 
As
Previously
Reported
  
GAC
Deconsolidation
Adjustments
  
Out of Period
Adjustments
  Restated  
As
Previously
Reported
  
GAC
Deconsolidation
Adjustments
  
Out of Period
Adjustments
  Restated 
                        
Net income including noncontrolling interests $51  $(194) $303  $160  $407  $(191) $(51) $165 
Foreign currency translation adjustments  195   (158)  -   37  (1) (36) -  (37)
Unrealized investment (losses) gains, net  (16)  -   -   (16)  (10)  -   -   (10)
                            
Comprehensive income  230   (352)  303   181  396  (227) (51) 118 
Comprehensive (income) loss attributable to noncontrolling interests  (393)  270   -   (123)  (209)  147   -   (62)
                            
Comprehensive income attributable to EEI $(163) $(82) $303  $58  $187  $(80) $(51) $56 

Page 10 of 38
  Nine Months Ended April 28, 2018 
  
As
Previously
Reported
  
GAC
Deconsolidation
Adjustments
  
Out of Period
Adjustments
  Restated 
             
Net income including noncontrolling interests $459  $(387) $253  $325 
Foreign currency translation adjustments  194   (194)  -   - 
Unrealized investment (losses) gains, net  (26)  -   -   (26)
                 
Comprehensive income  627   (581)  253   299 
Comprehensive (income) loss attributable to noncontrolling interests  (603)  418   -   (185)
                 
Comprehensive income attributable to EEI $24  $(163) $253  $114 

Page 11 of 38 of 37
Ecology and Environment Inc.
Condensed Consolidated Statement of Cash Flows
(amounts in thousands)

 Six Months Ended January 27, 2018 
 
As
Previously
Reported
  
Impact of
GAC
Deconsolidation
  
Other
Adjustments
  Restated  Nine Months Ended April 28, 2018 
             
As
Previously
Reported
  
Impact of
GAC
Deconsolidation
  
Other
Adjustments
  Restated 
Cash flows from operating activities:                        
Net income $51  $(194) $303  $160  $459  $(387) $253  $325 
Adjustments to reconcile net income to net cash provided by operating activities:                            
Depreciation and amortization  537   (18)  -   519  827  (26) -  801 
Provision for deferred income taxes  436   (266)  (262)  (92) 380  (599) 158  (61)
Share based compensation expense  -   -   70   70  -  -  94  94 
(Gain) loss on sale of assets and investment securities  (1)  -   -   (1)
Net recovery of contract adjustments  (35)  -   -   (35)
Net bad debt (recovery) expense  (130)  32   -   (98)
Gain on sale of assets and investment securities (19) -  -  (19)
Net recoveries of contract adjustments (60) -  -  (60)
Net bad debt recoveries (96) 33  -  (63)
Changes in:                            
- contract receivables  7,248   261   (686)  6,823  8,063  175  (465) 7,773 
- other current assets  (300)  5   145   (150) (46) (5) 123  72 
- income tax receivable  543   142   (17)  668  275  387  (396) 266 
- equity method investment  -   (239)  -   (239) -  (376) -  (376)
- other non-current assets  60   (13)  (11)  36  (54) 296  12  254 
- accounts payable  (1,996)  69   442   (1,485) (2,784) (117) 233  (2,668)
- accrued payroll costs  (640)  (100)  -   (740) (1,409) (130) -  (1,539)
- income taxes payable  294   8   -   302  285  1  -  286 
- customer deposits  506   52   -   558  505  131  -  636 
- other accrued liabilities  (250)  34   -   (216)  (601)  306   -   (295)
Net cash provided by (used in) operating activities  6,323   (227)  (16)  6,080 
Net cash provided by used in operating activities  5,725   (311)  12   5,426 
                            
Cash flows from investing activities:                            
Purchase of property, building and equipment  (425)  10   -   (415) (702) 48  -  (654)
Proceeds from sale of building and equipment  1   -   -   1  19  -  -  19 
Purchase of investment securities  7   -   -   7   (23)  -   -   (23)
Net cash (used in) provided by investing activities  (417)  10   -   (407)
Net cash used in investing activities  (706)  48   -   (658)
                            
Cash flows from financing activities:                            
Dividends paid  (860)  -   -   (860) (1,721) -  -  (1,721)
Repayment of debt  (358)  -   -   (358) (373) -  -  (373)
Net borrowings (repayment) of lines of credit  (152)  218   -   66  (577) 221  -  (356)
Distributions to noncontrolling interests  (192)  -   -   (192)  (322)  -   -   (322)
Net cash (used in) provided by financing activities  (1,562)  218   -   (1,344)
Net cash used in financing activities  (2,993)  221   -   (2,772)
                            
Effect of exchange rate changes on cash and cash equivalents  20   (24)  9   5   38   (71)  (13)  (46)
                            
Net increase (decrease) in cash, cash equivalents and restricted cash  4,364   (23)  (7)  4,334 
Net increase in cash, cash equivalents and restricted cash 2,064  (113) (1) 1,950 
Cash, cash equivalents and restricted cash at beginning of period  13,343   (208)  -   13,135   13,343   (208)  -   13,135 
                            
Cash, cash equivalents and restricted cash at end of period $17,707  $(231) $(7) $17,469  $15,407  $(321) $(1) $15,085 

3.
Recent Accounting Pronouncements

The Financial Accounting Standards Board (“FASB”) establishes changes to U.S. GAAP in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”).  The Company considers the applicability and impact of all ASUs when they are issued by FASB.  ASUs listed below were either adopted by the Company during its current fiscal year, or will be adopted as each ASU becomes effective during future reporting periods.  ASUs not listed below were assessed to be not applicable to the Company’s operations or are expected to have minimal impact on the Company’s consolidated financial position or results of operations.

Page 11Page 12 of 38 of 37
Accounting Pronouncements Adopted During the SixNine Months Ended January 26,April 27, 2019

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09, as amended by subsequent ASUs that amended and clarified the guidance in ASU 2014-09, forms the basis for FASB ASC Topic 606 (“ASC Topic 606”), which superseded previous authoritative U.S. GAAP guidance regarding revenue recognition.  The Company adopted ASC Topic 606 effective August 1, 2018.  Refer to Note 67 of these condensed consolidated financial statements for additional disclosures regarding the Company’s adoption of ASC Topic 606.

In January 2016, FASB issued ASU No. 2016-01, Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities (“ASU 2016-01”).  The amendments in ASU 2016-01 address certain aspects of recognition, measurement, presentation and disclosure of financial instruments.  In February 2018, FASB issued ASU 2018-03, Technical Corrections and Improvements to Financial Instruments – Overall (Subtopic 825-10) – Recognition and Measurement of Financial Assets and Financial Liabilities, which clarified certain aspects of the guidance issued in ASU 2016-01.  Under the new guidance, entities are no longer able to classify equity investments as either trading or available for sale (“AFS”), and may no longer recognize unrealized holding gains and losses in other comprehensive income on equity securities that were classified as AFS under previous U.S. GAAP.  The Company adopted the applicable provisions of ASU 2016-01 effective August 1, 2018 by recording a cumulative effect adjustment of less than $0.1 million to beginning retained earnings and beginning accumulated other comprehensive income on the condensed consolidated balance sheets.  The cumulative effect adjustment is also separately reported on the condensed consolidated statements of shareholders’ equity.

In August 2016, FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230) – Classification of Certain Cash Receipts and Cash Payments (“ASU 2016-15”).  The amendments included in this update provide guidance regarding eight specific cash flow classification issues that are not specifically addressed in previous U.S. GAAP, only one of which was deemed applicable to the Company’s cash flow reporting.  Issue 6 of ASU 2016-15 requires that reporting entities elect an accounting policy to classify distributions received from equity method investees using one of two possible approaches:

the “cumulative earnings approach,” under which, subject to certain limitations, distributions received from equity investees are considered returns on investment and classified as cash inflows from operating activities; or
the “nature of the distribution approach,” under which distributions received from equity investees should be classified on the basis of the nature of the activity or activities of the investee that generated the distribution as either a return on investment (classified as a cash inflow from operating activities) or a return of investment (classified as a cash inflow from investing activities).

The Company adopted the provisions of ASU 2016-15 effective August 1, 2018 and elected the “cumulative earnings approach.”
The Company received $0.2 million of dividends from its equity method investee during the sixnine months ended January 26,April 27, 2019 that are included in cash flows from operating activities.

Accounting Pronouncements Not Yet Adopted as of January 26,April 27, 2019

In March 2016, FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”).  The main difference between previous U.S. GAAP and ASU 2016-02, as amended by subsequent ASUs that amended and clarified the guidance in ASU 2016-02, is the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous U.S. GAAP.  ASU 2016-02 provides specific guidance for determining whether a contractual arrangement contains a lease, lease classification by lessees and lessors, initial and subsequent measurement of leases by lessees and lessors, sale and leaseback transactions, transition, and financial statement disclosures.  ASU 2016-02 requires entities to use a modified retrospective approach to apply its guidance, and includes a number of optional practical expedients that entities may elect to apply.  ASU 2016-02 will be effective for the Company beginning August 1, 2019.  Management is currently assessing the provisions of ASU 2016-02.  The Company anticipates that adoption of ASU 2016-02 will result in the addition of material right-of-use assets and lease liabilities to the Company’s consolidated balance sheet in addition to expanding required disclosures.  Management has not yet estimated the impact of ASU 2016-02 on the Company’s consolidated statements of operations and cash flows.

In June 2016, FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (Topic 326) (“ASU 2016-13”).  The amendments included in this update affect entities holding financial assets, including trade receivables and investment securities available for sale, that are not accounted for at fair value through net income.  ASU 2016-13, as amended by subsequent updates that amended and clarified the guidance in ASU 2016-13, requires a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected.  The amendments included in this update also provide guidance for measurement of expected credit losses and for presentation of increases or decreases of expected credit losses on the statement of operations.  ASU No. 2016-13 will be effective for the Company beginning August 1, 2020.  Early adoption is permitted for the Company beginning August 1, 2019.  Management is currently assessing the provisions of ASU 2016-13 and has not yet estimated its impact on the Company’s consolidated financial statements.

Page 12Page 13 of 38 of 37
In January 2017, FASB issued ASU No. 2017-04, Intangibles – Goodwill and Other (Topic 350) – Simplifying the Test for Goodwill Impairment (“ASU 2017-04”).  The amendments included in this update simplify the subsequent measurement of goodwill by revising the steps required during the registrant’s annual goodwill impairment test.  This accounting standard update will be effective for the Company beginning August 1, 2021.  Management is currently assessing the provisions of ASU 2017-04 and has not yet estimated its impact on the Company’s consolidated financial statements.

4.
Significant Transactions During the Three Months Ended April 27, 2019

Staff Reduction Programs

In December 2018, the Company began to notify employees of a voluntary retirement program.  In February 2019, the Company began to notify affected employees of an involuntary separation program.  These programs (collectively, the “Staff Reduction Programs”), which are being implemented in connection with a corporate restructuring plan within the Company’s U.S. operating segment, were substantially completed by April 27, 2019 and are expected to be completed by July 31, 2019. Company management anticipates that the combined effect of the Staff Reduction Programs and other expense reduction initiatives will result in annual pre-tax cost savings of greater than $6.0 million.  During the three months ended April 27, 2019, the Company recorded and paid approximately $0.8 million of employee severance and termination expenses related to the Staff Reduction Programs, which was reported in selling, general and administrative expenses on the condensed consolidated statements of operations.  The Company expects to record additional severance expense of approximately $0.1 million during the three months ended July 31, 2019 in connection with the Staff Reduction Programs.

Expenses Associated with Restatements of Financial Statements

As described above, the Company restated its audited consolidated financial statements for the fiscal years ended July 31, 2016 and 2017 and unaudited condensed consolidated financial statements for the quarters ended October 28, 2017, January 27, 2018 and April 28, 2018.  Financial data included in tables and various accounting policies and commentaries included in the Company’s Restated 2019 Annual Report and Restated 2019 Quarterly Reports were also restated or otherwise revised.  These restatements required extensive internal and external resources to complete, including significant incremental fees paid to the Company’s independent auditors, tax consultants and external legal counsel.  The Company’s U.S. operating segment recorded incremental audit, tax and legal expenses of $0.9 million in selling, general and administrative expenses on the condensed consolidated statements of operations during the nine months ended April 27, 2019, $0.6 million of which was recorded during the three months ended April 27, 2019.

5.
Cash, Cash Equivalents and Restricted Cash

Cash, cash equivalents and restricted cash balances are summarized in the following table.

 Balance at  
April 27,
2019
  
July 31,
2018
 
 
January 26,
2019
  
July 31,
2018
  (in thousands) 
 (in thousands)    
Cash and cash equivalents $11,017  $13,496  $9,646  $13,496 
Restricted cash included in other assets  252   250   240   250 
Total cash, cash equivalents and restricted cash $11,269  $13,746  $9,886  $13,746 

The Company considers all liquid instruments purchased with a maturity of three months or less to be cash equivalents.  Money market funds of less than $0.1 million and $0.4 million were included in cash and cash equivalents at January 26,April 27, 2019 and July 31, 2018, respectively.  Restricted cash included in other assets represents collateral for pending litigation matters in Brazil that are not expected to be resolved within one year from the balance sheet date.

5.6.
Fair Value of Financial Instruments

The Company’s financial assets or liabilities are measured using inputs from the three levels of the fair value hierarchy.  The Company classifies assets and liabilities within the fair value hierarchy based on the lowest level of any input that is significant to the fair value measurement.  Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs.  The Company has not elected a fair value option on any assets or liabilities. The three levels of the hierarchy are as follows:

Level 1 Inputs – Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Generally, this includes debt and equity securities and derivative contracts that are traded on an active exchange market (e.g., New York Stock Exchange) as well as certain U.S. Treasury and U.S. Government and agency mortgage-backed securities that are highly liquid and are actively traded in over-the-counter markets.

Page 14 of 38
Level 2 Inputs – Quoted prices for similar assets or liabilities in active markets; quoted prices for identical or similar assets or liabilities in inactive markets; or valuations based on models where the significant inputs are observable (e.g., interest rates, yield curves, credit risks, etc.) or can be corroborated by observable market data.

Level 3 Inputs – Valuations based on models where significant inputs are not observable.  The unobservable inputs reflect the Company’s own assumptions about the assumptions that market participants would use.

The Company monitors the availability of observable market data to assess the appropriate classification of financial instruments within the fair value hierarchy.  Changes in economic conditions or model-based valuation techniques may require the transfer of financial instruments from one fair value level to another.  In such instances, the Company reports the transfer as of the beginning of the reporting period.  The Company evaluated the significance of transfers between levels based upon the nature of the financial instrument.  There were no transfers in or out of levels 1, 2 or 3, respectively, during the sixnine months ended JanuaryApril 27, 20182019 or the fiscal year ended July 31, 2017.2018.

The carrying amount of cash, cash equivalents and restricted cash approximated fair value at January 26,April 27, 2019 and July 31, 2018.  These assets were classified as level 1 instruments at both dates.

Investment securities available for sale of $1.5 million at January 26,April 27, 2019 and July 31, 2018 primarily included mutual funds invested in U.S. municipal bonds, which the Company may immediately redeem without prior notice.  These mutual funds are valued at the net asset value (“NAV”) of shares held by the Company at period end as a practical expedient to estimate fair value.  These mutual funds are deemed to be actively traded, are required to publish their daily NAV and are required to transact at that price.

Page 13 of 37
Prior to August 1, 2018, unrealized gains or losses related to investment securities available for sale were recorded in the consolidated balance sheets and statements of comprehensive income.  Subsequent to adoption of ASU 2016-01 effective August 1, 2018 (refer to Note 3 of these condensed consolidated financial statements), unrealized gains or losses related to investment securities available for sale are recorded in the consolidated statements of operations.  The cost basis of securities sold is based on the specific identification method.  The Company did not record any sales of investment securities during the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018.

Long-term debt consists of bank loans and capitalized equipment leases.  Lines of credit consist of borrowings for working capital requirements.  Based on the relative immateriality of consolidated debt and line of credit borrowings, management believes that the carrying amount of these liabilities approximated fair value at January 26,April 27, 2019 and July 31, 2018.  These liabilities were classified as level 2 instruments at both dates.

There were no financial instruments classified as level 3 at January 26,April 27, 2019 and January 27,July 31, 2018.

6.7.
Revenue and Contract Receivables, net

Adoption of ASC Topic 606

The Company adopted ASC Topic 606 effective August 1, 2019.2018.  Gross revenue for reporting periods beginning after July 31, 2018 is recognized under ASC Topic 606.  Gross revenue for previous reporting periods was recognized in accordance with historic accounting under U.S. GAAP, as summarized in revenue recognition policies included in the Company’s 2018 Annual Report.

The Company adopted ASC Topic 606 using the modified retrospective method.  As a practical expedient allowed under ASC Topic 606, the Company applied the new guidance only to contracts that were not completed as of the date of initial application.  The Company did not record any cumulative effect adjustment to retained earnings as of August 1, 2019,2018, and did not record any material adjustment to gross revenue for the three or sixnine months ended January 26,April 27, 2019 as a result of applying the guidance in ASC Topic 606.

Revenue Recognition under ASC Topic 606

The Company recognizes substantially all of its revenue from the sale of labor hours under environmental consulting contracts.  Revenue reflected in the Company'sCompany’s consolidated statements of operations represents services rendered for which the Company maintains a primary contractual relationship with its customers.  Included in revenue are certain services outside the Company'sCompany’s normal operations that the Company has elected to subcontract to other contractors.

Page 15 of 38
In accordance with ASC Topic 606, the Company identifies a contract with a customer, identifies the performance obligations in the contract, determines the transaction price, allocates the transaction price to each performance obligation in the contract and recognizes revenue when (or as) the Company satisfies a performance obligation.  The Company recognizes the vast majority of its contractual revenue over time, as services are rendered and performance obligations are satisfied, because of the continuous transfer of control to the customer, and because the Company generally maintains the right to remuneration for efforts already expended under its contracts even if a customer terminates the contract.  The Company'sCompany’s contracts with customers generally include payment terms that range from 30-90 days from the billing date.


A performance obligation is a promise in a contract to transfer a distinct good or service to the customer, and is the unit of account for revenue recognition.  The Company allocates a contract’s transaction price to each distinct performance obligation and recognizes revenue when, or as, the performance obligation is satisfied.  Predominantly, the Company’s contracts have a single performance obligation because the promise to transfer the individual goods or services is not separately identifiable from other promises in the contracts.

The Company performs its consulting work under a mix of time and materials, fixed price and cost-plus contracts.  The Company accounts for time and material contracts over the period of performance, predominately based on labor hours incurred.  Under these types of contracts, there is no predetermined fee.  Instead, the Company negotiates hourly billing rates and charges the clients based upon actual hours expended on a project.  In addition, any direct project expenditures are passed through to the client and are typically reimbursed.  Time and materials contracts may contain “not to exceed” provisions that effectively cap the amount of revenue that the Company can bill to the client.  In order to record revenue that exceeds the billing cap, the Company must obtain approval from the client for expanded scope or increased pricing.

The Company recognizes revenue under fixed price contracts using the proportional performance method, under which progress is determined based on the ratio of efforts expended to date in proportion to total efforts expected to be expended over the life of a contract.  The proportional performance method requires the use of estimates and judgment regarding a project’s expected revenue and the extent of progress towards completion.  The Company makes periodic estimates of progress towards project completion by analyzing efforts expended to date, plus an estimate of the amount of efforts to expend that we expect to incur until the completion of the project.  Revenue is then calculated on a cumulative basis (project-to-date) as the proportion of efforts-expended.  The revenue for the current period is calculated as cumulative revenue less project revenue already recognized.  If an estimate of efforts expended at completion on any contract indicates that a loss will be incurred, the entire estimated loss is charged to operations in the period the loss becomes evident.

Cost-plus contracts provide for payment of allowable incurred costs, to the extent prescribed in the contract, plus fees that we record as revenue.  These contracts establish an estimate of total cost and an invoicing ceiling that the contractor may not exceed without the approval of the client.  Revenue earned from cost-plus contracts is recognized over the period of performance.

Substantially all of the Company'sCompany’s cost-plus contracts are with federal governmental agencies and, as such, are subject to audits after contract completion.  Government audits have been completed and final rates have been negotiated through fiscal year 2014.  The Company recorded an allowance for potential disallowances resulting from government audits of $0.7 million in other accrued liabilities at January 26,April 27, 2019 and July 31, 2018.  Adjustments to allowances for project disallowances are recorded as adjustments to revenue when the amounts are estimable.  Resolution of these amounts is dependent upon the results of government audits and other formal contract closeout procedures.

Contract modifications are common in the performance the Company’s contracts, and typically result from changes in scope, specifications, design, performance, sites, or period of completion.  In most cases, contract modifications are for services that are not distinct, and, therefore, are accounted for as part of the existing contract.  Revenue is recognized on contract modifications when it is probable that the modification will be approved and the amount can be reasonably estimated.

Cost of professional services and other direct operating expenses, which includes employee labor and fringe expenses and out of pocket expenses such as travel, meals and field supplies, represent costs incurred in connection with revenue recognized under client contracts. Sales and cost of sales recognized by the Company’s South American operations exclude value added tax (VAT) assessments by governmental authorities, which the Company collects from its customers and remits to governmental authorities.

The Company expenses all bid and proposal and other pre-contract costs as incurred.

Page 14Page 16 of 38 of 37
Contract Receivables, net and Contract Assets

Contract receivables, net are summarized in the following table.

 
January 26,
2019
  
July 31,
2018
  
April 27,
2019
  
July 31,
2018
 
 (in thousands)  (in thousands) 
Contract Receivables:            
Billed $12,578  $12,905  $12,616  $12,905 
Unbilled  14,602   13,994   13,324   13,994 
Total contract receivables  27,180   26,899  25,940  26,899 
Allowance for doubtful accounts  (1,234)  (1,284)  (1,171)  (1,284)
Contract receivables, net $25,946  $25,615  $24,769  $25,615 

Billed contract receivables represent amounts billed to clients in accordance with contracted terms but not collected as of the end of the reporting period.  Billed contract receivables may include: (i) amounts billed for revenue from efforts expended and fees earned in accordance with contractual terms; and (ii) progress billings in accordance with contractual terms that include revenue not yet earned as of the end of the reporting period.  The Company anticipates that substantially all billed contract receivables will be collected over the next twelve months.  Billed contract receivables included contractual retainage balances of $0.8 million and $1.4 million at January 26,April 27, 2019 and July 31, 2018, respectively.

Unbilled contract receivables, which represent an unconditional right to payment subject only to the passage of time, represent amounts billable to clients in accordance with contracted terms that have not been billed as of the end of the reporting period.  Unbilled contract receivables that are not expected to be billed and collected within one year from the balance sheet date are reported in other assets on the condensed consolidated balance sheets.

The Company reduces contract receivables by recording an allowance for doubtful accounts to account for the estimated impact of collection issues resulting from a client’s inability or unwillingness to pay valid obligations to the Company.  The resulting provision for doubtful accounts is recorded within selling, general and administrative expenses on the condensed consolidated statements of operations.

The Company may record contract assets for the right to receive consideration from customers when that right is conditional based on future performance under a contract.  Contract assets are transferred to billed contract receivables when the right to consideration becomes unconditional.  The Company did not record any contract assets at January 26,April 27, 2019 or July 31, 2018.

At January 26,April 27, 2019 and July 31, 2018, management identified $0.3 million and $0.5 million, respectively, of contract receivables, net of related allowance for doubtful accounts, which are not expected to be collected within one year.  These receivable balances are included in other assets on the accompanying condensed consolidated balance sheets.

Page 15 of 37
Allowance for Doubtful Accounts

Activity within the allowance for doubtful accounts is summarized in the following table.

 Three Months Ended  Six Months Ended  Three Months Ended Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
January 26,
2019
  
January 27,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
 (in thousands)  (in thousands) 
                        
Balance at beginning of period $1,300  $2,033  $1,284  
$
2,044  $1,234  
$
1,902  $1,284  $2,044 
Provision for doubtful accounts during the period  54   59   70   92  89  154  159  246 
Write-offs and recoveries of allowance recorded in prior periods  (120)  (190)  (120)  (234)  (152)  
(444
)
  (272)  (678)
Balance at end of period $1,234  $1,902  $1,234  
$
1,902  $1,171  
$
1,612  $1,171  $1,612 

Page 17 of 38
Contract Receivable Concentrations

Contract receivables and the allowance for doubtful accounts are summarized in the following table.

 January 26, 2019  July 31, 2018  April 27, 2019  
July 31, 2018
Restated
 
 
Total Billed
and Unbilled
Contract
Receivables
  
Allowance
for Doubtful
Accounts
  
Total Billed
and Unbilled
Contract
Receivables
  
Allowance
for Doubtful
Accounts
  
Total Billed
and Unbilled
Contract
Receivables
  
Allowance
for Doubtful
Accounts
  
Total Billed
and Unbilled
Contract
Receivables
  
Allowance
for Doubtful
Accounts
 
 (in thousands)  (in thousands) 
                        
U.S. operations $22,171  $539  $21,580  $569  $20,340  $505  $21,580  $569 
South American operations  5,009   695   5,319   715   5,600   666   5,319   715 
Totals $27,180  $1,234  $26,899  $1,284  $25,940  $1,171  $26,899  $1,284 

The allowance for doubtful accounts for the Company’s South American operations represented 14%12% of related contract receivables at January 26,April 27, 2019 compared to 2% for the Company’s U.S. operations.  Unstable local economies that adversely impacted certain of our South American clients in recent years demonstrated signs of stabilizing during fiscal year 2018.  Management continues to monitor trends and events that may adversely impact the realizability of recorded receivables from our South American clients.

Page 16 of 37
Disaggregation of Revenues

The following table provides a summary of the Company’s gross revenue, disaggregated by operating segment and contract type.

 Three Months Ended  Six Months Ended 
 
January 26,
2019
  
January 27, 2018
(Restated)
  
January 26,
2019
  
January 27, 2018
(Restated)
  Three Months Ended  Nine Months Ended 
             
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
Gross revenue from time and materials contracts:           Gross revenue from time and materials contracts:          
U.S. operations $9,732  $8,837  $18,988  $18,788  $10,699  $10,038  $29,689  $28,826 
South American operations  -   -   -   -   -   -   -   - 
Total gross revenue from time and materials contracts $9,732  $8,837  $18,988  $18,788  $10,699  $10,038  $29,689  $28,826 
                            
Gross revenue from fixed price contracts:                            
U.S. operations $5,803  $2,758  $9,415  $7,088  $2,888  $3,248  $9,445  $10,336 
South American operations  1,091   4,905   4,832   10,175   4,840   4,112   12,530   14,287 
Total gross revenue from fixed price contracts $6,894  $7,663  $14,247  $17,263  $7,728  $7,360  $21,975  $24,623 
                            
Gross revenue from cost-plus contracts:                            
U.S. operations $3,626  $4,789  $8,768  $11,343  $3,348  $3,279  $12,116  $14,622 
South American operations  -   -   1   -   -   -   -   - 
Total gross revenue from cost-plus contracts $3,626  $4,789  $8,769  $11,343  $3,348  $3,279  $12,116  $14,622 
                            
Gross revenue from all contracts:                            
U.S. operations $19,161  $16,384  $37,171  $37,219  $16,935  $16,565  $51,250  $53,784 
South American operations  1,091   4,905   4,833   10,175   4,840   4,112   12,530   14,287 
Consolidated gross revenue $20,252  $21,289  $42,004  $47,394  $21,775  $20,677  $63,780  $68,071 

Customer Deposits

Customer deposits of $2.8 million and $3.2 million at April 27, 2019 and July 31, 2018, respectively, represent cash advances received from customers to be applied tofor future services.

Remaining Performance Obligations

The Company’s remaining performance obligations under its current contracts, also known as firm backlog, represent a measure of the total dollar value of work be performed on contracts that are awarded, funded, and in progress. The Company had approximately $66.5 million in remaining performance obligations as of January 26, 2019, of which it expects to recognize $52.6 million (79%) within the next twelve months.

The projects included in firm backlog are subject to cancellations, scope adjustments, foreign exchange fluctuations and project deferrals that may affect the volume or expected timing of revenue recognition.  A significant portion of the Company’s revenue is generated from projects awarded under master service agreements with clients.  In these instances, only the current unfinished projects are included in our backlog.

7.8.
Variable Interest Entities and Equity Method Investment

Variable Interest Entities (“VIE”)

The Company’s majority owned subsidiaries are deemed to be VIEs when, on a stand-alone basis, they lack sufficient capital to finance the activities of the VIE.  The Company consolidates investments in VIEs if the Company is the primary beneficiary of the VIE.  The Company uses a qualitative approach to determine if the Company is the primary beneficiary of the VIE, which considers factors that indicate the Company has significant influence and control over the activities that most significantly impact the VIE’s economic performance.  These factors include representation on the investee’s board of directors, management representation, authority to make decisions, substantive participating rights of the minority shareholders and ownership interest.

Page 17Page 18 of 38 of 37
As of January 26,April 27, 2019 and July 31, 2018, the Company consolidated one majority owned subsidiary that was deemed to be VIE.  The financial position of this VIE as of January 26,April 27, 2019 and July 31, 2018 is summarized in the following table.

 
January 26,
2019
  
July 31,
2018
  
April 27,
2019
  
July 31,
2018
 
 (in thousands)  (in thousands) 
            
Current assets
 
$
2,525
  
$
2,359
  
$
3,269
  
$
2,359
 
Noncurrent assets
  
696
   
878
   
766
   
878
 
Total assets
 
$
3,221
  
$
3,237
  
$
4,035
  
$
3,237
 
              
Current liabilities
 
$
5,168
  
$
5,408
  
$
5,753
  
$
5,408
 
Noncurrent liabilities
  
23
   
32
   
16
   
32
 
Total liabilities
  
5,191
   
5,440
   
5,769
   
5,440
 
Total Ecology and Environment Inc. shareholder’s equity
  
(864
)
  
(1,051
)
 
(688
)
 
(1,051
)
Noncontrolling interests shareholders’ equity
  
(1,106
)
  
(1,152
)
  
(1,046
)
  
(1,152
)
Total shareholders’ equity
  
(1,970
)
  
(2,203
)
  
(1,734
)
  
(2,203
)
Total liabilities and shareholders’ equity
 
$
3,221
  
$
3,237
  
$
4,035
  
$
3,237
 

Total gross revenue of the consolidated VIE was $5.0$9.5 million and $4.6$8.1 million for the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018, respectively.  With the exception of restricted cash of $0.2 million and $0.3 million included in noncurrent assets at January 26,April 27, 2019 and July 31, 2018, respectively (refer to Note 4)5), all assets of the VIE were available for the general operations of the VIE.

Equity Method Investment

VIEs for which the Company is not the primary beneficiary, and other investee companies over which the Company does not influence or control the activities that most significantly impact the investee company’s economic performance, are not consolidated and are accounted for under the equity method of accounting.  Under the equity method of accounting, an investee company'scompany’s accounts are not reflected within the Company'sCompany’s consolidated balance sheets and statements of operations.  The Company'sCompany’s share of the earnings of the investee company is reported as earnings from equity method investment in the Company'sCompany’s consolidated statements of operations.   The Company'sCompany’s carrying value in an equity method investee is reported as equity method investment on the Company'sCompany’s consolidated balance sheets.  The Company'sCompany’s carrying value in an equity method investee is reduced by the Company’s share of dividends declared by an investee company.

If the Company'sCompany’s carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company'sCompany’s consolidated financial statements unless the Company guaranteed obligations of the investee company or has committed additional funding.  When the investee company subsequently reports income, the Company will not record its share of such income until it equals the amount of its share of losses not previously recognized.

The Company’s equity method investment in GAC had a carrying value of $2.3$2.0 million and $2.1 million at January 26,April 27, 2019 and July 31, 2018, respectively.  TheIn April 2019, GAC issued additional shares to two of its senior employees, which effectively reduced the Company’s ownership percentage was 55.1%to 52.48% as of April 27, 2019 from 55.10% at both dates.  July 31, 2018.

Page 19 of 38
The equity method investment in GAC is included within the Company’s South American operating segment.  Activity recorded for the Company’s equity method investment during the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018 is summarized in the following table.

 Six Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
 (in thousands)  (in thousands) 
      
Equity investment carrying value at beginning of period $2,058  $1,464  $2,058  $1,464 
GAC net income attributable to EEI  231   239  295  376 
Dividends declared and paid during the period  (348)  --- 
Equity investment carrying value at end of period $2,289  $1,703  $2,005  $1,840 

GAC’s financial position as of January 26,April 27, 2019 and July 31, 2018 is summarized in the following table.

Page 18 of 37
 
January 26,
2019
  
July 31,
2018
  
April 27,
2019
  
July 31,
2018
 
 (in thousands)  (in thousands) 
            
Current assets
 
$
5,017
  
$
5,713
  
$
5,495
  
$
5,713
 
Noncurrent assets
  
755
   
501
   
1,032
   
501
 
Total assets
 
$
5,772
  
$
6,214
  
$
6,527
  
$
6,214
 
              
Current liabilities
 
$
1,631
  
$
2,620
  
$
2,832
  
$
2,620
 
Noncurrent liabilities
  
939
   
593
   
900
   
593
 
Total liabilities
  
2,570
   
3,213
   
3,732
   
3,213
 
Total Ecology and Environment Inc. shareholder’s equity
  
1,840
   
1,678
  
1,487
  
1,678
 
Noncontrolling interests shareholders’ equity
  
1,362
   
1,323
 
Minority interests shareholders’ equity
  
1,308
   
1,323
 
Total shareholders’ equity
  
3,202
   
3,001
   
2,795
   
3,001
 
Total liabilities and shareholders’ equity
 
$
5,772
  
$
6,214
  
$
6,527
  
$
6,214
 

The results of GAC’s operations for the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018 are summarized in the following table.

 Six Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
  
April 27,
2019
  
April 28,
2018
 
 (in thousands)  (in thousands) 
            
Gross revenue
 
$
6,147
  
$
5,267
  
$
9,456
  
$
8,095
 
Direct cost of services and subcontract costs
  
3,682
   
3,165
  
6,053
  
4,781
 
Income from operations
  
597
   
611
  
775
  
951
 
Net income
  
419
   
434
  
538
  
681
 
Net income attributable to EEI
  
231
   
239
  
295
  
376
 

8.9.
Lines of Credit

Unsecured lines of credit are summarized in the following table.

 
January 26,
2019
  
July 31,
2018
  
April 27,
2019
  
July 31,
2018
 
 (in thousands)  (in thousands) 
            
Outstanding cash advances $222  $---  $620  $--- 
Outstanding letters of credit  1,697   1,668   1,570   1,668 
Total amounts used under lines of credit  1,919   1,668  2,190  1,668 
Remaining amounts available under lines of credit  33,988   36,832   33,668   36,832 
Total approved unsecured lines of credit $35,907  $38,500  $35,858  $38,500 

The Company’s U.S. operations are supported by two line of credit arrangements:
$19.0 million available line of credit at OctoberApril 27, 2018;2019; no outstanding cash advances as of January 26,April 27, 2019 or July 31, 2018; letters of credit of less than $0.1 million were outstanding at January 26,April 27, 2019 and July 31, 2018; interest rate on cash advances is based on LIBOR plus 275 basis points; and

Page 20 of 38
$13.5 million available line of credit at January 26.April 27, 2019; no outstanding cash advances as of January 26,April 27, 2019 or July 31, 2018; letters of credit of less than $0.1 million were outstanding at January 26,April 27, 2019 and July 31, 2018, respectively; interest rate on cash advances is based on LIBOR plus 200 basis points.

The Company’s South American operations are supported by two line of credit arrangements:
$2.0 million available line of credit to support operations in Peru; no outstanding cash advances as of January 26,April 27, 2019 or July 31, 2018; letters of credit of $1.1 million and $1.0 million were outstanding at January 26,April 27, 2019 and July 31, 2018, respectively; interest rate on cash advances is affirmed or negotiated annually; and
$1.4 million available line of credit to support operations in Brazil; $0.2$0.6 million of cash advances were outstanding as of January 26.April 27, 2019; $0.6 million of letters of credit of $0.6 million were outstanding at January 26,April 27, 2019 and July 31, 2018; interest rate on cash advances is based on a Brazilian government economic index.

Page 19 of 37

9.10.
Income Taxes

During interim reporting periods, the effective tax rate may be impacted by changes in the mix of forecasted pre-tax income or losses from the U.S. and foreign jurisdictions where the Company operates, by changes in tax rates within those jurisdictions, or by significant unusual or infrequent items that could change assumptions used in the calculation of the income tax provision.

The estimated effective tax rate decreased to 55.0%17.5% for the sixnine months ended January 26,April 27, 2019 from 66.5%46.2% for the sixnine months ended JanuaryApril 28, 2018. Unfavorable permanent adjustments related to forecasted losses in the U.S. resulted in an effective tax rate that was lower than the statutory rate for the nine months ended April 27, 2018.2019. The decrease in the estimated effective tax rate for the nine months ended April 27, 2019 resulted mainly from changes in the pre-tax earnings of the Company’s U.S. operations in the current fiscal year and from the impact of changes in U.S. corporate income tax regulations included in the Tax Cuts and Jobs Act enacted in December 2017, (the “Tax Act”), which included:

A reduction in the Company’s U.S. statutory corporate income tax rate to 21% for the sixnine months ended January 26,April 27, 2019, compared with a blended rate of 26% for the sixnine months ended January 27,April 28, 2018.
Certain one-time tax items, including revaluation of deferred tax assets and liabilities and the effect of a new territorial tax system, that increased the Company’s federal income tax expense by a combined $0.4 million for the six-monthsnine-months ended January 27,April 28, 2018.  The Company did not record any similar or other unusual adjustments to federal income tax expense during the sixnine months ended January 26,April 27, 2019.

10.11.
Shareholders'Shareholders’ Equity

The following tables provide reconciliations of changes in consolidated shareholders’ equity for the three months ended January 26,April 27, 2019 and January 27,April 28, 2018.  Amounts for the three months ended January 27,April 28, 2018 have been restated for the GAC Deconsolidation Adjustments and Out of Period Adjustments described in Note 2.

 Three Months Ended January 26, 2019  Three Months Ended April 27, 2019 
 
Class A
Common
Stock
  
Class B
Common
Stock
  
Capital in
Excess of
Par Value
  
Retained
Earnings
  
Accumulated
Other
Accumulated
Income (Loss)
  
Treasury
Stock
  
Noncontrolling
Interests
  
Class A
Common
Stock
  
Class B
Common
Stock
  
Capital in
Excess of
Par Value
  
Retained
Earnings
  
Accumulated
Other
Accumulated
Income (Loss)
  
Treasury
Stock
  
Noncontrolling
Interests
 
                                          
Balance at October 27, 2018 $31  $13  $17,595  $20,848  $(1,947) $(884) $605 
Balance at January 26, 2019 $31  $13  $17,629  $20,539  $(1,893) $(884) $484 
                                                 
Net income  -   -   -   (309)  -   -   (1)
Net (loss) income -  -  -  (1,030) -  -  76 
Cash dividends declared ($0.20 per share) -  -  -  (864) -  -  - 
Conversion of Class B common stock to Class A common stock 1  (1) -  -  -  -  - 
Foreign currency translation adjustment  -   -   -   -   54   -   (7) -  -  -  -  14  -  (3)
Share-based compensation expense  -   -   34   -   -   -   -  -  -  33  -  -  -  - 
Distributions to noncontrolling interests  -   -   -   -   -   -   (112) -  -  -  -  -  -  (61)
Purchase of additional noncontrolling interests  -   -   -   -   -   -   (1)  -   -   -   -   -   -   (102)
                                                 
Balance at January 26, 2019 $31  $13  $17,629  $20,539  $(1,893) $(884) $484 
Balance at April 27, 2019 $32  $12  $17,662  $18,645  $(1,879) $(884) $394 

Page 21 of 38
 Three Months Ended January 27, 2018  Three Months Ended April 28, 2018 
 
Class A
Common
Stock
  
Class B
Common
Stock
  
Capital in
Excess of
Par Value
  
Retained
Earnings
  
Accumulated
Other
Accumulated
Income (Loss)
  
Treasury
Stock
  
Noncontrolling
Interests
  
Class A
Common
Stock
  
Class B
Common
Stock
  
Capital in
Excess of
Par Value
  
Retained
Earnings
  
Accumulated
Other
Accumulated
Income (Loss)
  
Treasury
Stock
  
Noncontrolling
Interests
 
                                          
Balance at October 28, 2017 (Restated) $30  $14  $17,617  $23,593  $(1,806) $(1,037) $992 
Balance at January 27, 2018 $30  $14  $17,641  $23,074  $(1,806) $(1,037) $878 
                                                 
Net loss  -   -   -   (519)  -   -   (9)
Net income -  -  -  69  -  -  96 
Cash dividends declared ($0.20 per share) -  -  -  (860) -  -  - 
Foreign currency translation adjustment  -   -   -   -   13   -   38  -  -  -  -  (3) -  (34)
Conversion of Class B common stock to Class A common stock -  -  -  -  -  -  - 
Unrealized investment losses, net  -   -   -   -   (13)  -   -  -  -  -  -  (10) -  - 
Share-based compensation expense  -   -   24   -   -   -   -  -  -  24  -  -  -  - 
Distributions to noncontrolling interests  -   -   -   -   -   -   (143)  -   -   -   -   -   -   (129)
                                                 
Balance at January 27, 2018 (Restated) $30  $14  $17,641  $23,074  $(1,806) $(1,037) $878 
Balance at April 28, 2018 (Restated) $30  $14  $17,665  $22,283  $(1,819) $(1,037) $811 

The following tables provide reconciliations of changes in consolidated shareholders’ equity for the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018. Amounts for the sixnine months ended January 27,April 28, 2018 have been restated for the GAC Deconsolidation Adjustments and Out of Period Adjustments described in Note 2.

Page 20 of 37
 Six Months Ended January 26, 2019  Nine Months Ended April 27, 2019 
 
Class A
Common
Stock
  
Class B
Common
Stock
  
Capital in
Excess of
Par Value
  
Retained
Earnings
  
Accumulated
Other
Accumulated
Income (Loss)
  
Treasury
Stock
  
Noncontrolling
Interests
  
Class A
Common
Stock
  
Class B
Common
Stock
  
Capital in
Excess of
Par Value
  
Retained
Earnings
  
Accumulated
Other
Accumulated
Income (Loss)
  
Treasury
Stock
  
Noncontrolling
Interests
 
                                          
Balance at July 31, 2018 $30  $14  $17,558  $20,973  $(1,885) $(907) $664  $30  $14  $17,558  $20,973  $(1,885) $(907) $664 
Cumulative effect of adoption of ASU 2016-01  -   -   -   (5)  5   -   -   -  -  -  (5) 5  -  - 
Balance at July 31, 2018 (Adjusted)  30   14   17,558   20,968   (1,880)  (907)  664  30  14  17,558  20,968  (1,880) (907) 664 
                                                 
Net income  -   -   -   (429)  -   -   4 
Net (loss) income -  -  -  (1,459) -  -  80 
Cash dividends declared ($0.20 per share) -  -  -  (864) -  -  - 
Foreign currency translation adjustment  -   -   -   -   (13)  -   (67) -  -  -  -  1  -  (70)
Conversion of Class B common stock to Class A common stock  1   (1)  -   -   -   -   -  2  (2) -  -  -  -  - 
Issuance of stock under stock award plan  -   -   4   -   -   23   -  -  -  4  -  -  23  - 
Share-based compensation expense  -   -   67   -   -   -   -  -  -  100  -  -  -  - 
Distributions to noncontrolling interests  -   -   -   -   -   -   (116) -  -  -  -  -  -  (177)
Purchase of additional noncontrolling interests  -   -   -   -   -   -   (1)  -   -   -   -   -   -   (103)
                                                 
Balance at January 26, 2019 $31  $13  $17,629  $20,539  $(1,893) $(884) $484 
Balance at April 27, 2019 $32  $12  $17,662  $18,645  $(1,879) $(884) $394 

 Six Months Ended January 27, 2018  Nine Months Ended April 28, 2018 
 
Class A
Common
Stock
  
Class B
Common
Stock
  
Capital in
Excess of
Par Value
  
Retained
Earnings
  
Accumulated
Other
Accumulated
Income (Loss)
  
Treasury
Stock
  
Noncontrolling
Interests
  
Class A
Common
Stock
  
Class B
Common
Stock
  
Capital in
Excess of
Par Value
  
Retained
Earnings
  
Accumulated
Other
Accumulated
Income (Loss)
  
Treasury
Stock
  
Noncontrolling
Interests
 
                                          
Balance at July 31, 2017 (Restated) $30  $14  $17,570  $23,005  $(1,795) $(1,037) $947 
Balance at July 31, 2017 $30  $14  $17,570  $23,005  $(1,795) $(1,037) $947 
                                                 
Net income  -   -   -   69   -   -   91  -  -  -  138  -  -  187 
Cash dividends declared ($0.20 per share) -  -  -  (860) -  -  - 
Foreign currency translation adjustment  -   -   -   -   5   -   32  -  -  -  -  2  -  (2)
Conversion of Class B common stock to Class A common stock -  -  -  -  -  -  - 
Unrealized investment losses, net  -   -   -   -   (16)  -   -  -  -  -  -  (26) -  - 
Share-based compensation expense  -   -   71   -   -   -   -  -  -  95  -  -  -  - 
Distributions to noncontrolling interests  -   -   -   -   -   -   (192)  -   -   -   -   -   -   (321)
                                                 
Balance at January 27, 2018 (Restated) $30  $14  $17,641  $23,074  $(1,806) $(1,037) $878 
Balance at April 28, 2018 (Restated) $30  $14  $17,665  $22,283  $(1,819) $(1,037) $811 

Class A and Class B Common Stock

The relative rights, preferences and limitations of the Company'sCompany’s Class A and Class B Common Stock are summarized as follows: Holders of Class A shares are entitled to elect 25% of the Board of Directors so long as the number of outstanding Class A shares is at least 10% of the combined total number of outstanding Class A and Class B common shares. Holders of Class A common shares have one-tenth the voting power of Class B common shares with respect to most other matters.

Page 22 of 38
In addition, Class A shares are eligible to receive dividends in excess of (and not less than) those paid to holders of Class B shares. Holders of Class B shares have the option to convert at any time, each share of Class B Common Stock into one share of Class A Common Stock. Upon sale or transfer, shares of Class B Common Stock will automatically convert into an equal number of shares of Class A Common Stock, except that sales or transfers of Class B Common Stock to an existing holder of Class B Common Stock or to an immediate family member will not cause such shares to automatically convert into Class A Common Stock.

During the nine months ended April 27, 2019, holders of 82,008 shares of Class B common stock converted their shares to Class A common stock and the Company converted 64,801 shares of Class B common stock held in treasury to Class A common stock.

Restrictive Shareholder Agreement

Messrs. Gerhard J. Neumaier (deceased), Frank B. Silvestro, Ronald L. Frank, and Gerald A. Strobel entered into a Stockholders’ Agreement dated May 12, 1970, as amended January 24, 2011, which governs the sale of certain shares of EEI’s common stock (now classified as Class B Common Stock) owned by them, certain children of those individuals and any such shares subsequently transferred to their spouses and/or children outright or in trust for their benefit upon the demise of a signatory to the Agreement (“Permitted Transferees”).  The Agreement provides that prior to accepting a bona fide offer to purchase some or all of their shares of Class B Common Stock governed by the Agreement, that the selling party must first allow the other signatories to the Agreement (not including any Permitted Transferee) the opportunity to acquire on a pro rata basis, with right of over-allotment, all of such shares covered by the offer on the same terms and conditions proposed by the offer.

Cash Dividends

The Company paid $0.9$1.7 million of cash dividends during the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018, thatapproximately half of which were declared and accrued in prior periods.

Page 21 of 37
Stock Repurchase Plan

In August 2010, the Company’s Board of Directors approved a program for repurchase of 200,000 shares of Class A common stock (the “Stock Repurchase Program”).  As of April 28, 2018, the Company repurchased 122,918 shares of Class A stock, and 77,082 shares had yet to be repurchased under the Stock Repurchase Program.  The Company did not acquire any Class A shares under the Stock Repurchase Program during the three or nine months ended OctoberApril 27,, 2018 2019 or Octoberthe three or nine months ended April 28, 2018, 2017..

Noncontrolling Interests

The Company discloses noncontrolling interests as a separate component of consolidated shareholders’ equity on the accompanying condensed consolidated balance sheets.  Earnings and other comprehensive income (loss) are separately attributed to both the controlling and noncontrolling interests.  The Company calculates earnings per share based on net income (loss) attributable to the Company’s controlling interests.

The Company considers acquiring additional interests in majority owned subsidiaries when noncontrolling shareholders express their intent to sell their interests.  The Company settles and records acquisitions of noncontrolling interests at amounts that approximate fair value.  Purchases of noncontrolling interests are recorded as reductions of shareholders’ equity on the condensed consolidated statements of shareholders’ equity.

As of July 31, 2018, the Company held an 87.88% ownership interest in Lowham-Walsh Engineering & EnvironmentEnvironmental Services, LLC (“Lowham”).  In November 2018, the Company purchased all remaining noncontrolling interest in Lowham for less than $0.1 million, thereby increasing its ownership interest in Lowham to 100%.

Accumulated Other Comprehensive Loss

The components of accumulated other comprehensive loss are summarized in the following table.

 
January 26,
2019
  
July 31,
2018
  
April 27,
2019
  
July 31,
2018
 
 (in thousands)  (in thousands) 
            
Unrealized net foreign currency translation losses
 
$
(1,893
)
 
$
(1,880
)
 
$
(1,879
)
 
$
(1,880
)
Unrealized net investment (losses) gains on available for sale investments
  
---
   
(5
)
  
---
   
(5
)
Total accumulated other comprehensive loss
 
$
(1,893
)
 
$
(1,885
)
 
$
(1,879
)
 
$
(1,885
)

Page 23 of 38
11.12.
Earnings Per Share

The Company calculates basic and diluted earnings per share by dividing the net income attributable to EEI’s common shareholders by the weighted average number of common shares outstanding for the period.  After consideration of all the rights and privileges of the Class A and Class B stockholders summarized in Note 11, in particular the right of the holders of the Class B common stock to elect no less than 75% of the Board of Directors making it highly unlikely that the Company will pay a dividend on Class A common stock in excess of Class B common stock, the Company allocates undistributed earnings between the two classes of stock on a one-to-one basis when computing earnings per share.  As a result, basic and fully diluted earnings per Class A and Class B share are equal amounts.

The Company has determined that its unvested share-based payment awards that contain non-forfeitable rights to dividends or dividend equivalents (whether paid or unpaid) are participating securities. These securities shall be included in the computation of earnings per share pursuant to the two-class method.  The resulting impact was to include unvested restricted shares in the weighted average shares outstanding calculation.

Page 22 of 37
The computation of earnings per share is included in the following table.

 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
January 26,
2019
  
January 27,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
 (in thousands, except share and per share amounts)  (in thousands, except share and per share amounts) 
               
Net (loss) income attributable to Ecology and Environment Inc. $(309) $(519) $(429) $69  $(1,030) $69  $(1,459) $138 
Dividends declared
  ---   ---   ---   ---   (864)  (860)  (864)  (860)
Balance at end of period $(309) $(519) $(429) $69 
Distributions in excess of earnings $(1,894) $(791) $(2,323) $(722)
                            
Weighted-average common shares outstanding - basic and diluted
  4,315,135   4,301,604   4,314,543   4,301,604   4,315,135   4,301,604   4,314,742   4,301,604 
                            
Distributed earnings per share - basic and diluted
 $---  $---  $---  $---  $0.20  $0.20  $0.20  $0.20 
Undistributed losses per share - basic and diluted
  (0.07)  (0.12)  (0.10)  0.02 
Net loss per common share - basic and diluted
 $(0.07) $(0.12) $(0.10) $0.02 
Distributions in excess of earnings per share - basic and diluted
  (0.44)  (0.18)  (0.54)  (0.17)
Net (loss) income per common share - basic and diluted
 $(0.24) $0.02  $(0.34) $0.03 

12.13.
Segment Reporting

Management generally assesses operating performance and makes strategic decisions based on the geographic regions in which the Company does business.  The Company reports separate operating segment information for its U.S. and South American operations.  Gross revenue, net income (loss) attributable to EEI and total assets by operating segment are summarized in the following tables.

 Three Months Ended  Six Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
January 26,
2019
  
January 27,
2018
(Restated)
  Three Months Ended  Nine Months Ended 
 (in thousands)  
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
             (in thousands) 
Gross revenue:                        
U.S. operations $16,303  $16,384  $34,313  $37,219  
$
16,934  
$
16,566
  
$
51,250  
$
53,784
 
South American operations  3,949   4,905   7,691   10,175   4,841   
4,111
   12,530   
14,287
 
Total $20,252  $21,289  $42,004  $47,394  
$
21,775  
$
20,677
  
$
63,780  
$
68,071
 

Gross revenue from U.S. federal government contracts was $2.9$3.2 million and $4.4$3.9 million for the three months ended January 26,April 27, 2019 and January 27,April 28, 2018, respectively, and $6.0$9.2 million and $8.0$11.9 million for the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018, respectively.

  Three Months Ended  Six Months Ended 
  
January 26,
2019
  
January 27,
2018
(Restated)
  
January 26,
2019
  
January 27,
2018
(Restated)
 
  (in thousands) 
             
Net income (loss) attributable to EEI:            
U.S. operations (a)
 $(294) $(480) $(402) $(176)
South American operations (b)
  (15)  (39)  (27)  245 
Total $(309) $(519) $(429) $69 
Page 24 of 38
  Three Months Ended  Nine Months Ended 
  
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
  (in thousands) 
Net income (loss) attributable to EEI:            
U.S. operations (a)
 $(1,136) $(186) $(1,538) $(362)
South American operations (b)
  106   255   79   500 
Total $(1,030) $69  $(1,459) $138 


(a)Includes depreciation and amortization expense of $0.2 million for the three months ended January 26,April 27, 2019 and January 27,April 28, 2018, and $0.4$0.5 million for the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018.

(b)Includes depreciation and amortization expense of $0.1 million three months ended January 26,April 27, 2019 and January 27,April 28, 2018, and $0.3 million and $0.2 million and $0.1million for the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018, respectively.

 
January 26,
2019
  
July 31,
2018
 
 (in thousands)  
April 27,
2019
  
July 31,
2018
 
       (in thousands) 
Total assets:
Total assets:
         
U.S. operations
 
$
43,991
  
$
43,823
  
$
39,664
  
$
43,823
 
South American operations
  
7,538
   
9,006
   
8,405
   
9,006
 
Total
 
$
51,529
  
$
52,829
  
$
48,069
  
$
52,829
 

Page 23 of 37
13.14.
Commitments and Contingencies

Legal Proceedings

From time to time, the Company is a named defendant in legal actions arising out of the normal course of business.  The Company is not a party to any pending legal proceeding, the resolution of which the management believes will have a material adverse effect on the Company’s results of operations, financial condition or cash flows, or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business.  The Company maintains liability insurance against risks arising out of the normal course of business.

On February 4, 2011, the Chico Mendes Institute of Biodiversity Conservation of Brazil (the “Institute”) issued a Notice of Infraction to ecology and environment do brasil Ltda. (“E&E Brazil”), a majority-owned consolidated subsidiary of EEI.  The Notice of Infraction concerned the taking and collecting of wild animal specimens without authorization by the competent authority and imposed a fine of approximately 0.5 million Reais against E&E Brazil.   The Institute also filed Notices of Infraction against four employees of E&E Brazil alleging the same claims and imposed fines against those individuals that, in the aggregate, were equal to the fine imposed against E&E Brazil.  No claim has been made against EEI.

E&E Brazil has filed court claims appealing the administrative decisions of the Institute for E&E Brazil’s employees that: (a) deny the jurisdiction of the Institute; (b) state that the Notice of Infraction is constitutionally vague; and (c) affirmatively state that E&E Brazil had obtained the necessary permits for the surveys and collections of specimens under applicable Brazilian regulations and that the protected conservation area is not clearly marked to show its boundaries.  The claim of violations against one of the four employees was dismissed.  The remaining three employees have fines assessed against them that are being appealed through the federal courts. Violations against E&E Brazil are pending agency determination.  At January 26,April 27, 2019, the Company recorded a reserve of approximately $0.4 million in other accrued liabilities related to these claims.

14.
Subsequent Events

Staff Reduction Programs

In December 2018, the Company began to notify affected employeesPage 25 of a voluntary retirement program.  In February 2019, the Company began to notify affected employees of an involuntary separation program.  These programs (collectively, the “Staff Reduction Programs”) are being implemented in connection with a corporate restructuring plan.  Company management anticipates that the combined effect of the Staff Reduction Programs and other expense reduction initiatives will result in annual pre-tax cost savings of greater than $6.0 million.  These activities are expected to result in pre-tax charges and cash expenditures of approximately $1.0 million during the fiscal year ending July 31, 2019, consisting primarily of employee severance and termination benefits.  These initiatives were substantially completed by April 30, 2019 and are expected to be completed by July 31, 2019.

Sale of Majority Owned Subsidiary

In February 2019, the Company consummated the sale of its majority interest in a consolidated subsidiary located in Ecuador.  The cash proceeds and loss from the sale to noncontrolling shareholders, both recorded in February 2019, were less than $0.1 million and $0.1 million, respectively.  The sold subsidiary did not represent a material portion of the Company’s consolidated assets, shareholders’ equity, gross revenue or net income attributable to EEI for any previously reported period, and management does not expect that the sale of this subsidiary will have a material impact on the Company’s results of operations, financial position or cash flows for future reporting periods.

38
Page 24 of 37
Item 2.Management'sManagement’s Discussion and Analysis of Financial Condition and Results of Operations

References in this Quarterly Report on Form 10-Q (the “Quarterly Report”) to “EEI” refer to Ecology and Environment Inc., a New York corporation.  References to “the Company,” “we,” “us,” “our,” or similar terms refer to EEI together with its consolidated subsidiaries.

Executive Overview

We reported a consolidated net loss attributable to EEI of $1.0 million ($0.24 per share) for the quarter ended April 27, 2019, compared with consolidated net income attributable to EEI of $0.1 million ($0.02 per share) for the third quarter of the prior fiscal year.  For the nine months ended April 27, 2019, we reported a consolidated net loss attributable to EEI of $1.5 million ($0.34 per share), compared with consolidated net income attributable to EEI of $0.1 million ($0.03 per share) for the first nine months of the prior year.

Our operating results for the three months and nine months ended April 27, 2019 were significantly impacted by $0.8 million of employee severance costs and $0.9 million of incremental expenses associated with restatements of our prior year consolidated financial statements.  These incremental expenses are described more fully below in commentary related to our results of operations.

Management generally assesses operating performance and makes strategic decisions based on the geographic regions in which we do business.  We report separate operating segment information for our United States (“U.S.”) and South American operations.  Our active subsidiaries during the sixnine months ended January 26,April 27, 2019 are listed in the following table.

Name 
Percentage of
Subsidiary
Capital Stock
Owned by the
Company
 
Operating
Segment
     
Consolidated Subsidiaries:    
Ecology & Environment Engineering, Inc. 100.00% United States
Walsh Environmental, LLC 100.00% United States
Gustavson Associates, LLC 83.60% United States
Walsh Peru, S.A. Ingenieros y Cientificos Consultores (“Walsh Peru”) 74.78% South America
ecology and environment do brasil Ltda. (“E&E Brazil”) 72.00% South America
Servicios Ambientales Walsh, S.A. (“Walsh Ecuador”) (a)
 51.00% South America
     
Majority-Owned Equity Investment:    
Gestión Ambiental Consultores S.A. (“GAC”) (b)
 55.10%52.48% South America


(a)
The Company’s investment in Walsh Ecuador was sold to minority shareholders effective February 1, 20192019. The sale of Walsh Ecuador is not expected to have a material impact on the Company's consolidated results of operations, financial position or cash flows for future reporting periods.

(b)
EEI’s equity investment in GAC is reported as an “equity method investment” on the consolidated balance sheets, and as a component of the South American operating segment.  EEI’s share of GAC’s earnings is reported as “income from equity method investment” on the consolidated statements of operations.

Net (loss) income by operating segment is summarized in the following table.

  Three Months Ended  Nine Months Ended 
  
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
  (in thousands) 
Net (loss) income attributable to EEI:            
U.S. operations $(1,136) $(186) $(1,538) $(362)
South American operations  106   255   79   500 
Consolidated net (loss) income $(1,030) $69  $(1,459) $138 

Page 26 of 38
The following table includes selected financial information by operating segment for the three months ended OctoberApril 27, 2019 and April 28, 2018 and October 28, 2017 (the firstthird quarters of fiscal years 2019 and 2018, respectively).  Refer to “Results of Operations” below for additional commentary regarding the Company’s revenues and expenses for these reporting periods.

  Three Months Ended
  
April 27,
2019
  
April 28,
2018
(Restated)
  
$
Change
  
%
Change
  ($ in thousands)
U.S. operations:            
Gross revenue $16,934  
$
16,566
  
$
368
   2
%
Gross revenue less subcontract costs  14,839   
14,725
   
114
   
1
%
Cost of professional services and other direct operating expenses  6,773   
6,438
   
335
   
5
%
Gross margin  8,066   
8,287
   
(221
)
  
(3
)%
Selling, general and administrative expenses  8,780   
8,440
   
340
   
(113
)%
                 
South American operations:                
Gross revenue $4,841  
$
4,111
  
$
730
   
18
%
Gross revenue less subcontract costs  3,944   
3,312
   
632
   
19
%
Cost of professional services and other direct operating expenses  2,037   
1,472
   
565
   
38
%
Gross margin  1,907   
1,840
   
67
   
4
%
Selling, general and administrative expenses  1,724   
1,509
   
215
   14
%
Income from equity method investment  64   
137
   
(73
)
  (53)%
                 
Consolidated totals:                
Gross revenue $21,775  
$
20,677
  
$
1,098
   
5
%
Gross revenue less subcontract costs  18,783   
18,037
   
746
   
4
%
Cost of professional services and other direct operating expenses  8,810   
7,910
   
900
   
11
%
Gross margin  9,973   
10,127
   
(154
)
  (2)%
Selling, general and administrative expenses  10,504   
9,949
   
555
   6
%
Income from equity method investment  64   
137
   
(73
)
  (53)%
 Three Months Ended  Nine Months Ended
 
January 26,
2019
  
January 27,
2018
(Restated)
  
$
Change
  
%
Change
  
April 27,
2019
  
April 28,
2018
(Restated)
  
$
Change
  
%
Change
 ($ in thousands)  ($ in thousands)
U.S. operations:                        
Gross revenue $16,303  $16,384  $(81)  ---% $51,250  
$
53,784
  
$
(2,534
)
  
(5
)%
Gross revenue less subcontract costs  13,400   13,577   (177)  (1
)%
  42,440   
44,491
   
(2,051
)
  
(5
)%
Cost of professional services and other direct operating expenses  6,145   6,396   (251)  (4
)%
  19,414   
19,850
   
(436
)
  
(2
)%
Gross margin  7,255   7,181   74   1%  23,026   
24,641
   
(1,615
)
  
(7
)%
Selling, general and administrative expenses  7,835   7,745   89   1%  24,453   
24,496
   
(43
)
  ---
%
                                
South American operations:                                
Gross revenue $3,949  $4,905  $(956)  (19
)%
 $12,530  
$
14,287
  
$
(1,757
)
  
(12
)%
Gross revenue less subcontract costs  3,233   3,283   (50)  (2
)%
  10,155   
10,162
   
(7
)
  ---
%
Cost of professional services and other direct operating expenses  1,629   1,570   59   4%  5,304   
4,644
   
660
   
14
%
Gross margin  1,604   1,713   (109)  (6
)%
  4,851   
5,518
   
(667
)
  
(12
)%
Selling, general and administrative expenses  1,617   1,738   (121)  (7
)%
  4,703   
4,717
   
(14
)
  ---
%
Income from equity method investment  171   221   (50)  (23
)%
  295   
376
   
(81
)
  (22)%
                                
Consolidated totals:              ��                 
Gross revenue $20,252  $21,289  $(1,037)  (5
)%
 $63,780  
$
68,071
  
$
(4,291
)
  
(6
)%
Gross revenue less subcontract costs  16,633   16,860   (227)  (1
)%
  52,595   
54,653
   
(2,058
)
  
(4
)%
Cost of professional services and other direct operating expenses  7,774   7,966   (192)  (2
)%
  24,718   
24,494
   
224
   
1
%
Gross margin  8,859   8,894   (35)  ---%  27,877   
30,159
   
(2,282
)
  
(8
)%
Selling, general and administrative expenses  9,452   9,483   (32)  ---%  29,156   
29,213
   
(57
)
  ---
%
Income from equity method investment  171   221   (50)  (23
)%
  295   
376
   
(81
)
  
(22
)%

Page 25 of 37
  Six Months Ended 
  
January 26,
2019
  
January 27,
2018
(Restated)
  
$
Change
  
%
Change
 
  ($ in thousands) 
             
U.S. operations:            
Gross revenue $34,313  $37,219  $(2,906)  (8)%
Gross revenue less subcontract costs  27,599   29,767   (2,168)  (7)%
Cost of professional services and other direct operating expenses  12,641   13,413   (772)  (6)%
Gross margin  14,958   16,354   (1,396)  (9)%
Selling, general and administrative expenses  15,673   16,057   (384)  (2)%
                 
South American operations:                
Gross revenue $7,691  $10,175  $(2,484)  (24)%
Gross revenue less subcontract costs  6,212   6,849   (637)  (9)%
Cost of professional services and other direct operating expenses  3,267   3,171   96   3%
Gross margin  2,945   3,678   (733)  (20)%
Selling, general and administrative expenses  2,979   3,208   (229)  (7)%
Income from equity method investment  231   239   (8)  (3)%
                 
Consolidated totals:                
Gross revenue $42,004  $47,394  $(5,390)  (11)%
Gross revenue less subcontract costs  33,811   36,616   (2,805)  (8)%
Cost of professional services and other direct operating expenses  15,908   16,584   (676)  (4)%
Gross margin  17,903   20,032   (2,129)  (11)%
Selling, general and administrative expenses  18,652   19,265   (613)  (3)%
Income from equity method investment  231   239   (8)  (3)%

We reported a consolidated net loss of $0.3 million ($0.07 per share) for the quarter ended January 26, 2019, compared with a consolidated net loss of $0.5 million ($0.12 per share) for the second quarter of the prior fiscal year.  For the six months ended January 26, 2019 and January 27, 2018, we reported a consolidated net loss of $0.4 million ($0.10 per share) and consolidated net income of $0.1 million, respectively.  Net (loss) income by operating segment is summarized in the following table.

  Three Months Ended  Six Months Ended 
  
January 26,
2019
  
January 27,
2018
(Restated)
  
January 26,
2019
  
January 27,
2018
(Restated)
 
  (in thousands) 
             
Net (loss) income attributable to EEI:            
U.S. operations (a)
 $(294) $(480) $(402) $(176)
South American operations (b)
  (15)  (39)  (27)  245 
Total $(309) $(519) $(429) $69 

Gross margin represents gross revenue less subcontract costs and cost of professional services and other direct operating expenses.  The Company generally earns a higher gross margin from its U.S. operations than gross margin earned from its South American operations.  As a percentage of gross revenue, the consolidated gross margin percentage of 43.7% and 42.6%decreased to 45.8% for the quarter and sixthree months ended January 26,April 27, 2019 respectively, increased slightly from 49.0% for the same periodsperiod of the prior fiscal year, due mainly to a higher percentage of consolidated gross revenue being generated from U.S.South American operations.

Page 27 of 38
Results of Operations

Gross Revenue and Gross Revenue less Subcontract Costs

Gross revenue by contract type is summarized in the following table.

Page 26 of 37
 Three Months Ended  Six Months Ended  Three Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
January 26,
2019
  
January 27,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
 (in thousands)  (in thousands) 
               
Time and materials $9,629  $8,833  $18,897  $18,765  $10,712  $10,000  $29,610  $28,765 
Fixed price  6,997   7,667   14,339   17,286  7,715  7,398  22,054  24,684 
Cost-plus  3,626   4,789   8,768   11,343   3,348   3,279   12,116   14,622 
Consolidated gross revenue $20,252  $21,289  $42,004  $47,394  $21,775  $20,677  $63,780  $68,071 

Gross revenue less subcontract costs is a key metric utilized by management for operational monitoring and decision-making.  References to “revenue” in the following commentary refer to gross revenue less subcontract costs, which is summarized by operating segment in the following tables.

 Three Months Ended  Three Months Ended 
Operating Segment 
January 26,
2019
  
January 27,
2018
(Restated)
  
$
Change
  
%
Change
  
April 27,
2019
  
April 28,
2018
(Restated)
  
$
Change
  
%
Change
 
 ($ in thousands)  ($ in thousands) 
      
U.S. operations $13,400  $13,577  $(177)  (1
)%
 $14,839  $14,725  $114   1%
                            
South American operations:                            
Chile  1,082   1,506   (424)  (28
)%
 973  1,218  (245) (20)%
Brazil  2,197   1,747   450   26% 2,971  2,062  909  44%
Other  (46)  30   (76)  ---
(a)
  ---   32   (32)  (100)%
Total South American operations  3,233   3,283   (50)  (2
)%
  3,944   3,312   632   19%
                            
Consolidated gross revenue less subcontract costs $16,633  $16,860  $(227)  (1
)%
 $18,783  $18,037  $746   4%

 Six Months Ended  Nine Months Ended 
Operating Segment 
January 26,
2019
  
January 27,
2018
(Restated)
  
$
Change
  
%
Change
  
April 27,
2019
  
April 28,
2018
(Restated)
  
$
Change
  
%
Change
 
 ($ in thousands)  ($ in thousands) 
      
U.S. operations $27,599  $29,767  $(2,168)  (7
)%
 $42,440  $44,491  $(2,051
)
  (5)%
                            
South American operations:                            
Peru  1,995   3,254   (1,259)  (39
)%
 2,968  4,472  (1,504
)
 (34)%
Brazil  4,225   3,552   673   19% 7,195  5,615  1,580  28%
Other  (8)  43   (51)  ---
(a)
  (8)  75   (83
)
  ---(a)
Total South American operations  6,212   6,849   (637)  (9
)%
  10,155   10,162   (7
)
  ---%
                            
Consolidated gross revenue less subcontract costs $33,811  $36,616  $(2,805)  (8
)%
 $52,595  $54,653  $(2,058
)
  (4)%


(a)
Percent change is not relevant because of the relatively immaterial amounts for all periods presented.

Revenue, net represents gross revenue recognized for the services provided to our clients, adjusted for the impacts of cost overruns or settlements recorded upon completion and close out of a project.  Revenue, net less subcontract costs is a key metric utilized by management for operational monitoring and decision-making.  References to “revenues” in the following commentary refer to revenue, net less subcontract costs from the table above.

Page 28 of 38
Consolidated revenues decreased slightlyincreased 4% during the currentthird quarter and the first half of fiscal year 2018, as lower revenues from U.S. operations were offset2019, driven mainly by significantly higher revenues from subsidiary operations in South America.  Consolidated revenues decreased 4% for the first nine months of 2019, mainly due to lower revenues from U.S. operations.

U.S. Operations

Revenue from U.S. operations decreasedincreased 1% during the secondthird quarter and decreased 7%5% during first sixnine months of fiscal year 2019 compared with the same periods of the prior fiscal year.

Page 27 of 37
During the secondthird quarter and first sixnine months of 2019, the Company recognizedexperienced continued revenue growth from survey, impact assessment, planning and data management services provided to clients in the LNG, offshore resources and resilient communities markets.  However, for the first nine months of 2019, this revenue growth was more than offset by decreases in revenue from the pipeline, onshore renewables, armed services and site assessment and remediation markets, as projects completed during fiscal year 2018 and the first quarterand second quarters of fiscal year 2019 were not replaced with new work of comparable size.  In addition, the federal government shutdown that occurred during the second quarter of fiscal year 2019 delayed new work authorizations, affected ongoing project schedules and postponed revenue delivery on various federal government contracts.contracts into the third quarter of fiscal year 2019.

South American Operations

Revenue from our Brazilian operations increased 26%44% and 19%28% during the secondthird quarter and first sixnine months of fiscal year 2019, respectively, compared with the same periods of the prior year.  In local currency, revenue from our Brazilian operations increased 30%62% for the third quarter and 47% for the first nine months of 2019 due mainly to increased project volumes with commercial clients in the transmission, energy and mining sectors.  Strengthening of the U.S. dollar compared to the Brazilian Real during the first nine months of fiscal year 2019 significantly offset the positive impact of higher project volumes.

Revenue from our Peruvian operations decreased 28%20% and 39%34% during the secondthird quarter and first sixnine months of fiscal year 2019, respectively, compared with the same periods of the prior year, due to lower project volumes with commercial clients in the energy sector.

Cost of Professional Services and Other Direct Operating Expenses

Cost of professional services and other direct operating expenses represents labor and other direct costs of providing services to our clients under our project agreements.  These costs, and fluctuations in these costs, generally correlate directly with related project work volumes and revenues.  Cost of professional services and other direct operating expenses by operating segment are summarized in the following tables.

 Three Months Ended  Three Months Ended 
Operating Segment 
January 26,
2019
  
January 27,
2018
(Restated)
  
$
Change
  
%
Change
  
April 27,
2019
  
April 28,
2018
(Restated)
  
$
Change
  
%
Change
 
 ($ in thousands)  ($ in thousands) 
               
U.S. operations $6,145  $6,396  $(251)  (4
)%
 $6,773  $6,438  $335   5%
                            
South American operations:                            
Peru  319   540   (221)  (41
)%
 385  425  (40) (9)%
Brazil  1,302   1,006   296   29% 1,652  1,025  627  61%
Other  8   24   (16)  ---
(a)
  ---   22   (22)  (100)%
Total South American operations  1,629   1,570   59   4%  2,037   1,472   565   38%
                            
Consolidated cost of professional services and other direct operating expenses $7,774  $7,966  $(192)  2% $8,810  $7,910  $900   11
%

  Six Months Ended 
Operating Segment 
January 26,
2019
  
January 27,
2018
(Restated)
  
$
Change
  
%
Change
 
  ($ in thousands) 
             
U.S. operations $12,641  $13,413  $(772)  (6
)%
                 
South American operations:                
Peru  720   1,088   (368)  (34
)%
Brazil  2,526   2,055   471   23%
Other  21   28   (7)  ---
(a)
Total South American operations  3,267   3,171   96   3%
                 
Consolidated cost of professional services and other direct operating expenses $15,908  $16,584  $(676)  (4
)%
Page 29 of 38
  Nine Months Ended 
Operating Segment 
April 27,
2019
  
April 28,
2018
(Restated)
  
$
Change
  
%
Change
 
   ($ in thousands)    
             
U.S. operations $19,414  $19,850  $(436)  (2)%
                 
South American operations:                
Peru  1,104   1,513   (409)  (27)%
Brazil  4,179   3,080   1,099   36%
Other  21   51   (30)  ---
(a)
Total South American operations  5,304   4,644   660   14%
                 
Consolidated cost of professional services and other direct operating expenses $24,718  $24,494  $224   1
%


(a)
Percent change is not relevant because of the relatively immaterial amounts for all periods presented.

Consolidated Cost of professional services and other direct operating expenses increased 2%11% and decreased 4%1% during the secondthird quarter and first sixnine months of fiscal year 2019, respectively, compared with the same periods of the prior year.  Higher direct costs in our Brazilian operations were more than offset by lower costs inDuring the U.S.three and Peru.  Thesenine months ended April 27, 2019, fluctuations in direct operating expensescosts for U.S. and South American operations, generally correspondcorresponded with increases or decreasesfluctuations in project revenue.

Page 28 of 37
Selling, General and Administrative Expenses

Selling, general and administrative expenses represent operating costs not directly associated with the generation of revenue.  Selling, general and administrative expenses by operating segment are summarized in the following tables.

 Three Months Ended  Three Months Ended 
Operating Segment 
January 26,
2019
  
January 27,
2018
(Restated)
  
$
Change
  
%
Change
  
April 27,
2019
  
April 28,
2018
(Restated)
  
$
Change
  
%
Change
 
 ($ in thousands)    ($ in thousands)    
                        
U.S. operations $7,835  $7,745  $89   1% $8,780  $8,440  $340   4%
                            
South American operations:                            
Peru  728   857   (129)  (15
)%
 744  713  31  4%
Brazil  841   861   (20)  (2
)%
 980  780  200  26%
Other  48   20   28   ---
(a)
  ---   16   (16)  (100)%
Total South American operations  1,617   1,738   (121)  (7
)%
  1,724   1,509   215   14%
                            
Consolidated selling, general and administrative expenses $9,452  $9,483  $(32)  ---% $10,504  $9,949  $555   6%

 Six Months Ended  Nine Months Ended 
Operating Segment 
January 26,
2019
  
January 27,
2018
(Restated)
  
$
Change
  
%
Change
  
April 27,
2019
  
April 28,
2018
(Restated)
  
$
Change
  
%
Change
 
 ($ in thousands)    ($ in thousands)    
                        
U.S. operations $15,673  $16,057  $(384)  (2
)%
 $24,453  $24,496  $(43)  ---%
                            
South American operations:                            
Peru  1,393   1,660   (267)  (16
)%
 2,137  2,373  (236) (10)%
Brazil  1,509   1,507   2   ---% 2,489  2,287  202  9%
Other  77   41   36   ---
(a)
  77   57   20   ---
(a)
Total South American operations  2,979   3,208   (229)  (7
)%
  4,703   4,717   (14)  ---%
                            
Consolidated selling, general and administrative expenses $18,652  $19,265  $(613)  (3
)%
 $29,156  $29,213  $(57)  ---%


(a)
Percent change is not relevant because of the relatively immaterial amounts for all periods presented.

Page 30 of 38
U.S. Operations

Selling, general and administrative expenses increased 1% and decreased 2%4% during the secondthird quarter and were relatively unchanged during first sixnine months of fiscal year 2019 respectively, compared with the same periods of the prior year.

In responseDecember 2018, the Company began to notify employees of a voluntary retirement program.  In February 2019, the trendCompany began to notify affected employees of lackan involuntary separation program.  These programs (collectively, the “Staff Reduction Programs”) are being implemented in connection with a corporate restructuring plan.  These initiatives were substantially completed by April 27, 2019 and are expected to be completed by July 31, 2019. Company management anticipates that the combined effect of revenue growth and erosion of profits during recent fiscal years, management implemented a restructuring plan that includes a reduction in workforcethe Staff Reduction Programs and other expense reductions duringreduction initiatives will result in annual pre-tax cost savings of greater than $6.0 million.  The Company recorded approximately $0.8 million of pre-tax charges and cash expenditures related to the second half of fiscal year 2019.  Refer to “Corporate Reorganization and Staff Reduction Programs, Initiatedconsisting primarily of employee severance and termination benefits, during the three months ended April 27, 2019.

As described in Fiscal Year 2019” belowNote 2 of the accompanying condensed consolidated financial statements, the Company restated its audited consolidated financial statements for additional commentary.the fiscal years ended July 31, 2016 and 2017 and unaudited condensed consolidated financial statements for the quarters ended October 28, 2017, January 27, 2018 and April 27, 2018.  Financial data included in tables and various accounting policies and commentaries included in the Delinquent Reports were also restated or otherwise revised.  These restatements required extensive internal and external resources to complete, including significant incremental fees paid to the Company’s independent auditors, tax consultants and external legal counsel.  The Company recorded incremental audit, tax and legal expenses of $0.9 million as a result of these restatements during the nine months ended April 27, 2019, $0.6 million of which was recorded during the three months ended April 27, 2019.

Excluding the incremental expenses associated with employee severance costs and restatements of financial statements described above, selling, general and administrative expenses from our U.S. operations decreased $1.0 million (12%) and $1.7 million (7%) during the three and nine months ended April 27, 2019 compared with the same periods of the prior year.  These decreases primarily resulted from a concerted effort by management to reduce operating expenses, including initial impacts of the Staff Reduction Programs described above.

South American Operations

Selling, general and administrative expenses in our Peruvian operations decreased 15% and 16% secondincreased 4% for the third quarter and decreased 10% for the first sixnine months of fiscal year 2019, respectively, compared with the same periods of the prior year.  Management implemented targeted cost reductions in response to lower project volumes and lower expectations for future work.

Selling, general and administrative expenses in our Brazilian operations decreased 2%increased 26% and 9% during the secondthird quarter and the first nine months of fiscal year 2019, and was relatively unchanged during the first six months of fiscal year 2019,respectively, compared with the same periods of the prior year.  In local currency, staff and other costs increased 28% during the first nine months of 2019 due to increased project proposal activity and increased general and administrative costs to support higher project volumes and expanded operations.  Strengthening of the U.S. dollar compared to the Brazilian Real significantly offset the increases in expenses due to expanded operations.

Page 29 of 37
Income from Equity Method Investment

The Company’s equity method investment in GAC had a carrying value of $2.3$2.4 million and $2.1 million at January 26,April 27, 2019 and July 31, 2018, respectively.  TheIn April 2019, GAC issued additional shares to two of its senior employees, which effectively reduced the Company’s ownership percentage was 55.1%to 52.48% as of April 27, 2019 from 55.10% at both dates.  July 31, 2018.

Page 31 of 38
The equity method investment in GAC is included within the Company’s South American operating segment.  Activity recorded for the Company’s equity method investment during the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018 is summarized in the following table.

 Six Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
(Restated)
  
April 27,
2019
  
April 28,
2018
(Restated)
 
 (in thousands)  (in thousands) 
      
Equity investment carrying value at beginning of period $2,058  $1,464  $2,058  $1,464 
GAC net income attributable to EEI  231   239  295  376 
Dividends declared and paid during the period  (348)  --- 
Equity investment carrying value at end of period $2,289  $1,703  $2,005  $1,840 

The results of GAC’s operations for the sixnine months ended January 26,April 27, 2019 and January 27,April 28, 2018 are summarized in the following table.

 Six Months Ended  Nine Months Ended 
 
January 26,
2019
  
January 27,
2018
  
April 27,
2019
  
April 28,
2018
 
 (in thousands)  (in thousands) 
            
Gross revenue
 
$
6,147
  
$
5,267
  
$
9,456
  
$
8,095
 
Direct cost of services and subcontract costs
  
3,682
   
3,165
  
6,053
  
4,781
 
Income from operations
  
597
   
611
  
775
  
951
 
Net income
  
419
   
434
  
538
  
681
 
Net income attributable to EEI
  
231
   
239
  
295
  
376
 

Income Taxes

During interim reporting periods, the effective tax rate may be impacted by changes in the mix of forecasted pre-tax income or losses from the U.S. and foreign jurisdictions where the Company operates,we operate, by changes in tax rates within those jurisdictions, or by significant unusual or infrequent items that could change assumptions used in the calculation of the income tax provision.

TheOur estimated effective tax rate decreased to 55.0%17.5% for the sixnine months ended January 26,April 27, 2019 from 66.5%46.2% for the sixnine months ended JanuaryApril 28, 2018. Unfavorable permanent adjustments related to forecasted losses in the U.S. resulted in an effective tax rate that was lower than the statutory rate for the nine months ended April 27, 2018.2019. The decrease in the estimated effective tax rate for the nine months ended April 27, 2019 resulted mainly from changes in the pre-tax earnings of our U.S. operations in the current fiscal year and from the impact of changes in U.S. corporate income tax regulations included in the Tax Cuts and Jobs Act enacted in December 2017, (the “Tax Act”), which included:

A reduction our in the U.S. statutory corporate income tax rate to 21% for the sixnine months ended January 26,April 27, 2019, compared with a blended rate of 26% for the sixnine months ended January 27,April 28, 2018.
Certain one-time tax items, including revaluation of deferred tax assets and liabilities and the effect of a new territorial tax system, that increased our federal income tax expense by a combined $0.4 million for the six-monthsnine-months ended January 27,April 28, 2018.  We did not record any similar or other unusual adjustments to federal income tax expense during the sixnine months ended January 26,April 27, 2019.

Corporate Reorganization and Staff Reduction Programs Initiated in Fiscal Year 2019

In response to a lack of revenue growth and erosion of profits during recent fiscal years, we implemented a restructuring plan for our U.S. operations during the quarter ended January 31, 2019, with the overall objective of achieving profitable growth (the “Corporate Restructuring Plan”).  The Corporate Restructuring Plan includes work streams to address the following broad objectives for U.S. operations:

Simplifying the business organizational structure;
Improving the efficiency of the technical organization and delivery model;
Developing an improved marketing and sales strategy; and
Reducing operating expenses.

Page 30 of 37
In December 2018, we began a process for notifying affected employees of voluntary retirement and involuntary separation programs (collectively, the “Staff Reduction Programs”) being implemented in connection with the Corporate Restructuring Plan.  We expect to reduce our U.S. operations workforce by more than 10% by July 31, 2019 as a direct result of the Staff Reduction Programs, resulting in approximately $6 million of anticipated annual reduction of salary and fringe expenses.  We also expect these actions to result in approximately $1.0 million of pre-tax charges and cash expenditures recorded during the second half of fiscal year 2019, consisting primarily of employee severance and termination benefits.  These initiatives were substantially completed by April 30, 2019 and are expected to be completed by July 31, 2019.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash decreased $2.5$3.9 million during the first sixnine months of fiscal year 2019.  Historically, cash generated from our operating activities has exceeded cash required for investing and financing activities.  However, recent declines in revenue and profits from our U.S. and Peruvian operations have had a detrimental impact on cash generated from operating activities.  In addition, higher revenue from our Brazilian operations during recent reporting periods represented initial resource outlays on new projects that have not yet been billed to and collected from our clients.  Cash outlays resulting from the Staff Reduction Programs and restatements of prior year financial statements also had a detrimental impact on cash flows from operations.  After initial outlays of cash for employee severance and termination benefits, the Corporate Restructuring Plan and Staff Reduction Programs described above are expected to have a significant positive impact on our cashearnings and liquidity position during the fourth quarter of fiscal year 2019 and future reporting periods.

Our Board of Directors considers the approval of dividends to our shareholders based on various operating parameters, including available cash balances, results of current operations and projections of future operating results and cash flows.  Excluding the payment of $0.9$1.7 million of dividends to shareholders that our Board of Directors approved on a discretionary basis, cash decreased $1.6$2.2 million during the period.

Page 32 of 38
Our U.S. operations had $32.5 million of unsecured lines of credit available to fund working capital requirements.  There were no cash advances and less than $0.1 million of letters of credit outstanding under these lines of credit at January 26,April 27, 2019.  Our lenders have reaffirmed the lines of credit within the past twelve months.  We believe that available cash balances, anticipated cash flows and our available lines of credit will be sufficient to cover working capital requirements of our U.S. operations during the next twelve months and the foreseeable future.

Our South American operations had $3.4 million of unsecured lines of credit available to fund working capital requirements.  There were $0.2$0.6 million of cash advances and $1.7$1.6 million of letters of credit outstanding under these lines of credit at January 26,April 27, 2019.  Our lenders have reaffirmed the lines of credit within the past twelve months.  Our South American operations are located in countries where local economies have historically had volatile reactions to changing global and local economic conditions.  There is continual risk that economic uncertainty will have an impact on our operations and liquidity position in South America.  Although we currently believe that available cash balances, anticipated cash flows, and available lines of credit will be sufficient to cover working capital requirements of our South American operations in the near future, economic uncertainty and volatility may challenge our liquidity position in the longer term.  In the event that these subsidiaries are unable to generate adequate cash flow to fund their operations, additional funding from EEI or lending institutions will be considered.

Excess cash accumulated by any foreign subsidiary, beyond that necessary to fund operations or business expansion, may be repatriated to the U.S. at the discretion of the Boards of Directors of the respective entities.  The Company repatriated $0.2 million of dividends from foreign subsidiaries, net of local taxes, during the first quarter of fiscal year 2019.

The Tax Act resulted in a one-time transition tax on deemed repatriation of historical earnings of foreign subsidiaries of approximately $0.5 million, which will be paid, without incurring interest, by July 31, 2019.

Contract Backlog

Firm backlog represents an estimate of gross revenue that will be recognized over the remaining life of the projects under contracts that are awarded, funded and in progress.  These projects include work to be performed under contracts which contain termination provisions that may be exercised without penalty at any time by our clients upon written notice to us, in which case the client would only be obligated to pay us for services provided through the termination date.  A significant portion of our revenue is generated through projects awarded under Master Service Agreements with our clients.  In these instances, only the current unfinished projects are included in our backlog.

During fiscal year 2019, the Company revised its methodology for determining the contract values to be included in firm backlog.  Under this revised methodology, certain backlog amounts that previously were classified and reported as firm backlog are now reported as soft backlog (as defined below).  For comparative purposes, management recalculated firm backlog retroactively as of April 28, 2018 using project funding data contemporaneous with that reporting period and other project status information known at the time.   Although management believes that the data are generally comparable by using a more consistent methodology, there can be no assurance that the methodologies are entirely comparable for all backlog balances reported as of April 27, 2019 and April 28, 2018.

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Firm backlog by operating segment is summarized in the following table.

  
April 27,
2019
  
April 28,
2018
  
  (in thousands)
Total firm backlog of uncompleted contracts:           
U.S. operations $35,725  $45,981  (a)
South American operations  14,204   11,479  
Consolidated totals 
$
49,929
  
$
57,460
  
               
Anticipated completion of firm backlog in next twelve months:             
U.S. operations $28,209  $32,934  (a)
South American operations  12,187   9,265  
Consolidated totals 
$
40,395
  
$
42,199
  

  
January 26,
2019
  
July 31,
2018
 
  (in thousands) 
Total firm backlog of uncompleted contracts:      
U.S. operations $51,744  $49,081 
South American operations  14,721   9,465 
Consolidated totals 
$
66,465
  
$
58,546
 
         
Anticipated completion of firm backlog in next twelve months:        
U.S. operations $43,716  $42,991 
South American operations  8,909   8,325 
Consolidated totals 
$
52,625
  
$
51,316
 
(a)In the Company’s Quarterly Report on Form 10-Q filed for the quarterly period ended April 28, 2018, the Company reported firm backlog from U.S. operations of $63.7 million, of which $40.3 million was expected to be completed within the subsequent twelve month period.

For ourTotal firm backlog from U.S. operations decreased 22% over the twelve month period preceding April 27, 2019, as new orders reported as additions to firm backlog have not kept pace with work delivered on projects during the first six months of fiscal year 2019.active projects.  The increase in firm backlog for our South American operations during the same periodtwelve months preceding April 27, 2019 was the result of significant new orders that outpaced completion of projects.

In addition to the firm backlog summarized in the table above, we also have been awarded contracts in our U.S. operations that are partially or entirely unfunded, but which are expected to be partially or entirely funded during the remaining life of the associated projects.  Total unfunded backlog approximated $24.0$31.5 million and $23.0$15.0 million for our U.S. operations at January 31,April 27, 2019 and July 31,April 28, 2018, respectively.  Until these projects are funded, we cannot be certain regarding the value of gross revenue that we will recognize under these contracts.

Backlog is not a measure defined by generally accepted accounting principles in the United States (“U.S. GAAP”) and is not a measure of profitability. Our method for calculating backlog may not be comparable to methodologies used by other companies.

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Critical Accounting Policies and Use of Estimates

The Company'sCompany’s condensed consolidated financial statements presented in Item 1 of this Form 10-Q have been prepared in accordance with accounting principles generally accepted in the United States of America.  The preparation of these statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities.  On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, allowance for doubtful accounts and contract adjustments, income taxes, impairment of long-lived assets and contingencies.  Management bases its estimates and judgments on historical experience and other factors that management believes are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources.  Actual results may differ from these estimates under different assumptions or conditions.

The Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018 includes descriptions of our critical accounting policies related to revenue recognition, allowance for doubtful accounts, goodwill and income taxes.

The Financial Accounting Standards Board (“FASB”) establishes changes to U.S. GAAP in the form of accounting standards updates (“ASUs”) to the FASB Accounting Standards Codification (“ASC”).  The Company considers the applicability and impact of all ASUs when they are issued by FASB.

Update to Revenue Recognition Accounting Policy

In May 2014, FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606) (“ASU 2014-09”).  ASU 2014-09, as amended by subsequent ASUs that amended and clarified the guidance in ASU 2014-09, forms the basis for FASB ASC Topic 606 (“ASC Topic 606”), which superseded previous authoritative U.S. GAAP guidance regarding revenue recognition.  The Company adopted ASC Topic 606 effective August 1, 2018.  Refer to Notes 3 and 67 of the unaudited condensed consolidated financial statements included in Item 1 of this Form 10-Q for additional disclosures regarding the adoption of ASU 2014-09 and our revenue recognition accounting policy.

Inflation

Inflation did not have a material impact on our business during the sixnine months ended January 26,April 27, 2019 or January 27,April 28, 2018 because a significant amount of our contracts are either cost based or contain commercial rates for services that are adjusted annually.

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Off-Balance Sheet Arrangements

We had outstanding letters of credit drawn under our lines of credit to support operations of $1.6 million and $1.7 million at January 26,April 27, 2019 and July 31, 2018.2018, respectively.  Other than these letters of credit, we did not have any off-balance sheet arrangements as of January 26,April 27, 2019 or July 31, 2018.

Item 4.Controls and Procedures

Disclosure Controls and Procedures

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934, as amended (the “Securities Exchange Act”) is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms.  Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information we are required to disclose in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, our management, with the participation of our Acting Principal Executive Officer and Acting Chief Financial Officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act.  As a consequence of the material weaknesses discussed below, our Acting Principal Executive Officer and Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were not effective at January 26, 2018.April 27, 2019.

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As disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended July 31, 2018, management concluded that the Company’s internal control over financial reporting was not effective as of July 31, 2018 because of material weaknesses in the Company’s internal control over financial reporting as described below.  A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the Company’s annual or interim financial statements would not be prevented or detected on a timely basis.  The material weaknesses arise from deficiencies relating to:

determining the appropriate application of accounting standards when assessing whether the Company’s investments in subsidiaries should be consolidated or accounted for under the equity method of accounting;
ascertaining and disclosing the appropriate accounting policies, including the effects of non-standard provisions, for revenue recognition related to the Company’s fixed-price service contracts;
establishing appropriate cutoff procedures for appropriate revenue and expense recognition.

As described in Note 2 of the unaudited condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q, management determined that an error in accounting for EEI’sEEI’s investment in GAC resulted in a material misstatement of the Company’sCompany’s consolidated financial statements reported prior to July 31, 2018.  Management identified deficiencies related to determining the appropriate application of accounting when assessing whether the Company’s investments in subsidiaries should be consolidated or accounted for under the equity method of accounting.  Specifically, the deficiencies relate to its process to review all factors necessary to assess its influence and control over the operations of its subsidiaries, and to assess the proper accounting for its investments in subsidiaries.  The financial statements for the three and sixnine months ended January 27,April 28, 2018 have been restated to correct this error.

With input from the Audit Committee, management developed, and is in the process of implementing, a remediation plan to address the material weaknesses as of July 31, 2018 noted above.  Specifically, the following controls and procedures will be established or strengthened to address the material weaknesses.
weaknesses:

We will assess our current accounting staff and identify the need to train existing staff resources regarding technical accounting topics and related disclosure requirements that are pertinent to the Company’s operations, including those relating to consolidation, equity method and revenue recognition standards.  We will also consider adding new staff resources and/or engaging third-party advisors that have adequate expertise and experience with pertinent U.S. GAAP requirements.
We will assess our policies and processes to determine controls required to appropriately address technical accounting topics and establish cutoff for recognition of revenues and expenses.  Once determined, we will implement any needed enhancements and/or additional procedures and controls.

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The design and execution of any new or enhanced controls noted above will be periodically tested by the Company’s Internal Auditor.

As of the end of the period covered by this report, our management, with the participation of our acting principal executive officer and acting chief financial officer, carried out an evaluation of the effectiveness of our disclosure controls and procedures pursuant to Rule 13a-15 promulgated under the Exchange Act.  Based upon this evaluation, our acting principal executive officer and our acting chief financial officer concluded that, excluding the control deficiencies that resulted in the material weakness described above, our disclosure controls and procedures were: (1) designed to ensure that material information relating to our Company is accumulated and made known to our management, including our acting principal executive officer and acting chief financial officer, in a timely manner, particularly during the period in which this report was being prepared; and (2) effective, in that they provide reasonable assurance that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms.

Management believes, however, that a controls system, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a Company have been detected.

Internal Controls

Other than certain controls added or improved to address the material weaknesses described above, no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the three months ended January 26,April 27, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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PART II — OTHER INFORMATION

Item 1.Legal Proceedings

From time to time, the Company is a named defendant in legal actions arising out of the normal course of business.  The Company is not a party to any pending legal proceeding, the resolution of which the management believes will have a material adverse effect on the Company’s results of operations, financial condition or cash flows, or to any other pending legal proceedings other than ordinary, routine litigation incidental to its business.  The Company maintains liability insurance against risks arising out of the normal course of business.  The Company’s legal proceedings are disclosed in Note 1314 of the condensed consolidated financial statements included in Item 1 of this Quarterly Report on Form 10-Q.

Item 2.Changes in Securities and Use of Proceeds

(e)  Purchased Equity Securities.  In August 2010, the Company’s Board of Directors approved a 200,000 share repurchase program.  The following table summarizes the Company’s purchases of its common stock during the sixnine months ended January 26,April 27, 2019 under this share repurchase program:

Fiscal Year 2018
Reporting Month
 
Total Number
of Shares
Purchased
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased
as Part of
Publicly Announced
Plans or Programs
 
Maximum Number
of Shares That May
Yet Be Purchased
Under the Plans or
Programs
         
August 2018 --- --- --- 77,082
September 2018 --- --- --- 77,082
October 2018 --- --- --- 77,082
November 2018 --- --- --- 77,082
December 2018 --- --- --- 77,082
January 2019 --- --- --- 77,082
February 2019---------77,082
March 2019---------77,082
April 2019---------77,082

Item 3.Defaults Upon Senior Securities

None.

Item 4.Submission of Matters to a Vote of Security Holders

None.

Item 5.Other Information

None.

Item 6.Exhibits and Reports on Form 8-K

 (a)
31.1 Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
31.2 Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
  
32.1 Certification of Principal Executive Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
32.2 Certification of Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
   
 
(b)
   
 
(c)

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(d)

Page 35 of 37
 (e)
The Company filed a Current Report on Form 8-K on December 12, 2018 to announce: (i) development and rollout of an organizational restructuring plan, which includes a reduction of workforce, that is expected to result in $5.0 million to $6.5 million of annual pre-tax cost savings: and (ii) the conclusion reached by the Company’s Audit Committee that the Company’s consolidated financial statements and related reports filed with the Securities and Exchange Commission (the “SEC”) for periods ended prior to July 31, 2018 should no longer be relied upon due to errors related to accounting for an investment in an entity in which the Company holds a majority economic interest.
   
 
(f)
   
 
(g)
   
 
(h)
   
 
(i)
   
 
(j)
   
 
(k)
   
 
(l)
   
 
(m)

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(n)

Page 36 of 37
 (o)
The Company filed a Current Report on Form 8-K on May 20, 2019 to announce that, in response to the May 13, 2019 formal determination letter received from Nasdaq, the Company timely submitted a request for a hearing before the Nasdaq hearings panel, including an additional request for a stay of delisting pending the hearing.  Also on May 20, 2019 the company received a letter from Nasdaq notifying the Company that the Nasdaq hearings panel has scheduled the Company’s hearing for June 27, 2019, and that any delisting action that may be taken by Nasdaq against the Company has been stayed for 15 calendar days, or until June 4, 2019.
(p)
The Company filed a Current Report on Form 8-K on May 31, 2019 to announce that the Company’s Board of Directors took the following actions: (i) the Company’s Re-Stated By-Laws were amended; (ii) independent director Justin C. Jacobs was appointed to the Audit Committee; and (iii) the minimum number of directors was reduced from seven to six.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

 Ecology and Environment Inc.
  
Date:May 31,     June 17, 2019By:/s/ Peter F. Sorci
  Peter F. Sorci
  Acting Chief Financial Officer


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