UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 
 (Mark
      One)[X]
              QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934For
      the quarterly period ended September 6, 2008OR[  
      ]
              TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF
      1934For the transition period
      from
      to
 
 Commission File Number 001-33987
 
 HERITAGE-CRYSTAL CLEAN,
INC.
 (Exact
name of registrant as specified in its charter)
 
 Delaware
                
                26-0351454State
      or other jurisdiction of
                
                (I.R.S.
      Employerincorporation
                
                Identification
      No.)
 
 2175
Point Boulevard
 Suite
375
 Elgin,
IL 60123
 (Address
of principal executive offices) (Zip Code)
 
 Registrant’s
telephone number, including area code (847)
836-5670
 
 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 [X]
No [  
]
 
 Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, or a non-accelerated filer. See definition of “large
accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule
12b-2 of the Exchange Act. (Check one):
 
 Large
      accelerated filer
            [  
      ]
            
            Accelerated
      Filer   [  
      ]Non-accelerated
      filer
            [X]
            
            Smaller
      reporting company   [  
      ]
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes [  
] No [X]
 
 Number of
shares outstanding of registrant’s class of common stock as of September 30,
2008: 10,675,390
 
 1
 Table
of Contents
 
 PART
      IFINANCIAL
      INFORMATIONITEM
      1. FINANCIAL STATEMENTS
                3ITEM
      2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
      AND
                  RESULTS OF OPERATIONS
                14ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
    RISK
                19ITEM
      4. CONTROL AND PROCEDURES
                19PART
      IIOTHER
      INFORMATIONITEM
      6. EXHIBITS
                20SIGNATURES
                21
  
 2
 PART
I
 ITEM
1. FINANCIAL STATEMENTS
 Heritage-Crystal
Clean, Inc.
 Consolidated
Balance Sheets
 (In
Thousands, Except Share and Par Value Amounts)
 (Unaudited)
  September
      6, 2008
                                                                                      
                                                                                      
                                                                                      December
      29, 2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                                                                                      
                                                                                      $
                                                                                      363
                                                                                      
                                                                                      
                                                                                      $
                                                                                      479Accounts
      receivable, net of allowance for doubtful accounts of $849and
      $1,130 at September 6, 2008 and December 29, 2007,
      respectively
                                                                                      
                                                                                      
                                                                                      15,516
                                                                                      
                                                                                      
                                                                                      
                                                                                      13,446Inventory
                                                                                      
                                                                                      
                                                                                      14,530
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,447Deferred
      income taxes
                                                                                      
                                                                                      
                                                                                      1,163
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Prepaid
      and other current assets
                                                                                      
                                                                                      
                                                                                      1,937
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,208Total
      Current Assets
                                                                                      
                                                                                      
                                                                                      33,509
                                                                                      
                                                                                      
                                                                                      
                                                                                      25,580Fixed
      assets, net of accumulated depreciation
                                                                                      
                                                                                      
                                                                                      20,584
                                                                                      
                                                                                      
                                                                                      
                                                                                      19,420Deferred
      offering costs
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,276Deferred
      income taxes
                                                                                      
                                                                                      
                                                                                      132
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Software
      and intangible assets, net of accumulated amortization
                                                                                      
                                                                                      
                                                                                      1,956
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,708Total
      Assets
                                                                                      
                                                                                      $
                                                                                      56,181
                                                                                      
                                                                                      
                                                                                      $
                                                                                      47,984LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
                                                                                      
                                                                                      $
                                                                                      7,003
                                                                                      
                                                                                      
                                                                                      $
                                                                                      7,258Accrued
      salaries, wages, and benefits
                                                                                      
                                                                                      
                                                                                      2,172
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,560Taxes
      payable
                                                                                      
                                                                                      
                                                                                      2,115
                                                                                      
                                                                                      
                                                                                      
                                                                                      983Other
      accrued expenses
                                                                                      
                                                                                      
                                                                                      1,249
                                                                                      
                                                                                      
                                                                                      
                                                                                      1,169Total
      Current Liabilities
                                                                                      
                                                                                      
                                                                                      12,539
                                                                                      
                                                                                      
                                                                                      
                                                                                      10,970Note
      payable - bank
                                                                                      
                                                                                      
                                                                                      1,165
                                                                                      
                                                                                      
                                                                                      
                                                                                      22,045Total
      Liabilities
                                                                                      
                                                                                      
                                                                                      13,704
                                                                                      
                                                                                      
                                                                                      
                                                                                      33,015Redeemable
      Capital Units
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      2,261STOCKHOLDERS'
      EQUITY:Preferred
      members' capital
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      14,704Common
      members' capital
                                                                                      
                                                                                      
                                                                                      -
                                                                                      
                                                                                      
                                                                                      
                                                                                      368Common
      stock - 15,000,000 Shares authorized at $0.01 par value,10,675,390
      shares issued and outstanding at September 6, 2008
                                                                                      
                                                                                      
                                                                                      107
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Additional
      paid-in capital
                                                                                      
                                                                                      
                                                                                      42,493
                                                                                      
                                                                                      
                                                                                      
                                                                                      -Accumulated
      deficit
                                                                                      
                                                                                      
                                                                                      (123
                                                                                      )
                                                                                      
                                                                                      
                                                                                      (2,364
                                                                                      )Total
      Stockholders' Equity
                                                                                      
                                                                                      $
                                                                                      42,477
                                                                                      
                                                                                      
                                                                                      $
                                                                                      12,708Total
      Liabilities and Stockholders' Equity
                                                                                      
                                                                                      $
                                                                                      56,181
                                                                                      
                                                                                      
                                                                                      $
                                                                                      47,984
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  3
 Heritage-Crystal
Clean, Inc. Consolidated
Statements of Operations (In
Thousands, Except Per Share Amounts) (Unaudited)
 Third
      Quarter Ended
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              First
      Three Quarters EndedSeptember
      6, 2008
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              September
      8, 2007
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              September
      6, 2008
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              September
      8, 2007Sales
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              25,646
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              20,967
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              73,482
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              60,541Cost
      of sales
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              6,020
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              5,480
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              17,936
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              15,361Cost
      of sales - inventory impairment
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2,182Gross
      profit
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              19,626
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              15,487
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              55,546
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              42,998Operating
      costs
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              12,523
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              10,100
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              36,640
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              29,270Selling,
      general, and administrative expenses
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              4,278
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,263
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              15,042
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              9,882Proceeds
      from contract termination
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              (3,000
                                                                                                                                                                              )Operating
      income
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2,825
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2,124
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,864
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              6,846Interest
      expense - net
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              24
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              314
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              395
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              957Income
      before income taxes
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2,801
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,810
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,469
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              5,889Provision
      for income taxes
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,179
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              3,206
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -Net
      income
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,622
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,810
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              263
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              5,889Preferred
      return
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              390
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              339
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,171Net
      income (loss) available to common shareholders
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              1,622
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              1,420
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (76
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              4,718Net
      income (loss) per share available to common shareholders:
      basic
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.15
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.20
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (0.01
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.66Net
      income (loss) per share available to common shareholders:
      diluted
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.15
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.20
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (0.01
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.65Pro
      forma data:Net
      income
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              1,622
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              1,810
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              263
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              5,889Pro
      forma provision for income taxes
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              742
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              497
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              2,415Return
      on preferred and mandatorily redeemable capital units
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              -
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              401
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              372
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              1,206Pro
      forma net income (loss) available to common members
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              1,622
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              667
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (606
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              2,268Pro
      forma net income (loss) per share: basic
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.15
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.09
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (0.06
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.32Pro
      forma net income (loss) per share: diluted
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.15
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.09
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              (0.06
                                                                                                                                                                              )
                                                                                                                                                                              
                                                                                                                                                                              $
                                                                                                                                                                              0.31Number
      of weighted average common shares outstanding: basic
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              10,675
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              7,182
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              9,657
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              7,176Number
      of weighted average common shares outstanding: diluted
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              10,848
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              7,242
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              9,657
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              
                                                                                                                                                                              7,223
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  4
 Heritage-Crystal
Clean, Inc. Consolidated
Statement of Shareholders' Equity (In
Thousands) (Unaudited)
  Par
                                                                      
                                                                      
                                                                      Paid-in
                                                                      
                                                                      
                                                                      RetainedUnits/
                                                                      
                                                                      
                                                                      Members'
                                                                      
                                                                      
                                                                      Value
                                                                      
                                                                      
                                                                      Capital
                                                                      
                                                                      
                                                                      EarningsShares
                                                                      
                                                                      
                                                                      Capital
                                                                      
                                                                      
                                                                      Common
                                                                      
                                                                      
                                                                      Common
                                                                      
                                                                      
                                                                      (Deficit)
                                                                      
                                                                      
                                                                      TotalBalance,
      December 29, 2007
                                                                      
                                                                      
                                                                      24
                                                                      
                                                                      
                                                                      $
                                                                      15,072
                                                                      
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      (2,364
                                                                      )
                                                                      
                                                                      $
                                                                      12,708Distribution
      to preferred members
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (10,887
                                                                      )
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (10,887
                                                                      )Tax
      distributions
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (425
                                                                      )
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      (365
                                                                      )
                                                                      
                                                                      
                                                                      (790
                                                                      )Reorganization
                                                                      
                                                                      
                                                                      6,642
                                                                      
                                                                      
                                                                      
                                                                      (3,760
                                                                      )
                                                                      
                                                                      
                                                                      66
                                                                      
                                                                      
                                                                      
                                                                      3,694
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -Income
      tax benefit of reorganization
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      2,343
                                                                      
                                                                      
                                                                      
                                                                      2,343Net
      income
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      263
                                                                      
                                                                      
                                                                      
                                                                      263Conversion
      of redeemable capital units
                                                                      
                                                                      
                                                                      564
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      6
                                                                      
                                                                      
                                                                      
                                                                      2,256
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      2,262Proceeds
      from issuance of common stock, net
                                                                      
                                                                      
                                                                      3,401
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      34
                                                                      
                                                                      
                                                                      
                                                                      33,211
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      33,245Share-based
      compensation
                                                                      
                                                                      
                                                                      68
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      1
                                                                      
                                                                      
                                                                      
                                                                      3,332
                                                                      
                                                                      
                                                                      
                                                                      -
                                                                      
                                                                      
                                                                      
                                                                      3,333Balance,
      September 6, 2008
                                                                      
                                                                      
                                                                      10,675
                                                                      
                                                                      
                                                                      $
                                                                      -
                                                                      
                                                                      
                                                                      $
                                                                      107
                                                                      
                                                                      
                                                                      $
                                                                      42,493
                                                                      
                                                                      
                                                                      $
                                                                      (123
                                                                      )
                                                                      
                                                                      $
                                                                      42,477
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  5
 Heritage-Crystal
Clean, Inc. Consolidated
Statements of Cash Flows (In
Thousands) (Unaudited)
  First
      Three Quarters EndedSeptember
      6, 2008
                                                                                    
                                                                                    
                                                                                    September
      8, 2007Cash
      Flows from Operating Activities:Net
      income
                                                                                    
                                                                                    $
                                                                                    263
                                                                                    
                                                                                    
                                                                                    $
                                                                                    5,889Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                                                                                    
                                                                                    
                                                                                    2,441
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,917Bad
      debt provision
                                                                                    
                                                                                    
                                                                                    584
                                                                                    
                                                                                    
                                                                                    
                                                                                    454Share-based
      compensation
                                                                                    
                                                                                    
                                                                                    3,333
                                                                                    
                                                                                    
                                                                                    
                                                                                    204Non-cash
      inventory charge related to contract termination
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    2,182Deferred
      tax expense
                                                                                    
                                                                                    
                                                                                    1,048
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivables
                                                                                    
                                                                                    
                                                                                    (2,654
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (2,339
                                                                                    )Decrease
      (increase) in inventory
                                                                                    
                                                                                    
                                                                                    (4,082
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (2,564
                                                                                    )Decrease
      (increase) in prepaid and other current assets
                                                                                    
                                                                                    
                                                                                    (730
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (186
                                                                                    )Increase
      (decrease) in accounts payable
                                                                                    
                                                                                    
                                                                                    210
                                                                                    
                                                                                    
                                                                                    
                                                                                    1,093Increase
      (decrease) in accrued expenses
                                                                                    
                                                                                    
                                                                                    1,824
                                                                                    
                                                                                    
                                                                                    
                                                                                    689Cash
      provided by operating activities
                                                                                    
                                                                                    
                                                                                    2,237
                                                                                    
                                                                                    
                                                                                    
                                                                                    7,339Cash
      flows from Investing Activities:Capital
      expenditures
                                                                                    
                                                                                    
                                                                                    (3,436
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (5,612
                                                                                    )Software
      and intangible asset costs
                                                                                    
                                                                                    
                                                                                    (489
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (126
                                                                                    )Cash
      used in investing activities
                                                                                    
                                                                                    
                                                                                    (3,925
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (5,738
                                                                                    )Cash
      flows from Financing Activities:Deferred
      offering costs
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (559
                                                                                    )Deferred
      financing costs
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    (33
                                                                                    )Proceeds
      from issuance of common stock, net of offering costs
                                                                                    
                                                                                    
                                                                                    34,220
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Proceeds
      from note payable - bank
                                                                                    
                                                                                    
                                                                                    30,760
                                                                                    
                                                                                    
                                                                                    
                                                                                    19,974Repayments
      of note payable - bank
                                                                                    
                                                                                    
                                                                                    (51,640
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (18,679
                                                                                    )Common
      member contributions
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    2Distributions
      to preferred members
                                                                                    
                                                                                    
                                                                                    (11,768
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (2,375
                                                                                    )Cash
      provided by (used in) financing activities
                                                                                    
                                                                                    
                                                                                    1,572
                                                                                    
                                                                                    
                                                                                    
                                                                                    (1,670
                                                                                    )Net
      increase (decrease) in cash and cash equivalents
                                                                                    
                                                                                    
                                                                                    (116
                                                                                    )
                                                                                    
                                                                                    
                                                                                    (69
                                                                                    )Cash
      and cash equivalents, beginning of period
                                                                                    
                                                                                    
                                                                                    479
                                                                                    
                                                                                    
                                                                                    
                                                                                    271Cash
      and cash equivalents, end of period
                                                                                    
                                                                                    $
                                                                                    363
                                                                                    
                                                                                    
                                                                                    $
                                                                                    202Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                                                                                    
                                                                                    $
                                                                                    526
                                                                                    
                                                                                    
                                                                                    $
                                                                                    1,104Payables
      for construction in process
                                                                                    
                                                                                    
                                                                                    -
                                                                                    
                                                                                    
                                                                                    
                                                                                    751Payables
      for offering costs
                                                                                    
                                                                                    
                                                                                    103
                                                                                    
                                                                                    
                                                                                    
                                                                                    -Income
      taxes paid
                                                                                    
                                                                                    
                                                                                    1,024
                                                                                    
                                                                                    
                                                                                    
                                                                                    -
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  6
 HERITAGE-CRYSTAL
CLEAN, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 September
6, 2008
 (Unaudited)
 (1)  ORGANIZATION
AND NATURE OF OPERATIONS
 
 Heritage-Crystal
Clean, Inc. and its subsidiaries (the “Company”), a Delaware corporation,
provides parts cleaning, hazardous and non-hazardous waste services to small and
mid-sized customers in both the manufacturing and automotive service
sectors.  Our service programs include parts cleaning, containerized
waste management, used oil collection, and vacuum truck services.
 
 On March
12, 2008, Heritage-Crystal Clean, Inc. raised net proceeds of $33.2 million in
an initial public offering and a direct placement (the “offerings”).
Concurrently, the Company paid preferred members an accrued return through March
11, 2008 of $10.9 million as part of a reorganization, in which, prior to the
consummation of the offerings, the members of Heritage-Crystal Clean, LLC and
the former stockholders of BRS-HCC Investment Co., Inc. became stockholders of
Heritage-Crystal Clean, Inc. (the “reorganization”). Further details regarding
these transactions can be found below under the heading “Shareholders’
Equity.”
 
 Prior to
the completion of the reorganization, the Company filed an amendment to its
certificate of incorporation with the Delaware Secretary of State, increasing
its authorized capital to 15,000,000 shares of common stock at a par value
of $0.01 per share and 500,000 shares of undesignated preferred
stock.
 
 (2)  SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
 
 (a)
Principles of consolidation and basis of presentation
 
 The
Company conducts its primary business operations through Heritage-Crystal Clean,
LLC., its wholly owned subsidiary, and all intercompany balances have been
eliminated in consolidation.
 
 The
unaudited interim financial statements included herein have been prepared by the
Company in accordance with U.S. generally accepted accounting principles
(“GAAP”) for interim financial information and in accordance with Rule 10-01 of
Regulation S-X of the Securities Exchange Act of 1934, as amended. Accordingly,
they do not include all of the information and footnotes required by GAAP for
complete financial statements. Operating results for interim periods are not
necessarily indicative of results that may be expected for the year as a whole.
In the opinion of the Company’s management, all adjustments (consisting of
normal recurring adjustments) considered necessary for a fair presentation have
been included. These financial statements and notes thereto should  be
read in conjunction with the Company’s audited financial statements for the
fiscal year ended December 29, 2007 filed with the Unites States Securities and
Exchange Commission on a Registration Statement on Form S-1, as amended (SEC
Reg. No. 333-143864)
 
 The 2007
year-end consolidated balance sheet data included in this Form 10-Q was derived
from the audited financial statements referenced above, but does not include all
disclosures required by accounting principles generally accepted in the United
States of America.
 
 GAAP
requires the use of certain estimates by management in determining the reported
amounts of assets and liabilities and disclosures of contingent assets and
liabilities at the date of the financial statements and the reported amounts of
sales and expenses during the reporting period. Significant items subject to
such estimates and assumptions are the allowance for doubtful accounts
receivable and valuation of inventory at lower of cost or market. Actual results
could differ from those estimates.
 
 The
Company’s fiscal year ends on the Saturday closest to December 31. The most
recent fiscal year ended on December 29, 2007. Our convention with respect to
reporting periodic financial data is such that each of our first three fiscal
quarters consist of twelve weeks while our last fiscal quarter consists of
sixteen or seventeen weeks. Interim results are presented for the twelve week
periods and thirty-six week periods ended September 6, 2008 and September 8,
2007 each referred to as “third quarter ended” or “third fiscal quarter” and
“first three quarters ended” respectively.
 
 (b) Income
Taxes
 
 In
connection with the Company's reorganization and initial public offering, the
Company became a ‘C’ corporation subject to federal and state income taxes. The
Company accounts for income taxes in accordance with SFAS No. 109, Accounting for Income Taxes
("SFAS No. 109"), under which deferred assets and liabilities are
recognized based upon anticipated future tax consequences attributable to
differences between financial statement carrying values of assets and
liabilities and their respective tax bases. A valuation allowance is established
to reduce the carrying value of deferred tax assets if it is considered more
likely than not that
 7
 such
assets will not be realized. Any change in the valuation allowance would be
charged to income in the period such determination was made.
 
 Prior to
converting to a ‘C’ corporation on March 11, 2008, the Company operated as a
limited liability company and was taxed as a partnership. As such, the Company's
income or losses were passed through to its owners who are liable for any
related income taxes.
 
 (c)
Stock-Based Compensation
 
 Effective
January 1, 2006, the Company adopted FASB Statement No. 123(R), Share-Based Payment(Statement 123(R)). This statement replaces FASB Statement No. 123,
Accounting for Stock-Based
Compensation(Statement 123) and supersedes APB No. 25.
Statement 123(R) requires that all stock-based compensation be recognized as an
expense in the financial statements and that such cost be measured at the fair
value of the award. This statement was adopted using the prospective method of
application, which requires the Company to recognize compensation cost on a
prospective basis. For share-based awards granted after January 1, 2006,
the Company recognized compensation expense based on estimated grant date fair
value.
 
 The
Company values restricted stock as of the closing stock price on the grant date,
then amortizes the expense on a straight-line basis in accordance with FASB
Statement No. 123(R) over the remaining vesting period of the
awards.
 
 The
Company estimates the fair value of stock options granted using the
Black-Scholes-Merton option-pricing model and a single option award approach.
This fair value is then amortized on a straight-line basis over the requisite
service periods of the awards, which is generally the vesting period. The
following assumptions are used in the Black-Scholes-Merton option pricing
model:
 
 Expected
Term —The Company’s expected term represents the period that the Company’s
stock-based awards are expected to be outstanding;
 
 Expected
Volatility —Due to the Company’s limited trading history, the average volatility
estimate used was determined by using a composite group of peer
companies;
 
 Expected
Dividend —The Black-Scholes-Merton valuation model calls for a single expected
dividend yield as an input. The Company currently pays no dividends and does not
expect to pay dividends in the foreseeable future;
 
 Risk-Free
Interest Rate —The Company bases the risk-free interest rate on the implied
yield currently available on United States Treasury zero-coupon issues with an
equivalent remaining term.
 
 (d)
Recent Accounting Pronouncements
 
 In
December 2007, the FASB issued FASB Statement No. 141R, Business Combinations
(Statement 141R) and FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial
Statements — an amendment to ARB No. 51 (Statement 160).
Statements 141R and 160 require most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at “full fair value” and require noncontrolling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with noncontrolling interest
holders. Both Statements are effective for periods beginning on or after
December 15, 2008, and earlier adoption is prohibited. Statement 141R
will be applied to business combinations occurring after the effective date.
Statement 160 will be applied prospectively to all noncontrolling interests,
including any that arose before the effective date. The impact of SFAS 141R on
the Company will be dependant upon the extent to which we have transactions or
events occur that are within its scope.
 
 (e)
New Accounting Pronouncements
 
 In
September 2006, the FASB issued SFAS No. 157, Fair Value Measurements
(SFAS 157). SFAS 157 defines fair value, establishes a framework for
measuring fair value in generally accepted accounting principles and expands
disclosures about fair value measurements. This Statement applies to previous
accounting pronouncements that require or permit fair value measurements.
Accordingly, this Statement does not require any new fair value measurements.
SFAS 157 is effective for fiscal years beginning after November 15,
2007. Delayed application is permitted for nonfinancial assets and nonfinancial
liabilities except for items that are recognized or disclosed at fair value in
the Financial Statements on a recurring basis (at least annually), until fiscal
years beginning after November 15, 2008. The Company has adopted SFAS 157
and the impact has been immaterial to the consolidated financial
statements.
 
 In
February 2007, the FASB issued SFAS 159, The Fair Value Option for
Financial Assets and
Financial Liabilities — Including on amendment of FASB Statement
No. 115(SFAS 159). This standard amends SFAS 115, Accounting for Certain Investments in Debt and Equity
Securities, with respect to accounting for a transfer to the trading
category for all entities with available-for-sale and trading securities
electing the fair value option. This standard allows companies to elect fair
value accounting for many financial instruments and other items that currently
are not required to be accounted as such, allows different applications for
electing the option for a single item or groups of items, and requires
disclosures to facilitate comparisons of similar assets and liabilities that
are
 8
 accounted
for differently in relation to the fair valueoption. SFAS 159 is effective
for fiscal years beginning after November 15, 2007. The Company has adopted
SFAS 159 and the impact has been immaterial to the consolidated financial
statements.
 
 (3)  INVENTORY
 
 The
carrying value of inventory consisted of the following (in
thousands):
  September
      6, 2008
                                  
                                  
                                  December
      29, 2007Machines
                                  
                                  $
                                  2,494
                                  
                                  
                                  $
                                  2,228Solvents
                                  
                                  
                                  9,901
                                  
                                  
                                  
                                  6,379Drums
                                  
                                  
                                  1,110
                                  
                                  
                                  
                                  1,004Accessories
                                  
                                  
                                  1,025
                                  
                                  
                                  
                                  836Total
      inventory
                                  
                                  $
                                  14,530
                                  
                                  
                                  $
                                  10,447
  (4)NOTE
PAYABLE
 
 The
Company has a bank credit facility that provides for borrowings of up to $25
million. On March 3, 2008, the Company amended the credit facility to extend the
maturity date of the credit facility to December 31, 2010. As of September
6, 2008 and December 29, 2007, $1.2 million and $22.0 million respectively, were
outstanding under the credit facility. Under the terms of the credit facility,
interest is payable monthly at the prime rate, unless the total leverage ratio
is greater than or equal to 2.75 to 1. The weighted average effective interest
rate for amounts outstanding was 6.68% and 8.34% at September 6, 2008 and
December 29, 2007, respectively. Amounts borrowed under the credit facility
are secured by a security interest in substantially all of the Company’s
tangible and intangible assets. As of September 6, 2008, the Company was in
compliance with all covenants under its credit facility. As of September 6, 2008
and December 29, 2007 $23.8 million and $3.0 million respectively, were
available under the credit facility.
 
 (5)  
COMMITMENTS AND CONTINGENCIES
 
 The
Company is subject to contingencies as a result of environmental laws and
regulations. The related future cost is not determinable due to such factors as
the unknown timing and extent of corrective actions, if any, that may be
required and also due to the application of joint and several liability. The
Company believes, however, that any such costs will not have a material adverse
effect on its financial position, future operations, or cash flows.
 
 The
Company leases office space, equipment, and vehicles under noncancelable
operating lease agreements which expire through 2016. Rental expense under
operating leases was approximately $1.7 million and $1.6 million for the third
quarter of 2008 and 2007, respectively, and $5.2 million and $4.5 million for
the first three quarters of 2008 and 2007, respectively.
 
 Future
minimum lease payments under noncancelable operating leases as of September 6,
2008 are as follows (in thousands):
  Fiscal
period:
 Remainder
      of 2008
                              
                              $
                              2,6692009
                              
                              
                              7,0662010
                              
                              
                              5,6492011
                              
                              
                              4,3142012
                              
                              
                              3,562Thereafter
                              
                              
                              4,449Total
                              
                              $
                              27,709
  9
 (6)  INCOME
TAXES
 
 On March
11, 2008, in connection with the reorganization and the Company converting
from a limited liability company to a 'C' corporation, the Company
established beginning balances in its deferred tax assets and liabilities
in accordance with SFAS No. 109. Accordingly, the Company recorded a
cumulative net deferred tax asset of $0.1 million.   Of this
amount, a tax benefit of $2.3 million was recorded directly to equity in
accordance with EITF 94-10, related to the increase in the tax basis of the
Company's assets due to the reorganization. This was partially offset by a $2.2
million tax liability related to the change in tax status which was recorded as
a component of the income tax provision.
 
 Components
of the Company's income tax benefit and provision for the period following the
Company's conversion to a ‘C’ corporation from December 30, 2007 through
September 6, 2008, including the $2.2 million deferred tax charge discussed
above, are as follows:
  December
      30, 2007throughSeptember
      6, 2008Current:Federal
                                            
                                            $
                                            1,759State
                                            
                                            
                                            399Total
      current
                                            
                                            $
                                            2,158Deferred:Change
      in tax status
                                            
                                            $
                                            2,210Federal
                                            
                                            
                                            (1,017
                                            )State
                                            
                                            
                                            (145
                                            )Total
      deferred
                                            
                                            $
                                            1,048Income
      tax provision
                                            
                                            $
                                            3,206Pro
      forma tax for period prior to conversion
                                            
                                            
                                            497Total
      pro forma tax provision
                                            
                                            $
                                            3,703
  A
reconciliation of the expected income taxes at the statutory federal rate to the
Company's actual income taxes for December 30, 2007 through September 6, 2008,
is as follows:
  December
      30, 2007throughSeptember
      6, 2008Tax
      at statutory federal rate
                                                                
                                                                $
                                                                1,180State
      and local tax, net of federal benefit
                                                                
                                                                
                                                                164Other
                                                                
                                                                
                                                                149Change
      in tax status
                                                                
                                                                
                                                                2,210Earnings
      for period prior to conversion
                                                                
                                                                
                                                                (497
                                                                )Total
      income tax provision
                                                                
                                                                $
                                                                3,206Pro
      forma tax for period prior to conversion
                                                                
                                                                
                                                                497Total
      pro forma tax provision
                                                                
                                                                $
                                                                3,703
  10
 Components
of deferred tax assets (liabilities) are as follows:
  September
      6, 2008Deferred
      tax assets:Tax
      intangible assets
                                                    
                                                    $
                                                    2,272Allowances
                                                    
                                                    
                                                    765Accrued
      other
                                                    
                                                    
                                                    728Stock
      compensation
                                                    
                                                    
                                                    1,182Total
      deferred tax asset
                                                    
                                                    $
                                                    4,947Deferred
      tax liabilities:Prepaids
                                                    
                                                    
                                                    (360
                                                    )Depreciation
      and amortization
                                                    
                                                    
                                                    (3,292
                                                    )Total
      deferred tax liability
                                                    
                                                    $
                                                    (3,652
                                                    )Net
      deferred tax asset
                                                    
                                                    $
                                                    1,295Current
      deferred tax asset
                                                    
                                                    $
                                                    1,163Noncurrent
      deferred tax asset
                                                    
                                                    
                                                    132Net
      deferred tax asset
                                                    
                                                    $
                                                    1,295
  The
Company has not provided any valuation allowance as it believes the realization
of its deferred tax assets is more likely than not based on the expectation of
future taxable income.
 
 
 (7)  SHAREHOLDERS’
EQUITY
 
  On March
11, 2008 the Company completed a reorganization, initial public offering and
direct placement.  In connection with the reorganization, initial public
offering and direct placement the Company:
  • Became a ‘C’
      corporation through the reorganization of Heritage-Crystal Clean, LLC and
      a merger of BRS-HCC Investment Co., Inc. with and into Heritage-Crystal
      Clean, Inc.;
  • Issued an
      aggregate of 1,217,390 shares of common stock as part of the exchange of
      preferred units of Heritage-Crystal Clean, LLC into common stock of
      Heritage-Crystal Clean, Inc. in the
  reorganization;
  • Issued an
      aggregate of 6,056,900 shares of common stock as part of the exchange of
      common units of Heritage-Crystal Clean, LLC into common stock of
      Heritage-Crystal Clean, Inc.
  •Sold 2,201,100 shares of common
      stock in the initial public offering, at $11.50 per share, raising
      approximately $20.4 million after underwriting discounts and transaction
      costs;
  •Sold 1,200,000 new shares at
      $11.50 per share in a direct placement, raising approximately $12.8
      million after underwriting discounts and transaction
      costs;
  •Repaid approximately $21.3 million
      of indebtedness with the proceeds raised in the initial public offering
      and direct placement;
  •Paid distributions of $10.9
      million to preferred unit holders of Heritage-Crystal Clean, LLC as part
      of the reorganization relating to an accrued return through March 11,
      2008; and
  •Recorded a cumulative net deferred
      tax liability of $2.2 million and a corresponding charge to our provision
      for income taxes upon becoming taxable as a ‘C’
      corporation.
  11
 (8)
SHARE-BASED COMPENSATION
  On March
3, 2008, the Company adopted the 2008 Omnibus Incentive Plan (the “Plan”) to
promote the interests of the Company and its stockholders by providing employees
of the Company and its subsidiaries and members of the Board who are not
employees of the Company (“Non-Employee Directors) with additional incentives to
increase their efforts on the Company’s behalf and to remain in the employ or
service of the Company and with the opportunity, through stock ownership, to
increase their proprietary interest in the Company and their personal interest
in its continued success and progress.  The aggregate number of shares
of common stock which may be issued under the Plan is 1,902,077 plus any common
stock that becomes available for issuance pursuant to the reusage provision of
the Plan.
 
 These
options may vest over various periods up to four years and expire no more than
ten years from the date of grant. A summary of activity under this Plan is as
follows (in thousands):
  Options
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  
                                                                                  WeightedAverage
      Fair
                                                                                  
                                                                                  
                                                                                  WeightedAverageExerciseAvailable
                                                                                  
                                                                                  
                                                                                  Number
      of
                                                                                  
                                                                                  
                                                                                  Value
      Per
                                                                                  
                                                                                  
                                                                                  Price
      PerFor
Grant
                                                                                  
                                                                                  
                                                                                  Options
                                                                                  
                                                                                  
                                                                                  Option
                                                                                  
                                                                                  
                                                                                  OptionBalance
      at December 29, 2007
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Shares
      reserved
                                                                                  
                                                                                  
                                                                                  1,902
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -
                                                                                  
                                                                                  
                                                                                  
                                                                                  -Options
      granted
                                                                                  
                                                                                  
                                                                                  (732
                                                                                  )
                                                                                  
                                                                                  
                                                                                  732
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.90
                                                                                  
                                                                                  
                                                                                  $
                                                                                  11.50Balance
      at September 6, 2008
                                                                                  
                                                                                  
                                                                                  1,170
                                                                                  
                                                                                  
                                                                                  
                                                                                  732
                                                                                  
                                                                                  
                                                                                  $
                                                                                  3.90
                                                                                  
                                                                                  
                                                                                  $
                                                                                  11.50
  At
September 6, 2008, 732,045 options were outstanding and had a weighted-average
remaining contractual life of 9.54 years and an exercise price of $11.50. All of
these options are fully vested and exercisable and the Company incurred $2.9
million of non-cash share-based compensation expense with respect to these
options. The Company also incurred $0.3 million of non-cash share-based
compensation expense that related to Key Employee Membership Interest Trust
“KEMIT” units that converted to shares of common stock upon the completion of
our initial public offering.
 
 The fair
values of employee stock options granted were estimated to be $3.90 per share on
the date of grant using the Black-Scholes-Merton option-pricing model with the
following assumptions:
 
 •
              Volatility
      of 33.23%;
 
 •
              Risk-free
      interest rate of 2.76%;
 
 •
              Expected
      term of 5 years;
 
 •
              No
      dividend yield; and
 
 •
              Market
      value per share of stock on measurement date of
  $11.50.
 
 In
addition to the stock options listed above, in February 2007, the Company
granted to certain key employees in our oil and vacuum business 120 common units
that subsequently converted to 60,000 restricted shares in connection with our
initial public offering in March 2008. These shares are subject to forfeiture if
certain performance goals are not achieved by fiscal year end 2011. As of
September 6, 2008, the Company believes that the performance criteria will be
met and has recorded compensation expense of $33,000 and $99,000 during the
third quarter and first three quarters of 2008, respectively, with respect to
these shares. At September 6, 2008, there was approximately $0.5 million of
unrecognized compensation expense related to these awards which will be recorded
through 2011.
 
 The
Company has granted in May 2008, 9,072 restricted shares to its Board of
Directors in which the shares become fully vested after one year of service from
their grant date. At September 6, 2008, there was less than $0.1 million of
unrecognized compensation expense related to these awards which will be recorded
through the second quarter of 2009.
  12
 (9)
PRO FORMA NET INCOME PER COMMON SHARE
 
 Basic net
income per common share is computed by dividing net income available for common
shareholders by the weighted average number of common shares outstanding for the
period in accordance with FASB Statement No. 128, Earnings per Share. Diluted
net income per common share is computed by dividing the sum of net income
available for common shareholders by the sum of the weighted average number of
common shares outstanding and any dilutive potential common equivalents for the
period.
 
 The
following table reconciles the components of net income, net income available to
common shareholders, and pro forma net income available to common members both
for basic and diluted income per common share (in thousands, except per share
data):
  Third
      Quarter Ended
                                                                                                          
                                                                                                          
                                                                                                          First
      Three Quarters EndedSeptember
      6, 2008
                                                                                                          
                                                                                                          
                                                                                                          September
      8, 2007
                                                                                                          
                                                                                                          
                                                                                                          September
      6, 2008
                                                                                                          
                                                                                                          
                                                                                                          September
      8, 2007Net
      income (loss) available to common shareholders
                                                                                                          
                                                                                                          $
                                                                                                          1,622
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          1,420
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          (76
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          4,718Net
      income (loss) per share available to common shareholders:
      basic
                                                                                                          
                                                                                                          $
                                                                                                          0.15
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          0.20
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          (0.01
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          0.66Net
      income (loss) per share available to common shareholders:
      diluted
                                                                                                          
                                                                                                          $
                                                                                                          0.15
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          0.20
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          (0.01
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          0.65Pro
      FormaNet
      Income
                                                                                                          
                                                                                                          $
                                                                                                          1,622
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          1,810
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          263
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          5,889Pro
      forma provision for income taxes
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          742
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          497
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          2,415Return
      on perferred and mandatorily redeemable capital units
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          401
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          372
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          1,206Pro
      forma net income (loss) available to common members
                                                                                                          
                                                                                                          $
                                                                                                          1,622
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          667
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          (606
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          2,268Pro
      forma net income (loss) per share: basic
                                                                                                          
                                                                                                          $
                                                                                                          0.15
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          0.09
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          (0.06
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          0.32Pro
      forma net income (loss) per share: diluted
                                                                                                          
                                                                                                          $
                                                                                                          0.15
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          0.09
                                                                                                          
                                                                                                          
                                                                                                          $
                                                                                                          (0.06
                                                                                                          )
                                                                                                          
                                                                                                          $
                                                                                                          0.31Number
      of weighted average common shares outstanding: basic
                                                                                                          
                                                                                                          
                                                                                                          10,675
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          7,182
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          9,657
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          7,176Diluted
      shares for share-based compensation plans
                                                                                                          
                                                                                                          
                                                                                                          173
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          60
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          -
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          47Number
      of weighted average common shares outstanding: diluted
                                                                                                          
                                                                                                          
                                                                                                          10,848
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          7,242
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          9,657
                                                                                                          
                                                                                                          
                                                                                                          
                                                                                                          7,223
  The
Company has included the redeemable common capital units outstanding prior to
the reorganization in the calculation of basic and diluted earnings per share as
the effect of excluding them would be anti-dilutive. In accordance with
SFAS 150, shares of common stock that are mandatorily redeemable are
excluded from the calculation of basic and diluted earnings per share. The
Company has deducted earnings attributable to mandatorily redeemable units from
income available to common unit holders.
 
 For the first three quarters ended September 6, 2008 the
Company has excluded the effects of the stock options and restricted stock
granted as their inclusion would have had an anti-dilutive effect on loss per
share.
  13
 ITEM
2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
 
 All references to the “Company,” “we,” “our,” and
“us” refer to Heritage-Crystal Clean, Inc., and its
subsidiaries.
 
 This
report contains forward-looking statements that are based upon current
management expectations. Generally, the words "aim," "anticipate," "believe,"
"could," "estimate," "expect," "intend," "may," "plan," "project," "should,"
"will be," "will continue," "will likely result," "would" and similar
expressions identify forward-looking statements. These forward-looking
statements involve known and unknown risks, uncertainties and other important
factors that could cause our actual results, performance or achievements or
industry results to differ materially from any future results, performance or
achievements expressed or implied by these forward-looking statements. These
risks, uncertainties and other important factors include, among others: our
ability to comply with the extensive environmental, health and safety and
employment laws and regulations that our Company is subject to; changes in
environmental laws that affect our business model; competition; claims relating
to our handling of hazardous substances; the limited demand for our used
solvent; our dependency on key employees; our ability to effectively manage our
extended network of branch locations; warranty expense and liability claims;
personal injury litigation; dependency of suppliers; economic conditions and
downturns in the business cycles of automotive repair shops, industrial
manufacturing business and small businesses in general; increased solvent, fuel
and energy costs; the control of The Heritage Group over our Company; and the
risks identified in our filings with the Securities and Exchange Commission,
including our Registration Statement on Form S-1. Given these uncertainties, you
are cautioned not to place undue reliance on these forward-looking statements.
We assume no obligation to update or revise them or provide reasons why actual
results may differ. The information in this report should be read in light of
such risks and in conjunction with the consolidated financial statements and the
notes thereto included elsewhere in this report.
 
 Overview
  Heritage-Crystal
Clean, Inc. provides parts cleaning, hazardous and non-hazardous waste services
to small and mid-sized customers in both the manufacturing and automotive
service sectors.  Our service programs include parts cleaning,
containerized waste management, used oil collection, and vacuum truck
services.  These services help our customers manage their used
chemicals and liquid and solid wastes, while also helping to minimize their
regulatory burdens.  Our customers include businesses involved in
vehicle maintenance operations, such as car dealerships, automotive repair
shops, and trucking firms, as well as small manufacturers, such as metal product
fabricators and printers.  Heritage-Crystal Clean, Inc. is
headquartered in Elgin, Illinois, and operates through more than 50 branches
serving over 36,000 customer locations.
  On March
11, 2008 we completed a reorganization, initial public offering, and direct
placement.  In connection with our reorganization, initial public offering,
and direct placement we:
  • Became a ‘C’
      corporation through the reorganization of Heritage-Crystal Clean, LLC and
      a merger of BRS-HCC Investment Co., Inc. with and into Heritage-Crystal
      Clean, Inc.;
  • Issued an
      aggregate of 1,217,390 shares of common stock as part of the exchange of
      preferred units of Heritage-Crystal Clean, LLC into common stock of
      Heritage-Crystal Clean, Inc. in the
  reorganization;
  • Issued an
      aggregate of 6,056,900 shares of common stock as part of the exchange of
      common units of Heritage-Crystal Clean, LLC into common stock of
      Heritage-Crystal Clean, Inc.
  •Sold 2,201,100 shares of common
      stock in the initial public offering, at $11.50 per share, raising
      approximately $20.4 million after underwriting discounts and transaction
      costs;
  •Sold 1,200,000 new shares at
      $11.50 per share in a direct placement, raising approximately $12.8
      million after underwriting discounts and transaction
      costs;
  •Repaid approximately $21.3 million
      of indebtedness with the proceeds raised in the initial public offering
      and direct placement;
  •Paid distributions of $10.9
      million to preferred unit holders of Heritage-Crystal Clean, LLC as part
      of the reorganization relating to an accrued return through March 11,
      2008; and
  •Recorded a cumulative net deferred
      tax liability of $2.2 million and a corresponding charge to our provision
      for income taxes upon becoming taxable as a ‘C’
      corporation.
  Critical
Accounting Policies
 
 Critical
accounting policies are those that both are important to the accurate portrayal
of a company’s financial condition and
  14
  results,
and require subjective or complex judgments, often as a result of the need to
make estimates about the effect of matters that are inherently
uncertain.
 
 In order
to prepare financial statements that conform to accounting principles generally
accepted in the United States, commonly referred to as GAAP, we make estimates
and assumptions that affect the amounts reported in our financial statements and
accompanying notes. Certain estimates
are particularly sensitive due to their significance to the financial statements
and the possibility that future events may be significantly different from our
expectations.
 Management
believes that there have been no significant changes during the first three
quarters ended September 6, 2008 to the items that we disclosed as our critical
accounting policies and estimates in the section entitled “Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our
Registration Statement on Form S-1 filed with the United States Securities and
Exchange Commission on March 11, 2008 (as amended) for the fiscal year ended
December 29, 2007.
 
 Recent
Accounting Pronouncements
  In
December 2007, the FASB issued FASB Statement No. 141R, Business Combinations
(Statement 141R) and FASB Statement No. 160, Noncontrolling Interests in
Consolidated Financial
Statements — an amendment to ARB No. 51 (Statement 160).
Statements 141R and 160 require most identifiable assets, liabilities,
noncontrolling interests, and goodwill acquired in a business combination to be
recorded at “full fair value” and require noncontrolling interests (previously
referred to as minority interests) to be reported as a component of equity,
which changes the accounting for transactions with noncontrolling interest
holders. Both Statements are effective for periods beginning on or after
December 15, 2008, and earlier adoption is prohibited. Statement 141R
will be applied to business combinations occurring after the effective date.
Statement 160 will be applied prospectively to all noncontrolling interests,
including any that arose before the effective date. The impact of SFAS 141R on
the Company will be dependant upon the extent to which we have transactions or
events occur that are within its scope.
 
 RESULTS
OF OPERATIONS
 
 Third
quarter and first three quarters ended September 6, 2008 compared to third
quarter and first three quarters ended September 8, 2007
 
 Sales,
Cost of sales, and Gross profit
  Third
      Quarter Ended(Dollars
      in thousands)September
      6, 2008
                                              
                                              
                                              September
      8, 2007
                                              
                                              
                                              ChangeSales
                                              
                                              $
                                              25,646
                                              
                                              
                                              $
                                              20,967
                                              
                                              
                                              $
                                              4,679Cost
      of sales
                                              
                                              
                                              6,020
                                              
                                              
                                              
                                              5,480
                                              
                                              
                                              
                                              540Gross
      profit
                                              
                                              $
                                              19,626
                                              
                                              
                                              $
                                              15,487
                                              
                                              
                                              $
                                              4,139Gross
      profit as % of sales
                                              
                                              
                                              77
                                              %
                                              
                                              
                                              74
                                              %
  First
      Three Quarters Ended(Dollars
      in thousands)September
      6, 2008
                                        
                                        
                                        September
      8, 2007
                                        
                                        
                                        ChangeSales
                                        
                                        $
                                        73,482
                                        
                                        
                                        $
                                        60,541
                                        
                                        
                                        $
                                        12,941Cost
      of sales
                                        
                                        
                                        17,936
                                        
                                        
                                        
                                        15,361
                                        
                                        
                                        
                                        2,575Cost
      of sales - inventory impairment
                                        
                                        
                                        -
                                        
                                        
                                        
                                        2,182
                                        
                                        
                                        
                                        (2,182
                                        )Gross
      profit
                                        
                                        $
                                        55,546
                                        
                                        
                                        $
                                        42,998
                                        
                                        
                                        $
                                        12,548Gross
      profit as % of sales
                                        
                                        
                                        76
                                        %
                                        
                                        
                                        71
                                        %
  For the
quarter ended September 6, 2008, sales increased $4.7 million, or 22%, to $25.6
million from $20.9 million for the quarter ended September 8, 2007. For the
first three quarters ended September 6, 2008, sales increased $12.9 million, or
21%, to $73.4 million from $60.5 million for the first three quarters ended
September 8, 2007. At the end of the third fiscal quarter of 2008, we were
operating 54 branch locations compared with 48 at the end of the third fiscal
quarter of 2007. There were 47 branches that were in operation during both
the third fiscal quarters of 2008 and 2007, which experienced same-branch sales
growth of $4.1 million, or 20%.  Excluding the 5 branches in this
group that gave up customers to new branch openings, the remaining 42 branches
experienced same-branch sales growth of 21%. On a year-to-date basis,
same-branch sales growth was $11.1 million, or 19% for the 47 branches and $10.1
or 19% excluding the 5 branches in this group that gave up customers to new
branch openings.
 
 For the
quarter ended September 6, 2008, total cost of sales increased $0.5 million, or
10%, to $6.0 million from $5.5 million for the quarter ended September 8, 2007.
Within cost of sales, increased solvent costs related to higher energy costs
were partially mitigated by improved margins on the reuse solvent, as we sold
solvent that had been carried in inventory at historically lower
values.
 
 For the
first three quarters ended September 6, 2008, total cost of sales increased $0.4
million, or 2%, to $17.9 million from $17.5 million for the first three quarters
ended September 8, 2007. In the first quarter of 2007, we received
$3.0 million from the termination of a contract for our used solvent with a
customer who had failed to meet their volume purchase obligations. We recorded
cost of sales of $2.2 million to reduce solvent inventories to net
realizable value in connection with this settlement.
  15
 Operating
costs
  Third
      Quarter Ended(Dollars
      in thousands)September
      6, 2008
                                    
                                    
                                    September
      8, 2007
                                    
                                    
                                    ChangeOperating
      costs
                                    
                                    $
                                    12,523
                                    
                                    
                                    $
                                    10,100
                                    
                                    
                                    $
                                    2,423As a
      % of sales
                                    
                                    
                                    49
                                    %
                                    
                                    
                                    48
                                    %
  First
      Three Quarters Ended(Dollars
      in thousands)September
      6, 2008
                                  
                                  
                                  September
      8, 2007
                                  
                                  
                                  ChangeOperating
      costs
                                  
                                  $
                                  36,640
                                  
                                  
                                  $
                                  29,270
                                  
                                  
                                  $
                                  7,370As a
      % of sales
                                  
                                  
                                  50
                                  %
                                  
                                  
                                  48
                                  %
  For the
quarter ended September 6, 2008, operating costs increased $2.4 million, or 24%,
to $12.5 million from $10.1 million in the quarter ended September 8, 2007. For
the first three quarters ended September 6, 2008, operating costs increased $7.3
million, or 25%, to $36.6 million from $29.3 million for the first three
quarters ended September 8, 2007. Operating costs, including branch labor and
collection truck costs, increased primarily due to volume increases and higher
costs for fuel and transportation related to fuel prices.
 
 Selling,
general & administrative
  Third
      Quarter Ended(Dollars
      in thousands)September
      6, 2008
                                      
                                      
                                      September
      8, 2007
                                      
                                      
                                      ChangeSelling,
      general & administrative
                                      
                                      $
                                      4,278
                                      
                                      
                                      $
                                      3,263
                                      
                                      
                                      $
                                      1,015As a
      % of sales
                                      
                                      
                                      17
                                      %
                                      
                                      
                                      16
                                      %
  First
      Three Quarters Ended(Dollars
      in thousands)September
      6, 2008
                                  
                                  
                                  September
      8, 2007
                                  
                                  
                                  ChangeSelling,
      general & administrative
                                  
                                  $
                                  15,042
                                  
                                  
                                  $
                                  9,882
                                  
                                  
                                  $
                                  5,160As a
      % of sales
                                  
                                  
                                  20
                                  %
                                  
                                  
                                  16
                                  %
  For the
quarter ended September 6, 2008, selling, general and administrative expense
increased $1.0 million, or 31%, to $4.3 million from $3.3 million in the quarter
ended September 8, 2007. Selling, general and administrative expense increased
by approximately $0.4 million due to costs associated with being a public
company which include among others, Board of Directors compensation and
insurance, incremental legal and accounting fees and Sarbanes-Oxley consulting
services.
 
 For the
first three quarters ended September 6, 2008, selling, general and
administrative expense increased $5.1million, or 52%, to $15.0 million from $9.9
million for the first three quarters ended September 8, 2007. Selling, general
and administrative expense included employee share-based compensation charges of
$3.2 million related to employee stock options granted at the time of our
initial public offering which vested immediately and also related to the vesting
of certain Key Employee Membership Interest Trust “KEMIT” units and additional
costs associated with being a public company which include among others, Board
of Directors compensation and insurance, incremental legal and accounting fees
and Sarbanes-Oxley consulting services.
 
 Proceeds
from contract termination
  First
      Three Quarters Ended(Dollars
      in thousands)September
      6, 2008
                                      
                                      
                                      September
      8, 2007
                                      
                                      
                                      ChangeProceeds
      from contract termination
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      3,000
                                      
                                      
                                      $
                                      (3,000
                                      )As a
      % of sales
                                      
                                      
                                      0
                                      %
                                      
                                      
                                      5
                                      %
  In the
first quarter of 2007, we received $3.0 million from the termination of a
contract for our used solvent with a customer who had failed to meet their
volume purchase obligations. We recorded cost of sales of $2.2 million to
reduce solvent inventories to net realizable value in connection with this
settlement. Please refer to the above section referenced “Cost of sales –
inventory impairment.”
 
 16
 Interest
expense - net
  Third
      Quarter Ended(Dollars
      in thousands)September
      6, 2008
                                    
                                    
                                    September
      8, 2007
                                    
                                    
                                    ChangeInterest
      expense - net
                                    
                                    $
                                    24
                                    
                                    
                                    $
                                    314
                                    
                                    
                                    $
                                    (290
                                    )As a
      % of sales
                                    
                                    
                                    0
                                    %
                                    
                                    
                                    1
                                    %
  First
      Three Quarters Ended(Dollars
      in thousands)September
      6, 2008
                                  
                                  
                                  September
      8, 2007
                                  
                                  
                                  ChangeInterest
      expense - net
                                  
                                  $
                                  395
                                  
                                  
                                  $
                                  957
                                  
                                  
                                  $
                                  (562
                                  )As a
      % of sales
                                  
                                  
                                  1
                                  %
                                  
                                  
                                  2
                                  %
  For the
quarter ended September 6, 2008, interest expense decreased by $0.3 million, or
93%, from $0.3 million in the quarter ended September 8, 2007. For the first
three quarters ended September 6, 2008, interest expense decreased $0.6 million,
or 59%, to $0.4 million from $1.0 million for the first three quarters ended
September 8, 2007. The decrease was due to our reduction in total debt
outstanding substantially due to our initial public offering in March
2008.
 
 Provision
for income taxes
  Third
      Quarter Ended(Dollars
      in thousands)September
      6, 2008
                                      
                                      
                                      September
      8, 2007
                                      
                                      
                                      ChangeProvision
      for income taxes
                                      
                                      $
                                      1,179
                                      
                                      
                                      $
                                      -
                                      
                                      
                                      $
                                      1,179As a
      % of sales
                                      
                                      
                                      5
                                      %
                                      
                                      
                                      0
                                      %
  First
      Three Quarters Ended(Dollars
      in thousands)September
      6, 2008
                                  
                                  
                                  September
      8, 2007
                                  
                                  
                                  ChangeProvision
      for income taxes
                                  
                                  $
                                  3,206
                                  
                                  
                                  $
                                  -
                                  
                                  
                                  $
                                  3,206As a
      % of sales
                                  
                                  
                                  4
                                  %
                                  
                                  
                                  0
                                  %
  In
connection with our initial public offering, we changed our parent company legal
structure from a limited liability company to a ‘C’ corporation. As a limited
liability company, we were not subject to federal or state corporate income
taxes and as such had not incurred any historical taxes. For comparison
purposes, we have presented pro forma net income, which reflects income taxes
assuming we had been a corporation since the time of our formation and assuming
tax rates equal to the rates that would have been in effect had we been required
to report tax expense in such years. A one-time charge to earnings of $2.2
million was recorded in the first quarter of 2008 reflecting the net deferred
tax assets and deferred tax liabilities at the time of the reorganization of the
LLC to a ‘C’ corporation.  Income subject to federal and state income
taxes since becoming a ‘C’ corporation was $5.4 million.  For the
three quarters ended September 6, 2008, our current provision for income tax was
$2.2 million and the deferred portion was $1.0 million.
 17
 
 FINANCIAL
CONDITION
 
 Liquidity
and Capital Resources
 First
      Three Quarters Ended(Dollars
      in thousands)September
      6, 2008
                                  
                                  
                                  September
      8, 2007Net
      cash provided by (used in):Operating
      activities
                                  
                                  $
                                  2,237
                                  
                                  
                                  $
                                  7,339Investing
      activities
                                  
                                  
                                  (3,925
                                  )
                                  
                                  
                                  (5,738
                                  )Financing
      activities
                                  
                                  
                                  1,572
                                  
                                  
                                  
                                  (1,670
                                  )Net
      increase (decrease) in cash and cash equivalents
                                  
                                  $
                                  (116
                                  )
                                  
                                  $
                                  (69
                                  )
  We had
$0.4 million of cash and cash equivalents at September 6, 2008 and
$0.5 million at December 29, 2007. We have historically financed our
operations primarily through the private placement of preferred equity
securities, borrowings from banks and investors and through funds from
operations. During the first quarter of 2007, we received $3.0 million from
the termination of a contract with a customer for used solvent who had failed to
meet their volume purchase obligations. In March 2008, we received net proceeds
of $35.1 million from an initial public offering and concurrent direct
placement. These net proceeds exclude offering costs of $0.9 million paid prior
to fiscal year end 2007 and $0.1 million accrued but not yet paid as of
September 6, 2008. The proceeds were used to reduce borrowings under our credit
facility which included $10.9 million borrowed in March 2008 used to pay
preferred members for an accrued return on preferred units as part of the
reorganization described above under “Overview.”
 
 Our
secured bank credit facility provides for borrowings of up to $25 million. On
March 3, 2008, we amended the facility to extend the maturity date to
December 31, 2010. As of September 6, 2008 and December 29, 2007 $1.2
million and $22.0 million, respectively, were outstanding under the credit
facility. Under the credit facility, interest is payable monthly at the prime
rate, unless the total leverage ratio is greater than or equal to 2.75 to 1. The
weighted average effective interest rate for amounts outstanding was 6.68% and
8.34% at September 6, 2008 and December 29, 2007, respectively. Amounts
borrowed under the credit facility are secured by a security interest in
substantially all of our tangible and intangible assets. As of September 6,
2008, we were in compliance with all covenants under the credit facility. As of
September 6, 2008 and December 29, 2007, $23.8 million and $3.0 million
respectively, were available under the credit facility.
 
 At
September 6, 2008, our working capital was $21.0 million compared to $14.6
million at December 29, 2007. The increase was primarily due to a $4.1 million
increase in inventory, a $2.1 million increase in net accounts receivable and a
$1.2 million current deferred tax asset. The increase was partially offset by
the increase in current taxes payable of approximately $1.1 million. The
increase in inventory was due to rising solvent prices. The increase in our
deferred tax asset was due to our conversion from a limited liability company to
a ‘C’ corporation and the establishment of beginning balances for our net
current deferred tax assets and liabilities. The increase in accounts receivable
was due to our increase in sales.
 
 Net cash
provided by operations was $2.2 million and $7.3 million in the first
three quarters of 2008 and 2007, respectively. The decrease primarily reflects
the receipt of $3.0 million in the first quarter of 2007 from the termination of
a contract with a customer coupled with an increase in inventory of $4.1 million
versus the $2.6 million increase reported in 2007.
 
 Net cash
used in investing activities was $3.9 million and $5.7 million in the first
three quarters of 2008 and 2007, respectively. In the first three quarters of
2007, approximately $3.5 million was for expenditures relating to the
construction of our distillation tower. Approximately $2.5 million of the
capital expenditures made in the first three quarters of 2008 was for purchases
of parts cleaning machines, and $1.4 million was for other items including
office equipment, leasehold improvements, software and intangible assets. We
expect future capital expenditures commensurate with business
growth.
 
 Net cash
provided by (used in) financing activities was $1.6 million and $(1.7)
million in the first three quarters of 2008 and 2007, respectively. The increase
is primarily due to the net proceeds from the issuance of common stock net of
offering costs. The net proceeds were primarily used to repay bank debt and to
make a distribution to preferred members of the Company prior to the
reorganization.
 
 We believe
that our existing cash, cash equivalents and available borrowings will be
sufficient to meet our anticipated cash needs for working capital and capital
expenditures in the next twelve months. We cannot assure you that this will be
the case or that our assumptions regarding sales and expense underlying this
belief will be accurate.
  18
 ITEM
3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
  We are
exposed to interest rate risks primarily through borrowings under our bank
credit facility. Interest on these borrowings is based upon variable interest
rates. Our weighted average borrowings under our bank credit facility during the
first three quarters ended September 6, 2008 was $11.8 million and the
annual effective interest rate for the first three quarters ended September 6,
2008 was 6.68%. We currently do not hedge against interest rate risk. Based on
the foregoing, a hypothetical 1% increase or decrease in interest rates would
have resulted in a $64,000 change to our interest expense in the first three
quarters of 2008.
  ITEM
4. CONTROLS AND PROCEDURES
 
 The
Company's Chief Executive Officer and Chief Financial Officer have concluded,
based on their evaluation as of the end of the period covered by this report,
that the Company's disclosure controls and procedures (as defined in the
Securities Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) are effective to
ensure that information required to be disclosed in the reports that the Company
files or submits under the Securities Exchange Act of 1934 is recorded,
processed, summarized and reported within the time periods specified in the
Securities and Exchange Commission's rules and forms, and that such information
is accumulated and communicated to our management, including our Chief Executive
Officer and Chief Financial Officer, as appropriate, to allow timely decisions
regarding financial disclosures. There was no change in the Company's internal
control over financial reporting that occurred during the quarter
ended September 6, 2008 that has materially affected or is reasonably
likely to materially affect, the Company's internal control over financial
reporting.
  19
 PART
II - OTHER INFORMATION
  ITEM 6. EXHIBITS
 
 31.1
            
            Certification
      of Chief Executive Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200231.2
            
            Certification
      of Chief Financial Officer pursuant to Section 302 of the
      Sarbanes-Oxley Act of 200232.1
            
            Certification
      of Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      200232.2
            
            Certification
      of Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as
      adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
      2002
 
 20
 SIGNATURES
 
 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.
 
 HERITAGE-CRYSTAL CLEAN, INC.
 
 Date: October 17,
    2008
                By:
                /s/
      Gregory RayGregory
      RayChief Financial Officer,
      Vice President, Business Management and
  Secretary
 
 
 21