UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. -20549

FORM 10-Q

☑ Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

For the quarterly period ended November 2, 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's telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to section 12(b) of the Act

Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Class A Common Stock par value $.01 per share	EEI	Nasdaq 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	☐	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 November 30, 2019 3,138,323 shares of Registrant's Class A Common Stock (par value $.01) and 1,191,678 shares of Registrant’s Class B Common Stock (par value $.01) were outstanding.

PART I – FINANCIAL INFORMATION

Item 1.

Financial Statements

Ecology and Environment Inc.

Condensed Consolidated Balance Sheets

Unaudited

(amounts in thousands, except share data)

	November 2, 2019			July 31, 2019

Assets

Current assets:
Cash and cash equivalents	$	10,022		$	13,344
Investment securities available for sale		1,582			1,577
Contract receivables, net		26,123			25,087
Income tax receivable		1,045			912
Other current assets		2,518			2,078

Total current assets		41,290			42,998

Property, buildings and equipment, net of accumulated depreciation of $17,193 and $17,066, respectively		3,026			3,253
Operating lease right of use assets		5,771			-
Deferred income taxes		2,008			2,130
Equity method investment		1,684			1,658
Other assets		1,637			1,771

Total assets	$	55,416		$	51,810

Liabilities and Shareholders' Equity

Current liabilities:
Accounts payable	$	5,310		$	6,099
Lines of credit		200			284
Accrued payroll costs		6,440			6,661
Current portion of operating lease liabilities		1,754			-
Current portion of long-term debt		35			41
Customer deposits		4,287			3,551
Other accrued liabilities		1,146			1,386

Total current liabilities		19,172			18,022

Operating lease liabilities		4,041			-
Long-term debt		7			13
Commitments and contingencies (Note 14)		-			-

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; 3,202,047 and 3,192,990 shares issued, respectively)		32			32
Class B common stock, par value $.01 per share; (10,000,000 shares authorized; 1,191,678 and 1,200,735 shares issued, respectively)		12			12
Capital in excess of par value		16,998			16,964
Retained earnings		17,160			18,687
Accumulated other comprehensive loss		(2,273	)		(2,098	)
Treasury stock, at cost (Class A common stock: 63,724 and 64,823 shares, respectively)		(729	)		(729	)

Total Ecology and Environment Inc. shareholders' equity		31,200			32,868
Noncontrolling interests		996			907

Total shareholders' equity		32,196			33,775

Total liabilities and shareholders' equity	$	55,416		$	51,810

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

Page 1 of 27

Ecology and Environment Inc.

Condensed Consolidated Statements of Operations

Unaudited

(amounts in thousands, except share data)

	Three Months Ended
	November 2, 2019			October 27, 2018

Gross revenue	$	22,213		$	21,752

Cost of professional services and other direct operating expenses		9,543			8,134
Subcontract costs		3,472			4,574
Selling, general and administrative expenses		10,715			9,200
Depreciation and amortization		234			277

Loss from operations		(1,751	)		(433	)

Income from equity method investment		79			60
Net interest income		59			54
Net foreign exchange gain		1			23
Other income		18			26

Loss before income tax benefit		(1,594	)		(270	)
Income tax benefit		(194	)		(155	)

Net loss		(1,400	)		(115	)

Net income attributable to noncontrolling interests		(127	)		(5	)

Net loss attributable to Ecology and Environment Inc.	$	(1,527	)	$	(120	)

Net loss per common share: basic and diluted	$	(0.35	)	$	(0.03	)

Weighted average common shares outstanding: basic and diluted		4,329,858			4,313,930

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

Page 2 of 27

Ecology and Environment Inc.

Condensed Consolidated Statements of Comprehensive Income

Unaudited

(amounts in thousands)

	Three Months Ended
	November 2, 2019			October 27, 2018

Net loss including noncontrolling interests	$	(1,400	)	$	(115	)
Foreign currency translation adjustments		(214	)		(127	)

Comprehensive loss		(1,614	)		(242	)
Comprehensive (income) loss attributable to noncontrolling interests		(88	)		55

Comprehensive loss attributable to Ecology and Environment Inc.	$	(1,702	)	$	(187	)

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

Page 3 of 27

Ecology and Environment Inc.

Condensed Consolidated Statements of Cash Flows

Unaudited

(amounts in thousands)

	Three Months Ended
	November 2, 2019			October 27, 2018

Cash flows from operating activities:
Net loss	$	(1,400	)	$	(115	)
Adjustments to reconcile net loss to net cash (used in) provided by operating activities:
Depreciation and amortization		234			277
Deferred income tax provision		31			32
Share based compensation expense		34			153
Gain on sale of assets and investment securities		-			(1	)
Net (recovery) provision for contract adjustments		(104	)		23
Net bad debt expense (recovery)		94			(19	)
Changes in:
- contract receivables		(1,300	)		(1,204	)
- other current assets		(490	)		(945	)
- income tax receivable		(114	)		84
- equity method investment		(79	)		(60	)
- operating lease right of use assets		(5,771	)		-
- other non-current assets		121			282
- accounts payable		123			1,999
- accrued payroll costs		(163	)		(624	)
- income taxes payable		-			3
- current portion of operating lease liabilities		1,754			-
- contract liabilities		790			226
- operating lease liabilities		4,041			-
- other accrued liabilities		(201	)		43
Net cash (used in) provided by operating activities		(2,400	)		154

Cash flows from investing activities:
Purchase of property, buildings and equipment		(76	)		(140	)
Proceeds from sale of property, buildings and equipment		35			2
Purchase of investment securities		(8	)		(41	)
Net cash used in investing activities		(49	)		(179	)

Cash flows from financing activities:
Dividends paid		(865	)		(863	)
Repayment of long-term debt and capital lease obligations		(9	)		(15	)
Net (repayments) borrowings under lines of credit		(62	)		1
Distributions to noncontrolling interests		(6	)		(4	)
Net cash used in financing activities		(942	)		(881	)

Effect of exchange rate changes on cash and cash equivalents		59			35

Net decrease in cash, cash equivalents and restricted cash		(3,332	)		(871	)
Cash, cash equivalents and restricted cash at beginning of period		13,592			13,746

Cash, cash equivalents and restricted cash at end of period	$	10,260		$	12,875

Supplemental disclosure of cash flow information:
Cash paid during the period for:
Interest	$	-		$	4
Income taxes		57			30
Supplemental disclosure of non-cash items:
Acquisition of noncontrolling interest of subsidiaries		(7	)		-

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

Page 4 of 27

Ecology and Environment Inc.

Notes to Condensed Consolidated Financial Statements

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 quarter ended November 2, 2019, EEI and its subsidiaries (collectively, the “Company”) included five active wholly-owned and majority-owned operating subsidiaries located in three countries (the United States of America (the “U.S.”), Brazil and Peru), and one majority-owned equity investment in Chile. 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, 2019 filed with the SEC (the “2019 Annual Report”). Other than new or revised accounting policies resulting from the adoption of new accounting pronouncements described in Note 2 of these condensed consolidated financial statements, the accounting policies followed by the Company for preparation of the consolidated financial statements included in the 2019 Annual Report were also followed for this quarterly report. The condensed consolidated results of operations for the three months ended November 2, 2019 are not necessarily indicative of the results for any subsequent period or the entire fiscal year ending July 31, 2020.

2.	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.

Accounting Pronouncements Adopted During the Three Months Ended November 2

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 (together with 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. The Company adopted the provisions of ASU 2016-02 effective August 1, 2019, using the modified retrospective approach under which comparative period information is not restated. The Company elected certain practical expedients allowed in ASU 2016-02 which permit the Company to: (i) not reassess whether existing contracts are or contain leases; (ii) not reassess the lease classification of any existing leases; (iii) not reassess initial direct costs for any existing leases; and (iv) not separate lease and non-lease components for all classes of underlying assets. The Company also made an accounting policy election to not record leases with an initial term of twelve months or less on the balance sheet for all classes of underlying assets.

Page 5 of 27

On the effective date, the Company recognized new right-of-use assets and corresponding lease liabilities associated with operating leases of approximately $6.2 million. The adoption of ASU 2016-02 did not have a material impact on the Company’s results of operations or liquidity. Refer to Note 9 of these condensed consolidated financial statements for additional disclosures regarding Leases.

Accounting Pronouncements Not Yet Adopted as of November 2, 2019

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 2016-13 originally was to be effective for the Company beginning August 1, 2020. In November 2019, FASB issued ASU No. 2019-10, Financial Instruments – Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842) (“ASU 2019-10”). ASU 2019-10 revised the effective date of ASU 2016-13 for the Company to August 1, 2023. Management is currently assessing the provisions of ASU 2016-13 and has not yet estimated its impact on the Company’s consolidated financial statements.

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. ASU 2017-04 originally was to be effective for the Company beginning August 1, 2021, but ASU 2019-10 revised the effective date of ASU 2017-04 for the Company to August 1, 2023. Management is currently assessing the provisions of ASU 2017-04 and has not yet estimated its impact on the Company’s consolidated financial statements.

3.	Agreement and Plan of Merger

On August 28, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with WSP Global Inc., a Canadian corporation (“WSP”), and Everest Acquisition Corp., a New York corporation and an indirect wholly owned subsidiary of WSP (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company (the “Merger”) with the Company continuing as the surviving corporation.

Under the terms of the Merger Agreement, at the Effective Time (as defined in the Merger Agreement), each share of the Company’s Class A common stock, $0.01 par value per share and Class B common stock, $0.01 par value per share (collectively, the “Company Shares”), issued and outstanding immediately prior to the Effective Time, (other than shares (i) held by the Company (or held in the Company’s treasury), (ii) held by any wholly owned subsidiary of the Company, (iii) held by WSP, Merger Sub or any other wholly owned subsidiary of WSP or (iv) held by holders of Class B common stock who have made a proper demand for appraisal of the shares in accordance with Section 623 of the New York Business Corporation Law) but including shares that are, as of the Effective Time, unvested and subject to restrictions, will be converted into the right to receive $15.00 in cash, without interest and subject to any required tax withholding. In addition, the Merger Agreement provides that record holders of Company Shares as of the close of business on the last business day prior to the Effective Time, including any shares that are then unvested and subject to restrictions, will receive a one-time special dividend from the Company of up to $0.50 in cash per share to be paid shortly after closing (the “Special Dividend”). The amount of the Special Dividend is subject to pro rata reduction if certain expenses incurred by the Company in connection with the Merger exceed $3.05 million in the aggregate, as further described in the Merger Agreement.

The consummation of the Merger is subject to the satisfaction or waiver of specified closing conditions, including: (i) the absence of an order, injunction or law issued by a court or governmental authority of competent jurisdiction that makes the consummation of the Merger illegal; (ii) the absence of legal proceedings brought by a governmental authority of competent jurisdiction seeking to restrain or prohibit the Merger; (iii) the clearance of the Merger by the Committee on Foreign Investment in the United States without the imposition of any burdensome conditions, as defined in the Merger Agreement; and (iv) subject to certain materiality qualifications, the continued accuracy of the Company’s representations and warranties and continued compliance by the Company with covenants and obligations (to be performed at or prior to the closing of the Merger).

If the Merger Agreement is terminated in certain circumstances, the Company may be required to pay WSP a termination fee of $4.0 million or reimburse WSP for certain expenses up to $1.75 million.

Page 6 of 27

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the SEC on August 28, 2019. Additional information about the Merger and the Merger Agreement is set forth in the Company’s definitive proxy statement filed with the SEC on October 8, 2019 and the definitive proxy statement supplement filed with the SEC on November 7, 2019.

On November 20, 2019, the Company held a special meeting of the Company’s stockholders at which a proposal to adopt the Merger Agreement was approved by the requisite vote of the Company’s stockholders, as more fully described in the Company’s Current Report on Form 8-K/A filed with the SEC on December 4, 2019.

During the quarter ended November 2, 2019, the Company’s U.S. operations recorded approximately $1.5 million of expenses in selling, general and administrative expenses related to the Merger.

4.	Cash, Cash Equivalents and Restricted Cash

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

	November 2, 2019		July 31, 2019
	(in thousands)

Cash and cash equivalents	$	10,022	$	13,344
Restricted cash (included in other assets)		238		248
Total cash, cash equivalents and restricted cash	$	10,260	$	13,592

The Company considers all liquid instruments purchased with a maturity of three months or less to be cash equivalents. Money market funds of $0.2 million and less than $0.1 million were included in cash and cash equivalents at November 2, 2019 and July 31, 2019, 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.	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 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.

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 transfer is reported at the beginning of the reporting period. There were no transfers in or out of levels 1, 2 or 3 during the three months ended November 2, 2019 or October 27, 2018.

The carrying amount of cash, cash equivalents and restricted cash approximated fair value at November 2, 2019 and July 31, 2019. These assets were classified as level 1 instruments at both dates.

Page 7 of 27

Investment securities of $1.6 million at November 2, 2019 and July 31, 2019 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 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.

The Company recorded unrealized investment losses or gains of less than $0.1 million in other income on the consolidated statement of operations during the three months ended November 2, 2019 and October 27, 2018. The Company did not record any sales of investment securities during the three months ended November 2, 2019 and October 27, 2018.

Long-term debt consists of bank loans and capitalized equipment leases. Lines of credit consist of borrowings for working capital requirements. The carrying amount of these liabilities approximated fair value at November 2, 2019 and July 31, 2019. These liabilities were classified as level 2 instruments at both dates.

6.	Revenue and Contract Receivables, net

Substantially all the Company's revenue is derived from environmental consulting work, which is principally derived from the sale of labor hours. Revenue reflected in the Company's consolidated statements of operations represent services rendered for which the Company maintains a primary contractual relationship with its customers. Included in revenue are certain services outside the Company's normal operations which the Company has elected to subcontract to other contractors.

The Company’s consulting work is performed 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 time and materials 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 accounts for fixed price contracts over time, based on progress determined by the ratio of efforts expended to date in proportion to total efforts expected to be expended over the life of a contract. This revenue recognition 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 effort expected to be incurred 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 efforts expended, to the extent prescribed in the contract, plus fees that are recorded as revenue. These contracts establish an estimate of total efforts to be expended 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 the Company'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 2017. The Company records an allowance for project disallowances in other accrued liabilities for potential disallowances resulting from government audits. 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 close-out procedures.

Change orders can occur when changes in scope are made after project work has begun and can be initiated by either the Company or its clients. Claims are amounts in excess of the agreed contract price which the Company seeks to recover from a client for customer delays and/or errors or unapproved change orders that are in dispute. The Company recognizes costs related to change orders and claims as incurred. Revenue and profit are recognized on change orders when it is probable that the change order will be approved, and the amount can be reasonably estimated. Revenue is recognized only up to the amount of costs incurred on contract claims when realization is probable, estimable and reasonable support from the customer exists.

The Company expenses all bid and proposal and other pre-contract costs as incurred. Out of pocket expenses such as travel, meals, field supplies, and other costs billed direct to contracts are included in both revenue and cost of professional services. Sales and cost of sales within 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.

Page 8 of 27

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 that have been 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.

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.

Contract Receivables, net and Contract Assets

Contract receivables, net are summarized in the following table.

	November 2, 2019			July 31, 2019
	(in thousands)
Contract Receivables:
Billed	$	12,437		$	12,405
Unbilled		14,708			13,686
Total contract receivables		27,145			26,091
Allowance for doubtful accounts		(1,022	)		(1,004	)
Contract receivables, net	$	26,123		$	25,087

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 at November 2, 2019 and July 31, 2019. Management anticipates that the unbilled contract receivables and retainage balances at November 2, 2019 will be substantially billed and collected within one year.

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 November 2, 2019 or July 31, 2019.

Allowance for Doubtful Accounts

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

	Three Months Ended
	November 2, 2019			October 27, 2018
	(in thousands)

Balance at beginning of period	$	1,004		$	1,284
Provision for doubtful accounts during the period		97			27
Write-offs and recoveries of allowance recorded in prior periods		(79	)		(11	)
Balance at end of period	$	1,022		$	1,300

Page 9 of 27

Contract Receivable Concentrations

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

	November 2, 2019				July 31, 2019
	Total Billed and Unbilled Contract Receivables		Allowance for Doubtful Accounts		Total Billed and Unbilled Contract Receivables		Allowance for Doubtful Accounts
	(in thousands)

U.S. operations	$	21,121	$	528	$	20,211	$	489
South American operations		6,024		494		5,880		515
Totals	$	27,145	$	1,022	$	26,091	$	1,004

The Company’s South American operations have historically maintained a higher level of allowance for doubtful accounts than its U.S. operations, due to uncertain or unstable local economies that adversely impact certain of our South American clients. The allowance for doubtful accounts for the Company’s South American operations represented 9% of related contract receivables at November 2, 2019 and July 31, 2019, compared with 2% for U.S. operations at the same dates. Management continues to monitor trends and events that may adversely impact the realizability of recorded receivables from our South American clients.

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
	November 2, 2019		October 27, 2018

Gross revenue from time and materials contracts:
U.S. operations	$	9,965	$	9,257
South American operations		40		-
Total gross revenue from time and materials contracts	$	10,005	$	9,257

Gross revenue from fixed price contracts:
U.S. operations	$	3,650	$	3,612
South American operations		4,395		3,741
Total gross revenue from fixed price contracts	$	8,045	$	7,353

Gross revenue from cost-plus contracts:
U.S. operations	$	4,163	$	5,142
South American operations		-		-
Total gross revenue from cost-plus contracts	$	4,163	$	5,142

Gross revenue from all contracts:
U.S. operations	$	17,778	$	18,011
South American operations		4,435		3,741
Consolidated gross revenue	$	22,213	$	21,752

Customer Deposits

Customer deposits of $4.3 million and $3.6 million at November 2, 2019 and July 31, 2019, respectively, represent cash advances received from customers for future services.

7.	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 10 of 27

At November 2, 2019 and July 31, 2019, the Company consolidated one majority owned subsidiary that was deemed to be a VIE. The financial position of this VIE as of November 2, 2019 and July 31, 2019 is summarized in the following table.

	November 2, 2019			July 31, 2019
	(in thousands)

Current assets	$	3,226		$	3,549
Noncurrent assets		1,952			781
Total assets	$	5,178		$	4,330

Current liabilities	$	5,246		$	5,728
Noncurrent liabilities		7			12
Total liabilities		5,253			5,740
Total Ecology and Environment Inc. shareholder’s equity		253			(708	)
Noncontrolling interests shareholders’ equity		(328	)		(702	)
Total shareholders’ equity		(75	)		(1,410	)
Total liabilities and shareholders’ equity	$	5,178		$	4,330

Total gross revenue of the consolidated VIE was $2.7 million and $2.4 million for the three months ended November 2, 2019 and October 28, 2018, respectively. With the exception of restricted cash of $0.2 million included in noncurrent assets at November 2, 2019 and July 31, 2018, 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's accounts are not reflected within the Company's consolidated balance sheets and statements of operations. The Company's share of the earnings of the investee company is reported as earnings from equity method investment in the Company's consolidated statements of operations. The Company's carrying value in an equity method investee is reported as equity method investment on the Company's consolidated balance sheets. The Company'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's carrying value in an equity method investee company is reduced to zero, no further losses are recorded in the Company'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 had a carrying value of $1.7 million at November 2, 2019 and July 31, 2019. The Company’s ownership percentage was 52.48% at both dates. The equity method investment is included within the Company’s South American operating segment. Activity recorded for the Company’s equity method investment is summarized in the following table.

	Three Months Ended
	November 2, 2019			October 27, 2018
	(in thousands)

Equity investment carrying value at beginning of period	$	1,658		$	2,058
Equity investee net income attributable to EEI		79			60
EEI’s portion of other comprehensive loss recorded by the equity investee		(53	)		---
Equity investment carrying value at end of period	$	1,684		$	2,118

Page 11 of 27

The financial position of the equity method investee is summarized in the following table.

	November 2, 2019		July 31, 2019
	(in thousands)

Current assets	$	5,233	$	5,671
Noncurrent assets		1,173		1,215
Total assets	$	6,406	$	6,886

Current liabilities	$	2,758	$	3,232
Noncurrent liabilities		793		847
Total liabilities		3,551		4,079
Total Ecology and Environment Inc. shareholder’s equity		1,830		1,806
Noncontrolling interests shareholders’ equity		1,025		1,001
Total shareholders’ equity		2,855		2,807
Total liabilities and shareholders’ equity	$	6,406	$	6,886

The equity method investee’s results of operations are summarized in the following table.

	Three Months Ended
	November 2, 2019		July 31, 2019
	(in thousands)

Gross revenue	$	2,892	$	2,852
Direct cost of services and subcontract costs		1,829		1,974
Income from operations		229		157
Net income		151		109
Net income attributable to EEI		79		60

8.	Lines of Credit

Unsecured lines of credit are summarized in the following table.

	November 2, 2019		July 31, 2019
	(in thousands)

Outstanding cash advances reported as lines of credit	$	200	$	284
Outstanding letters of credit		1,338		1,635
Total amounts used under lines of credit		1,538		1,919
Remaining amounts available under lines of credit		34,311		34,015
Total unsecured lines of credit	$	35,849	$	35,934

The Company’s U.S. operations are supported by two line of credit arrangements:

•

$19.0 million available line of credit at November 2, 2019 and July 31, 209; no outstanding cash advances at November 2, 2019 or July 31, 2019; letters of credit of less than $0.1 million were outstanding at November 2, 2019 and July 31, 2019; interest rate based on LIBOR plus 275 basis points; and

•

$13.5 million available line of credit at November 2, 2019 and July 31, 2019; no outstanding cash advances at November 2, 2019 or July 31, 2019; letters of credit of less than $0.1 million outstanding at November 2, 2019 and July 31, 2019; interest rate 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 at November 2, 2019 and July 31, 2019 to support operations in Peru; outstanding cash advances of $0.2 million and zero at November 2, 2019 and July 31, 2019, respectively; letters of credit of $0.7 million and $1.0 million were outstanding at November 2, 2019 and July 31, 2019, respectively; interest rate is affirmed by or negotiated with the lender annually; and

•

$1.3 and $1.4 million available line of credit at November 2, 2019 and July 31, 2019, respectively to support operations in Brazil; outstanding cash advances of zero and $0.3 million at November 2, 2019 and July 31, 2019, respectively; letters of credit of $0.6 million were outstanding at November 2, 2019 and July 31, 2019; interest rate based on a Brazilian government economic index.

Page 12 of 27

Leases

Nature of Leases

The Company's leases are classified as operating leases and consist mostly of real estate leases. For leases with terms greater than twelve months at lease commencement, the Company recognizes a right of use asset and a corresponding lease liability. The initial right of use asset and corresponding lease liability are recognized at the present value of remaining lease payments over the lease term. Because the Company has elected to not separate lease and non-lease components, lease payments include variable costs paid to the landlord for common area maintenance, real estate taxes, insurance, and other operating expenses. Leases with an initial term of twelve months or less are not recorded on the Company's condensed consolidated balance sheet. The Company recognizes lease expense for operating leases on a straight-line basis over the lease term.

The Company's leases have lease terms ranging from one to six years, some of which include options to extend or terminate the lease. The exercise of lease renewal options is at the Company's sole discretion. When deemed reasonably certain of exercise, the renewal options are included in the determination of the lease term. The Company's lease agreements do not contain material residual value guarantees or any material restrictive covenants.

As of November 2, 2019, the Company does not have any significant additional operating leases that have not yet commenced.

Significant Assumptions of Judgements

The discount rate implicit within each lease is generally not readily determinable, therefore, the Company uses its estimated incremental borrowing rate in determining the present value of lease payments. The incremental borrowing rate is determined based on the Company’s recent debt issuances, lease term, and the currency in which lease payments are made.

Significant assumptions are provided in the following table.

	As Of November 2, 2019

Weighted-average remaining lease term (in years)		2.56
Weighted average discount rate		5.17	%

Amounts Recognized in the Financial Statements

Balance sheet classification of right of use assets and lease liabilities are presented in the following table.

	As Of November 2, 2019
	(in thousands)

Right of use assets (included in non-current assets)	$	5,771
Lease liabilities:
Current	$	1,754
Non-current		4,041
Total lease liabilities	$	5,795

Operating lease expense of $0.6 million for the three months ending November 2, 2019 is included in selling, general and administrative expenses on the condensed consolidated statements operations. Short-term lease expense, sublease income, and variable lease expenses were not material for the three months ending November 2, 2019.

Page 13 of 27

Maturities of Operating Lease Liabilities

Maturities of operating lease liabilities as of November 2, 2019 are provided in the following table.

Fiscal Year Ending July 31	As Of November 2, 2019
	(in thousands)

Remainder of fiscal year 2020	$	1,610
2021		1,880
2022		1,384
2023		928
2024		453
Thereafter		59
Total undiscounted lease payments		6,314
Less: imputed interest		(519	)
Present value of lease liabilities	$	5,795

10.	Income Taxes

During interim reporting periods, the effective tax rate may be impacted by changes in the mix of forecasted income 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 Company’s effective tax rate was a benefit of 12.2% and 57.4% for the three months ended November 2, 2019 and October 27, 2018, respectively. The effective tax rate for the three months ended November 2, 2019 was less than the statutory U.S. federal rate of 21% due mainly to the following factors:

•

Continued application of unfavorable permanent tax adjustments pertaining to global low-taxed intangible income in the U.S. resulting from tax reform legislation enacted during fiscal year 2018; and

•

Income from operations in Peru are not taxed in the Company’s tax provision due to a valuation allowance recorded against deferred tax assets.

11.	Shareholders' Equity

The following table provides a reconciliation of the changes in consolidated shareholders’ equity for the three months ended November 2, 2019.

	Three Months Ended November 2, 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

Balance at July 31, 2019		32		12		16,964		18,687			(2,098	)		(729	)		907

Net (loss) income		-		-		-		(1,527	)		-			-			127
Foreign currency translation adjustment		-		-		-		-			(175	)		-			(39	)
Share-based compensation expense		-		-		34		-			-			-			-
Distributions to noncontrolling interests		-		-		-		-			-			-			(6	)
Purchase of additional noncontrolling interests																	7

Balance at November 2, 2019	$	32	$	12	$	16,998	$	17,160		$	(2,273	)	$	(729	)	$	996

Page 14 of 27

The following table provides a reconciliation of the changes in consolidated shareholders’ equity for the three months ended October 27, 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

Balance at July 31, 2018	$	30	$	14		$	17,558	$	20,973		$	(1,885	)	$	(907	)	$	664
Cumulative effect of adoption of ASU 2016-01		-		-			-		(5	)		5			-			-
Balance at July 31, 2018 (Adjusted)		30		14			17,558		20,968			(1,880	)		(907	)		664

Net (loss) income		-		-			-		(120	)		-			-			5
Foreign currency translation adjustment		-		-			-		-			(67	)		-			(60	)
Conversion of Class B common stock to Class A common stock		1		(1	)		-		-			-			-			-
Issuance of stock under stock award plan		-		-			4		-			-			23			-
Share-based compensation expense		-		-			33		-			-			-			-
Distributions to noncontrolling interests		-		-			-		-			-			-			(4	)

Balance at October 27, 2018	$	31	$	13		$	17,595	$	20,848		$	(1,947	)	$	(884	)	$	605

Class A and Class B Common Stock

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

In addition, holders of Class A Common Stock are eligible to receive dividends in excess of (and not less than) those paid to holders of Class B Common Stock. Holders of Class B Common Stock 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.

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 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.

Concurrently with the execution and delivery of the Merger Agreement, Frank B. Silvestro, Ronald L. Frank, Gerald A. Strobel, Marshall A. Heinberg, Michael C. Gross, Michael El-Hillow, the Gerhard J. Neumaier Testamentary Trust, Justin C. Jacobs and Mill Road Capital II, L.P. (the “Supporting Stockholders”) entered into voting and support agreements with WSP (the “Voting Agreements”) with respect to all Company Shares and other Subject Securities (as defined in the Voting Agreements) beneficially owned or owned of record by the Supporting Stockholders (the “Voting Agreement Shares”). Upon the closing of the transaction contemplated by the Merger Agreement, the Stockholders’ Agreement and the Voting Agreements shall terminate.

Cash Dividends

The Company paid $0.9 million of cash dividends during the three months ended November 2, 2019 and October 27, 2018 that were declared and accrued in prior periods.

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 November 2, 2019, the Company had repurchased 122,918 shares of Class A Common 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 months ended November 2, 2019 or October 27, 2018.

Page 15 of 27

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. The Company did not acquire additional interest in any of its majority-owned subsidiaries during the three months ended November 2, 2019 or October 27, 2018.

Accumulated Other Comprehensive Loss

Accumulated other comprehensive loss is comprised of $2.3 million and $2.1 million of unrealized net foreign currency translation losses at November 2, 2019 and July 31, 2019, respectively.

12.	Earnings Per Share

Basic and diluted earnings per share (“EPS”) are computed by dividing the net income attributable to EEI 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 (defined in Note 11 of these condensed consolidated financial statements), the Company allocates undistributed earnings between the classes 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 are included in the computation of earnings per share pursuant to the two-class method. As a result, unvested restricted shares are included in the weighted average shares outstanding calculation.

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

	Three Months Ended
	November 2, 2019			October 27, 2018
	(in thousands, except share and per share amounts)

Net loss attributable to Ecology and Environment Inc.	$	(1,527	)	$	(120	)
Dividends declared		---			---
Balance at end of period	$	(1,527	)	$	(120	)

Weighted-average common shares outstanding - basic and diluted		4,329,858			4,313,930

Distributed earnings per share - basic and diluted	$	---		$	---
Undistributed (losses) earnings per share - basic and diluted		(0.35	)		(0.03	)
Net income per common share - basic and diluted	$	(0.35	)	$	(0.03	)

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.

Page 16 of 27

	Three Months Ended
	November 2, 2019		October 27, 2018
	(in thousands)

Gross revenue:
U.S. operations	$	17,778	$	18,011
South American operations		4,435		3,741
Total	$	22,213	$	21,752

Net income (loss) attributable to EEI:
U.S. operations (a)	$	(1,669	)	$	(107	)
South American operations (b)		142			(13	)
Total	$	(1,527	)	$	(120	)

(a)

Includes depreciation and amortization expense of $0.1 million and $0.2 million for the three months ended November 2, 2019 and October 27, 2018, respectively.

(b)

Includes depreciation and amortization expense of $0.1 million for the three months ended November 2, 2019 and October 27, 2018.

	November 2, 2019		July 31, 2019
	(in thousands)

Total assets:
U.S. operations	$	47,478	$	43,842
South American operations		7,938		7,968
Total	$	55,416	$	51,810

Gross revenue from U.S. federal government contracts was $3.5 million and $3.1 million for the three months ended November 2, 2019 and October 27, 2018, respectively.

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 Reals 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 July 31, 2019, the Company recorded a reserve of approximately $0.4 million in other accrued liabilities related to these claims.

Page 17 of 27

On October 8 and 14, 2019, two complaints challenging the Merger were filed in the United States District Court for the Southern District of New York, captioned Jordan Rosenblatt v. Ecology & Environment, Inc., et al. and Randall Meidenbauer v. Ecology & Environment Inc. et al., respectively. The Rosenblatt complaint was filed as a putative class action on behalf of the public shareholders of the Company, while the Meidenbauer complaint was filed as an individual action on behalf of the named plaintiff only. Both complaints name as defendants the Company and the members of the Company’s Board of Directors. The Rosenblatt complaint generally alleges violations of federal securities laws with respect to purported disclosure deficiencies in the preliminary proxy statement for the Merger that the Company filed with the SEC on September 26, 2019, and the Meidenbauer complaint generally alleges violations of federal securities laws with respect to purported disclosure deficiencies in the definitive proxy statement for the Merger that the Company filed with the SEC on October 8, 2019 (the “Definitive Proxy Statement”). The complaints seek various forms of relief, including a preliminary injunction preventing the Company from proceeding with the stockholder meeting or the consummation of the Merger until the alleged material information omitted from the Definitive Proxy Statement is disclosed, rescission of the Merger if it is consummated, damages, attorneys’ fees and expenses. On October 31, 2019, the Company received a demand letter from an additional stockholder alleging violations of federal securities laws with respect to purported disclosure deficiencies in the Definitive Proxy Statement and threatening to file a lawsuit unless certain supplemental disclosures were made by the Company regarding the Merger.

On November 7, 2019, E&E filed a supplement to the Definitive Proxy Statement disclosing, among other things, certain additional information in the sections “The Merger—Background of the Merger”, “The Merger— Opinion of E&E’s Financial Advisor” and “The Merger— Certain Unaudited Prospective Financial Information” (the “Responsive Disclosures”) in response to the two complaints and the demand letter and solely for the purpose of mooting the allegations contained therein. In light of the Responsive Disclosures, counsel for each of the plaintiffs who had filed the complaints and sent the demand letter informed counsel for the Company that they considered their claims to be moot, and would voluntarily dismiss their complaints (or, in the case of the plaintiff that submitted a demand letter, would refrain from filing a complaint), subject in each case to the plaintiff’s right to seek a mootness fee. For the avoidance of doubt, the Company denies the allegations of the two complaints and demand letter, denies any violations of law, and denies any obligation to pay a mootness fee or other compensation in connection with the Responsive Disclosures. The Company believes that the Definitive Proxy Statement disclosed all material information required to be disclosed therein and denies that the Responsive Disclosures are material or are otherwise required to be disclosed. The Company disclosed the Responsive Disclosures following discussions with counsel for plaintiffs and the stockholder from whom the Company received the demand letter and solely to avoid the expense and distraction of litigation. Nothing in the Responsive Disclosures shall be deemed an admission of the legal necessity or materiality under applicable law of any of the Responsive Disclosures.

Page 18 of 27

Item 2.

Management'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.

Agreement and Plan of Merger

On August 28, 2019, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with WSP Global Inc., a Canadian corporation (“WSP”), and Everest Acquisition Corp., a New York corporation and an indirect wholly owned subsidiary of WSP (“Merger Sub”). Pursuant to the Merger Agreement, Merger Sub will merge with and into the Company(the “Merger”) with the Company continuing as the surviving corporation.

If the Merger Agreement is terminated in certain circumstances, the Company may be required to pay WSP a termination fee of $4.0 million or reimburse WSP for certain expenses up to $1.75 million.

The foregoing description of the Merger Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Merger Agreement, which is attached as Exhibit 2.1 to the Company’s Current Report on Form 8-K filed with the Securities and Exchange Commission (the “SEC”) on August 28, 2019. Additional information about the Merger and the Merger Agreement is set forth in the Company’s definitive proxy statement filed with the SEC on October 8, 2019 and the proxy supplement filed on November 7, 2019.

During the quarter ended November 2, 2019, the Company’s U.S. operations recorded approximately $1.5 million of expenses in selling, general and administrative expenses related to the Merger.

Executive Overview

EEI was incorporated in February 1970 as a global broad-based environmental consulting firm with an underlying philosophy of providing professional services in the regions it serves so that sustainable economic and human development may proceed with acceptable impact on the environment. Our management generally assesses operating performance and makes strategic decisions based on the geographic regions in which we do business. During the quarter ended November 2, 2019, EEI had direct and indirect ownership in four significant active wholly owned and majority-owned operating subsidiaries in three countries (the United States of America, Brazil and Peru), and one majority-owned equity investment in Chile. We report separate operating segment information for our U.S. and South American operations.

Page 19 of 27

Our significant active subsidiaries as of November 2, 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

Majority-Owned Equity Investment (a):
Gestión Ambiental Consultores S.A. (“GAC”)		52.48	%	South America

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

The following table includes selected financial information by operating segment for the three months ended November 2, 2019 and October 27, 2018 (the first quarters of fiscal years 2020 and 2019, respectively). Refer to “Results of Operations” below for additional commentary regarding the Company’s revenues and expenses for these reporting periods.

	Three Months Ended
	November 2, 2019			October 27, 2018			$ Change			% Change
	($ in thousands)
U.S. operations:
Gross revenue	$	17,778		$	18,011		$	(233	)		(1	)%
Gross revenue less subcontract costs		15,096			14,200			896			6	%
Direct cost of professional services and other direct operating expenses		7,553			6,496			1,057			16	%
Gross margin		7,543			7,704			(161	)		(2	)%
Selling, general and administrative expenses		9,197			7,836			1,361			17	%
Net income (loss) attributable to EEI		(1,669	)		(107	)		(1,562	)		(a)	%

South American operations:
Gross revenue	$	4,435		$	3,741		$	694			19	%
Gross revenue less subcontract costs		3,645			2,978			667			22	%
Direct cost of professional services and other direct operating expenses		1,990			1,638			352			21	%
Gross margin		1,655			1,340			315			24	%
Selling, general and administrative expenses		1,518			1,364			154			11	%
Income from equity method investment		79			60			19			32	%
Net income (loss) attributable to EEI		142			(13	)		155			(a)	%

Consolidated totals:
Gross revenue	$	22,213		$	21,752		$	461			2	%
Gross revenue less subcontract costs		18,741			17,178			1,563			9	%
Direct cost of professional services and other direct operating expenses		9,543			8,134			1,409			17	%
Gross margin		9,198			9,044			154			2	%
Selling, general and administrative expenses		10,715			9,200			1,515			16	%
Income from equity method investment		79			60			19			32	%
Net income (loss) attributable to EEI		(1,527	)		(120	)		(1,407	)		(a)	%

(a)

percentage change not relevant due to relatively immaterial amounts reported for three months ended October 27, 2018.

Gross margin represents gross revenue less subcontract costs and direct cost of services. As a percentage of gross revenue, the consolidated gross margin percentage of 41.4% for the first quarter of fiscal year 2020 decreased slightly from the first quarter of the prior year. The current period increase in project related expenses (as a percentage of prior year project related expenses) exceeded the increase in gross revenue less subcontract costs in our U.S. operating segment.

Page 20 of 27

Results of Operations

Gross Revenue and Gross Revenue less Subcontract Costs

Gross revenue for our operating segments is summarized by contract type in the following table.

	Three Months Ended
	November 2, 2019		October 27, 2018

Gross revenue from time and materials contracts:
U.S. operations	$	9,965	$	9,257
South American operations		40		-
Total gross revenue from time and materials contracts	$	10,005	$	9,257

Gross revenue from fixed price contracts:
U.S. operations	$	3,650	$	3,612
South American operations		4,395		3,741
Total gross revenue from fixed price contracts	$	8,045	$	7,353

Gross revenue from cost-plus contracts:
U.S. operations	$	4,163	$	5,142
South American operations		-		-
Total gross revenue from cost-plus contracts	$	4,163	$	5,142

Gross revenue from all contracts:
U.S. operations	$	17,778	$	18,011
South American operations		4,435		3,741
Consolidated gross revenue	$	22,213	$	21,752

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 table.

	Three Months Ended
Operating Segment	November 2, 2019		October 27, 2018		$ Change			% Change

U.S. operations	$	15,096	$	14,200	$	896			6	%

South American operations:
Peru		1,167		912		255			28	%
Brazil		2,478		2,028		450			22	%
Other		---		38		(38	)		---	(a)
Total South American operations		3,645		2,978		667			22	%

Consolidated gross revenue less subcontract costs	$	18,741	$	17,178	$	1,563			9	%

(a)

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

U.S. Operations

Revenue from our U.S. operations increased 6% during the first quarter of fiscal year 2020, as compared with the first quarter of the prior year, as slightly lower gross revenues were more than offset by 30% reduction in subcontract expenses on our projects. During the current quarter, we recorded increased project activity and revenue in our transmission, resiliency and federal site assessment and remediation sectors, while activity in our pipeline, renewables and restoration sectors was consistent with the prior year. These positive factors were partially offset by lower project activity and revenue in our liquified natural gas and federal water and lands sectors.

Page 21 of 27

South American Operations

Revenue from our Peruvian operations increased 28% during the first quarter of fiscal year 2020 compared with the first quarter of the prior year, due to higher project volumes with commercial clients in within mining and resilience planning markets.

Revenue from our Brazilian operations increased 22% during the first quarter of fiscal year 2020 compared with the first quarter of the prior year. In local currency, revenue from our Brazilian operations increased 21% due mainly to increased project volumes with commercial clients in the transmission, energy and mining sectors.

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 is summarized in the following table.

	Three Months Ended
Operating Segment	November 2, 2019		October 27, 2018		$ Change			% Change
	($ in thousands)

U.S. operations	$	7,553	$	6,496	$	1,057			16	%

South American operations:
Peru		410		400		10			3	%
Brazil		1,580		1,225		355			29	%
Other		---		13		(13	)		---	(a)
Total South American operations		1,990		1,638		352			21	%

Consolidated cost of professional services and other direct operating expenses	$	9,543	$	8,134	$	1,409			17	%

(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 17% during the current quarter compared with the same period last year. Higher direct costs in our U.S. and Brazilian operations were due mainly to higher project revenues.

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 table.

	Three Months Ended
Operating Segment	November 2, 2019		October 27, 2018		$ Change			% Change
	($ in thousands)

U.S. operations	$	9,197	$	7,836	$	1,361			17	%

South American operations:
Peru		660		665		(5	)		(1	)%
Brazil		858		669		189			28	%
Other		---		30		(30	)		---	(a)
Total South American operations		1,518		1,364		154			11	%

Consolidated selling, general and administrative expenses	$	10,715	$	9,200	$	1,515			16	%

(a)

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

Page 22 of 27

U.S. Operations

Selling, general and administrative expenses increased 17% during the first quarter of fiscal year 2020 compared with the same quarter last year. During the quarter ended November 2, 2019, our U.S. operations recorded approximately $1.5 million of expenses related to the Merger.

South American Operations

Selling, general and administrative expenses in our Brazilian operations increased 28% during the first quarter of fiscal year 2020 compared with the same quarter last year. In local currency, staff and other costs increased 26% due to increased project proposal activity and increased general and administrative costs to support higher project volumes and expanded operations.

Income from Equity Method Investment

The Company’s equity method investment in GAC had a carrying value of $1.7 million and $2.1 million at November 2, 2019 and July 31, 2018, respectively. The Company’s ownership percentage was 52.48% at both dates. The equity method investment in GAC is included within the Company’s U.S. operations operating segment. Activity recorded for the Company’s equity method investment is summarized in the following table.

	Three Months Ended
	November 2, 2019			October 27, 2018
	(in thousands)

Equity investment carrying value at beginning of period	$	1,658		$	2,058
GAC net income attributable to EEI		79			60
EEI’s portion of other comprehensive income recorded by GAC		(53	)		---
Equity investment carrying value at end of period	$	1,684		$	2,118

The results of GAC’s operations for the quarters ended November 2, 2019 and October 27, 2018 are summarized in the following table.

	Three Months Ended
	November 2, 2019		October 27, 2018
	(in thousands)

Gross revenue	$	2,892	$	2,852
Direct cost of services and subcontract costs		1,829		1,974
Income from operations		229		157
Net income		151		109
Net income attributable to EEI		79		60

Income Taxes

During interim reporting periods, our effective tax rate may be impacted by changes in the mix of forecasted income from the U.S. and foreign jurisdictions where 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.

•

Continued application of unfavorable permanent tax adjustments pertaining to global low-taxed intangible income in the U.S. resulting from tax reform legislation enacted during fiscal year 2018; and

•

Income from operations in Peru are not taxed in the Company’s tax provision due to a valuation allowance recorded against deferred tax assets.

Page 23 of 27

•

Taxable income from operations in Brazil which are taxed at a 34% rate, which is higher that the U.S. statutory federal rate.

Liquidity and Capital Resources

Cash, cash equivalents and restricted cash decreased $3.3 million during the first quarter of fiscal year 2019, due mainly to the following factors and activity:

•

We paid $0.9 million of dividends during the first quarter of fiscal year 2020 that were declared during the prior quarter. Our Board of Directors considers the approval dividends to our shareholders on a discretionary basis based on various operating parameters, including available cash balances, results of current operations and projections of future operating results and cash flows.

•

During the first quarter of fiscal year 2019, our U.S. operations incurred and paid approximately $1.5 million of expenses related to the Merger.

•

A decline in revenue and profits from our U.S. operations during fiscal year 2019 had a detrimental impact on cash generated from operating activities during the first quarter of fiscal year 2020.

•

Higher revenue from our Peruvian operations during the first quarter of fiscal year 2020 required initial resource outlays on new projects that have not yet been billed to and collected from our clients.

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 as of November 2, 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 $3.3 million of unsecured lines of credit available to fund working capital requirements. There were $0.2 million of cash advances and $1.3 million of letters of credit outstanding under these lines of credit as of November 2, 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 2020.

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.

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

	November 2, 2019		July 31, 2019
	(in thousands)
Total firm backlog of uncompleted contracts:
U.S. operations	$	45,896	$	47,795
South American operations		14,169		13,057
Consolidated totals	$	60,165	$	60,852

Anticipated completion of firm backlog in next twelve months:
U.S. operations	$	22,227	$	32,472
South American operations		11,461		11,262
Consolidated totals	$	33,688	$	43,734

Page 24 of 27

In addition to the firm backlog summarized in the table above, we also have been awarded contracts 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 $23.7 million and $16.8 million at November 2, 2019 and July 31, 2019 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.

Critical Accounting Policies and Use of Estimates

The Company'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.

Update to Leases Accounting Policy

In March 2016, FASB issued ASU 2016-02. The main difference between previous U.S. GAAP and ASU 2016-02 (together with 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. The Company adopted the provisions of ASU 2016-02 effective August 1, 2019, using the modified retrospective approach. The adoption of ASU 2016-02 did not have a material impact on the results of operations or liquidity for the Company’s U.S. or South American operations. On the effective date, the recognized new right-of-use assets and corresponding lease liabilities associated with operating leases of approximately $6.2 million. Refer to Notes 2 and 9 of the accompanying condensed consolidated financial statements for additional information regarding our adoption of ASU 2016-02.

Inflation

Inflation did not have a material impact on our business during the quarters ended November 2, 2019 or October 27, 2018 because a significant amount of our contracts are either cost based or contain commercial rates for services that are adjusted annually.

Off-Balance Sheet Arrangements

We had outstanding letters of credit drawn under our lines of credit to support operations of $1.3 million and $1.6 million at November 2, 2019 and July 31, 2019, respectively. Other than these letters of credit, we did not have any off-balance sheet arrangements as of November 2, 2019 or July 31, 2019.

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.

Page 25 of 27

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. Our Acting Principal Executive Officer and Acting Chief Financial Officer have concluded that the Company’s disclosure controls and procedures were effective at November 2, 2019.

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

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 November 2, 2019 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Accordingly, even effective internal control over financial reporting can only provide reasonable assurance of achieving their control objectives.

PART II — OTHER INFORMATION

Item 1.

Legal Proceedings

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 three months ended November 2, 2019 under this share repurchase program:

Fiscal Year 2019 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 2019	---	---	---	77,082
September 2019	---	---	---	77,082
October 2019	---	---	---	77,082

Item 3.

Defaults Upon Senior Securities

None.

Page 26 of 27

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)

The Company filed a Current Report on Form 8-K on November 20, 2019 (the “Original Report”) to announce that, at a special meeting of stockholders held by the Company on November 20, 2019 (the “Special Meeting”), the Company’s stockholders approved the following proposals: (i) a proposal to adopt the Agreement and Plan of Merger, dated as of August 28, 2019 (the “Merger Agreement”), by and among WSP Global Inc., a Canadian corporation, Everest Acquisition Corp., a New York corporation and indirect wholly owned subsidiary of WSP Global Inc. and the Company (the “Merger Agreement Proposal”); (ii) a proposal to approve, on an advisory (non-binding) basis, the compensation that may be paid or become payable to E&E’s named executive officers that is based on or otherwise relates to the merger contemplated by the Merger Agreement; and (iii) a proposal to approve an adjournment of the Special Meeting, if necessary or appropriate, to solicit additional proxies if there are not sufficient votes at the time of the Special Meeting to approve the Merger Agreement Proposal.

(c)

The Company filed a Current Report on Form 8-K/A on December 4, 2019 to amend an immaterial, typographical error included in the Original Report. This correction was immaterial and did not impact the outcome of the vote as previously disclosed in the Original Report.

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:	December 17, 2019	/s/ Peter F. Sorci
		Peter F. Sorci
		Acting Chief Financial Officer