UNITED
STATES
 SECURITIES
AND EXCHANGE COMMISSION
 Washington,
D.C. 20549
 
 FORM
10-Q
 
 
 (Mark
      One)°
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934

                For
      the quarterly period ended June 14, 2008OR°
            TRANSITION REPORT PURSUANT TO
      SECTION 13 OR 15(d) OF THE SECURITIES   EXCHANGE ACT OF 1934

                For the transition period
      from to
 
 Commission File Number 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 £ No R
 
 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
            o
            
            Accelerated
      Filer   oNon-accelerated
      filer
            x
            
            Smaller
      reporting company   o
 
 Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act).
 Yes R No £
 
 Number of
shares outstanding of registrant’s class of common stock as of July 11, 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 (Unaudited)
 June
      14,
                    2008
                  
                  
                  December
      29,
                    2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
                  
                  $
                  434,391
                  
                  
                  $
                  479,364Accounts receivable, net of allowance for doubtful accounts of
      $661,617and
      $1,129,657 at June 14, 2008 and December 29, 2007,
      respectively
                  
                  
                  14,812,231
                  
                  
                  
                  13,446,073Inventory
                  
                  
                  13,426,349
                  
                  
                  
                  10,447,373Deferred
      income taxes
                  
                  
                  1,078,633
                  
                  
                  
                  -Prepaid
      and other current assets
                  
                  
                  1,349,639
                  
                  
                  
                  1,207,426Total
      Current Assets
                  
                  
                  31,101,243
                  
                  
                  
                  25,580,236Fixed
      assets, net of accumulated depreciation
                  
                  
                  20,238,045
                  
                  
                  
                  19,420,294Deferred
      offering costs
                  
                  
                  -
                  
                  
                  
                  1,275,694Deferred
      income taxes
                  
                  
                  380,084
                  
                  
                  
                  -Software
      and intangible assets, net of accumulated amortization
                  
                  
                  1,849,709
                  
                  
                  
                  1,707,395Total
      Assets
                  
                  $
                  53,569,081
                  
                  
                  $
                  47,983,619LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
                  
                  $
                  6,354,266
                  
                  
                  $
                  7,257,643Accrued
      salaries, wages, and benefits
                  
                  
                  1,579,422
                  
                  
                  
                  1,559,941Taxes
      payable
                  
                  
                  2,067,583
                  
                  
                  
                  983,128Other
      accrued expenses
                  
                  
                  1,079,128
                  
                  
                  
                  1,169,260Total
      Current Liabilities
                  
                  
                  11,080,399
                  
                  
                  
                  10,969,972Note
      payable - bank
                  
                  
                  1,705,000
                  
                  
                  
                  22,045,000Total
      Liabilities
                  
                  
                  12,785,399
                  
                  
                  
                  33,014,972Redeemable
      Capital Units
                  
                  
                  -
                  
                  
                  
                  2,261,391STOCKHOLDERS'
      EQUITY:Preferred
      members' capital
                  
                  
                  -
                  
                  
                  
                  14,703,813Common
      members' capital
                  
                  
                  -
                  
                  
                  
                  367,932Common
      stock - 15,000,000 Shares authorized at $0.01 parvalue,
      10,675,390 shares issued and outstanding at June 14, 2008
                  
                  
                  106,754
                  
                  
                  
                  -Additional
      paid-in capital
                  
                  
                  42,422,302
                  
                  
                  
                  -Accumulated
      deficit
                  
                  
                  (1,745,374
                  )
                  
                  
                  (2,364,489
                  )Total
      Stockholders' Equity
                  
                  $
                  40,783,682
                  
                  
                  $
                  12,707,256Total
      Liabilities and Stockholders' Equity
                  
                  $
                  53,569,081
                  
                  
                  $
                  47,983,619
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  3
 
 Heritage-Crystal
Clean, Inc. Consolidated
Statements of Operations (Unaudited)
 Second
      Quarter Ended
              
              First
      Half EndedJune
      14, 2008
              
              
              June
      16, 2007
              
              
              June
      14, 2008
              
              
              June
      16, 2007Sales
              
              $
              24,837,826
              
              
              $
              20,386,092
              
              
              $
              47,835,269
              
              
              $
              39,574,192Cost
      of sales
              
              
              5,630,289
              
              
              
              4,876,978
              
              
              
              11,915,980
              
              
              
              9,881,173Cost
      of sales - inventory impairment
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              2,182,330Gross
      profit
              
              
              19,207,537
              
              
              
              15,509,114
              
              
              
              35,919,289
              
              
              
              27,510,689Operating
      costs
              
              
              12,601,403
              
              
              
              9,888,264
              
              
              
              24,117,458
              
              
              
              19,169,347Selling,
      general, and administrative expenses
              
              
              4,131,455
              
              
              
              3,518,237
              
              
              
              10,762,565
              
              
              
              6,618,829Proceeds
      from contract termination
              
              
              -
              
              
              
              -
              
              
              
              -
              
              
              
              (3,000,000
              )Operating
      income
              
              
              2,474,679
              
              
              
              2,102,613
              
              
              
              1,039,266
              
              
              
              4,722,513Interest
      expense - net
              
              
              18,647
              
              
              
              302,329
              
              
              
              371,338
              
              
              
              642,356Income
      before income taxes
              
              
              2,456,032
              
              
              
              1,800,284
              
              
              
              667,928
              
              
              
              4,080,157Provision
      for income taxes
              
              
              1,046,644
              
              
              
              -
              
              
              
              2,026,814
              
              
              
              -Net
      income (loss)
              
              
              1,409,388
              
              
              
              1,800,284
              
              
              
              (1,358,886
              )
              
              
              4,080,157Preferred
      return
              
              
              -
              
              
              
              390,299
              
              
              
              339,188
              
              
              
              780,598Net
      income (loss) available to common shareholders
              
              $
              1,409,388
              
              
              $
              1,409,985
              
              
              $
              (1,698,074
              )
              
              $
              3,299,559Net
      income (loss) per share available to common shareholders:
      basic
              
              $
              0.13
              
              
              $
              0.20
              
              
              $
              (0.19
              )
              
              $
              0.46Net
      income (loss) per share available to common shareholders:
      diluted
              
              $
              0.13
              
              
              $
              0.19
              
              
              $
              (0.19
              )
              
              $
              0.46Pro
      forma data:Net
      income (loss)
              
              $
              1,409,388
              
              
              $
              1,800,284
              
              
              $
              (1,358,886
              )
              
              $
              4,080,157Pro
      forma provision for income taxes
              
              
              -
              
              
              
              738,116
              
              
              
              497,246
              
              
              
              1,672,864Return
      on preferred and mandatorily redeemable capital units
              
              
              -
              
              
              
              400,488
              
              
              
              372,474
              
              
              
              805,720Pro
      forma net income (loss) available to common members
              
              $
              1,409,388
              
              
              $
              661,680
              
              
              $
              (2,228,606
              )
              
              $
              1,601,573Pro
      forma net income (loss) per share: basic
              
              $
              0.13
              
              
              $
              0.09
              
              
              $
              (0.24
              )
              
              $
              0.22Pro
      forma net income (loss) per share: diluted
              
              $
              0.13
              
              
              $
              0.09
              
              
              $
              (0.24
              )
              
              $
              0.22Number
      of weighted average common shares outstanding: basic
              
              
              10,675,390
              
              
              
              7,181,790
              
              
              
              9,147,554
              
              
              
              7,172,830Number
      of weighted average common shares outstanding: diluted
              
              
              10,927,360
              
              
              
              7,241,790
              
              
              
              9,147,554
              
              
              
              7,213,630
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  4
 Heritage-Crystal
Clean, Inc. Consolidated
Statement of Shareholders' Equity (Unaudited)
 Par
                
                
                Paid-in
                
                
                RetainedUnits/
                
                
                Members'
                
                
                Value
                
                
                Capital
                
                
                EarningsShares
                
                
                Capital
                
                
                Common
                
                
                Common
                
                
                (Deficit)
                
                
                TotalBalance,
      December 29, 2007
                
                
                24,152
                
                
                $
                15,071,745
                
                
                $
                -
                
                
                $
                -
                
                
                $
                (2,364,489
                )
                
                $
                12,707,256Distribution
      to preferred members
                
                
                -
                
                
                
                (10,886,826
                )
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (10,886,826
                )Tax
      distributions
                
                
                -
                
                
                
                (424,471
                )
                
                
                -
                
                
                
                -
                
                
                
                (364,999
                )
                
                
                (789,470
                )Reorganization
                
                
                6,642,690
                
                
                
                (3,760,448
                )
                
                
                66,427
                
                
                
                3,694,021
                
                
                
                -
                
                
                
                -Income
      tax benefit of reorganization
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                2,343,000
                
                
                
                2,343,000Net
      loss
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                (1,358,886
                )
                
                
                (1,358,886
                )Conversion
      of redeemable capital units
                
                
                564,100
                
                
                
                -
                
                
                
                5,641
                
                
                
                2,255,750
                
                
                
                -
                
                
                
                2,261,391Proceeds
      from issuance of common stock, net
                
                
                3,401,100
                
                
                
                -
                
                
                
                34,011
                
                
                
                33,211,096
                
                
                
                -
                
                
                
                33,245,107Share-based
      compensation
                
                
                67,500
                
                
                
                -
                
                
                
                675
                
                
                
                3,261,435
                
                
                
                -
                
                
                
                3,262,110Balance,
      June 14, 2008
                
                
                10,675,390
                
                
                $
                -
                
                
                $
                106,754
                
                
                $
                42,422,302
                
                
                $
                (1,745,374
                )
                
                $
                40,783,682
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  5
 Heritage-Crystal
Clean, Inc. Consolidated
Statements of Cash Flows (Unaudited)
 First
      Half EndedJune
      14, 2008
                
                
                June
      16, 2007Cash
      Flows from Operating Activities:Net
      income (loss)
                
                $
                (1,358,886
                )
                
                $
                4,080,157Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
                
                
                1,597,273
                
                
                
                1,243,554Bad
      debt provision
                
                
                379,011
                
                
                
                296,567Share-based
      compensation
                
                
                3,262,110
                
                
                
                149,430Non-cash
      inventory charge related to contract termination
                
                
                -
                
                
                
                2,182,330Deferred
      tax expense
                
                
                884,283
                
                
                
                -Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivables
                
                
                (1,745,169
                )
                
                
                (1,570,129
                )Decrease
      (increase) in inventory
                
                
                (2,978,976
                )
                
                
                (2,296,837
                )Decrease
      (increase) in prepaid and other current assets
                
                
                (142,213
                )
                
                
                224,014Increase
      (decrease) in accounts payable
                
                
                (520,600
                )
                
                
                1,255,859Increase
      (decrease) in accrued expenses
                
                
                1,013,805
                
                
                
                540,891Cash
      provided by operating activities
                
                
                390,638
                
                
                
                6,105,836Cash
      flows from Investing Activities:Capital
      expenditures
                
                
                (2,278,837
                )
                
                
                (2,741,694
                )Software
      and intangible asset costs
                
                
                (302,624
                )
                
                
                (56,782
                )Cash
      used in investing activities
                
                
                (2,581,461
                )
                
                
                (2,798,476
                )Cash
      flows from Financing Activities:Deferred
      offering costs
                
                
                -
                
                
                
                (10,295
                )Deferred
      financing costs
                
                
                -
                
                
                
                (23,686.00
                )Proceeds
      from issuance of common stock, net of offering costs
                
                
                34,251,288
                
                
                
                -Proceeds
      from note payable - bank
                
                
                23,775,000
                
                
                
                9,059,000Repayments
      of note payable - bank
                
                
                (44,115,000
                )
                
                
                (10,484,000
                )Common
      member contributions
                
                
                -
                
                
                
                1,900.00Distributions
      to preferred members
                
                
                (11,765,438
                )
                
                
                (1,697,598
                )Cash
      provided by (used in) financing activities
                
                
                2,145,850
                
                
                
                (3,154,679
                )Net
      increase (decrease) in cash and cash equivalents
                
                
                (44,973
                )
                
                
                152,681Cash
      and cash equivalents, beginning of period
                
                
                479,364
                
                
                
                271,308Cash
      and cash equivalents, end of period
                
                $
                434,391
                
                
                $
                423,989Supplemental
      disclosure of cash flow information:Cash
      paid for interest
                
                $
                500,267
                
                
                $
                698,611Payables
      for construction in process
                
                
                50,500
                
                
                
                656,989Payables
      for offering costs
                
                
                134,278
                
                
                
                -Income
      taxes paid
                
                
                55,500
                
                
                
                -
  The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
  6
 HERITAGE-CRYSTAL
CLEAN, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 June
14, 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 twenty-four week periods ended June 14, 2008 and June 16, 2007 each
referred to as “second quarter ended” or “first half ended” or “fiscal first
half ended”.
 
 (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
  7
 reduce
the carrying value of deferred tax assets if it is considered more likely than
not that 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) and 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.
 
 Then
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 Company is currently
evaluating the impact of adopting Statement 141R and Statement 160 on
its results of operations and financial position .
 
 (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 Investment 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
accounted for differently in relation to the fair value
  8
 option.
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:
  June
      14, 2008
              
              
              December
      29, 2007Machines
              
              $
              2,321,437
              
              
              $
              2,227,933Solvents
              
              
              9,119,015
              
              
              
              6,379,013Drums
              
              
              1,054,456
              
              
              
              1,004,077Accessories
              
              
              931,441
              
              
              
              836,350Total
      inventory
              
              $
              13,426,349
              
              
              $
              10,447,373
 (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 June 14,
2008 and December 29, 2007 $1.7 million and $22.0 million respectively, was
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 6.83% and 8.34% at June 14, 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 June 14, 2008, the Company was in
compliance with all covenants under its credit facility. As of June 14, 2008 and
December 29, 2007 $23.3 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 $1.8 million and $1.5 million for the second
quarter of 2008 and 2007, respectively and $3.5 million and $3.0 million for the
first half of 2008 and 2007, respectively.
 
 Future
minimum lease payments under noncancelable operating leases as of June 14, 2008
are as follows:
 
 Fiscal
      period:Remainder
      of
                2008
                
                $
                4,160,3772009
                
                
                6,788,9712010
                
                
                5,399,6702011
                
                
                4,081,7202012
                
                
                3,250,301Thereafter
                
                
                
                3,944,262Total
                
                
                $
                27,625,301
   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 on December 30, 2007 through June 14,
2008 including the $2.2 million deferred tax charge discussed above, are as
follows:
  December
      30, 2007throughJune
      14, 2008Current:Federal
              
              $
              857,090State
              
              
              285,441Total
      current
              
              $
              1,142,531Deferred:Change
      in tax status
              
              $
              2,210,535Federal
              
              
              (1,152,718
              )State
              
              
              (173,534
              )Total
      deferred
              
              $
              884,283Income
      tax provision
              
              $
              2,026,814Pro
      forma tax for period prior to conversion
              
              
              497,246Total
      pro forma tax provision
              
              $
              2,524,060
  A
reconciliation of the expected income taxes at the statutory federal rate
to the Company's actual income taxes for December 30, 2007 through
June 14, 2008, is as follows:
  December
      30, 2007throughJune
      14, 2008Tax
      benefit at statutory federal rate
              
              $
              228,000State
      and local tax, net of federal benefit
              
              
              68,523Other
              
              
              17,002Change
      in tax status
              
              
              2,210,535Earnings
      for period prior to conversion
              
              
              (497,246
              )Total
      income tax provision
              
              $
              2,026,814Pro
      forma tax for period prior to conversion
              
              
              497,246Total
      pro forma tax provision
              
              $
              2,524,060
   10
 Components
of deferred tax assets (liabilities) are as follows:
  June
      14, 2008Deferred
      tax assets:Tax
      intangible assets
              
              $
              2,303,951Allowances
              
              
              690,001Accrued
      other
              
              
              549,703Stock
      compensation
              
              
              1,310,403Total
      deferred tax asset
              
              $
              4,854,058Deferred
      tax liabilities:Prepaids
              
              
              (176,447
              )Depreciation
      and amortization
              
              
              (3,218,894
              )Total
      deferred tax liability
              
              $
              (3,395,341
              )Net
      deferred tax asset
              
              $
              1,458,717Current
      deferred tax asset
              
              $
              1,078,633Noncurrent
      deferred tax asset
              
              
              380,084Net
      deferred tax asset
              
              $
              1,458,717
  The
Company has not provided any valuation allowance as it believes the realization
of its deferred tax assets is more likely than not.
 
 (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:
  WeightedWeighted
                
                
                AverageOptions
                
                
                
                
                
                Average
      Fair
                
                
                ExerciseAvailable
      For
                
                
                Number
      of
                
                
                Value
      Per
                
                
                Price
      PerGrant
                
                
                Options
                
                
                Option
                
                
                OptionBalance
      at December 29, 2007
                
                
                -
                
                
                
                -
                
                
                
                -
                
                
                
                -Shares
      reserved
                
                
                1,902,077
                
                
                
                -
                
                
                
                -
                
                
                
                -Options
      granted
                
                
                (732,045
                )
                
                
                732,045
                
                
                $
                3.90
                
                
                $
                11.50Balance
      at June 14, 2008
                
                
                1,170,032
                
                
                
                732,045
                
                
                $
                3.90
                
                
                $
                11.50
  At June
14, 2008 732,045 options were outstanding and had a weighted-average remaining
contractual life of 9.77 years and an exercise price of $11.50. All of these
options are fully vested and exercisable and the Company incurred $2.9 million
($1.7 million net of tax) of non-cash share-based compensation expense. The
Company also incurred $0.3 million ($0.2 million net of tax) 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 June
14, 2008, the Company believes that the performance criteria will be met and has
recorded compensation expense of $33,000 and $66,000 during the second quarter
and first half of 2008, respectively, with respect to these shares. At June 14,
2008, there was $0.5 million of unrecognized compensation expense related to
these awards which will be recorded through 2011.
 
 The
Company has granted in May 2008, 9,012 restricted shares to its Board of
Directors in which the shares become fully vested after one year of service from
their grant date. At June 14, 2008, there was $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:
  Second
      Quarter Ended
                  
                  
                  First
      Half EndedJune
      14, 2008
                  
                  
                  June
      16, 2007
                  
                  
                  June
      14, 2008
                  
                  
                  June
      16, 2007Net
      income (loss) available to common shareholders
                  
                  $
                  1,409,388
                  
                  
                  $
                  1,409,985
                  
                  
                  $
                  (1,698,074
                  )
                  
                  $
                  3,299,559Net
      income (loss) per share available to common shareholders:
      basic
                  
                  $
                  0.13
                  
                  
                  $
                  0.20
                  
                  
                  $
                  (0.19
                  )
                  
                  $
                  0.46Net
      income (loss) per share available to common shareholders:
      diluted
                  
                  $
                  0.13
                  
                  
                  $
                  0.19
                  
                  
                  $
                  (0.19
                  )
                  
                  $
                  0.46Pro
      formaNet
      income (loss)
                  
                  $
                  1,409,388
                  
                  
                  $
                  1,800,284
                  
                  
                  $
                  (1,358,886
                  )
                  
                  $
                  4,080,157Pro
      forma provision for income taxes
                  
                  
                  -
                  
                  
                  
                  738,116
                  
                  
                  
                  497,246
                  
                  
                  
                  1,672,864Return
      on preferred and mandatorily redeemable capital units
                  
                  
                  -
                  
                  
                  
                  400,488
                  
                  
                  
                  372,474
                  
                  
                  
                  805,720Pro
      forma net income (loss) available to common members
                  
                  $
                  1,409,388
                  
                  
                  $
                  661,680
                  
                  
                  $
                  (2,228,606
                  )
                  
                  $
                  1,601,573Pro
      forma net income (loss) per share: basic
                  
                  $
                  0.13
                  
                  
                  $
                  0.09
                  
                  
                  $
                  (0.24
                  )
                  
                  $
                  0.22Pro
      forma net income (loss) per share: diluted
                  
                  $
                  0.13
                  
                  
                  $
                  0.09
                  
                  
                  $
                  (0.24
                  )
                  
                  $
                  0.22Number
      of weighted average common shares outstanding: basic
                  
                  
                  10,675,390
                  
                  
                  
                  7,181,790
                  
                  
                  
                  9,147,554
                  
                  
                  
                  7,172,830Dilutive
      shares for share-based compensation plans
                  
                  
                  251,970
                  
                  
                  
                  60,000
                  
                  
                  
                  -
                  
                  
                  
                  40,800Number
      of weighted average common shares outstanding: diluted
                  
                  
                  10,927,360
                  
                  
                  
                  7,241,790
                  
                  
                  
                  9,147,554
                  
                  
                  
                  7,213,630
  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 half ended June 14, 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 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
  14
 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 half ended
ended June 14, 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 Company is currently
evaluating the impact of adopting Statement 141R and Statement 160 on
its results of operations and financial position.
 
 RESULTS
OF OPERATIONS
 
 Second
quarter and first half ended June 14, 2008 compared to second quarter and first
half ended June 16, 2007
 
 Sales,
Cost of sales, and Gross profit
  Second
      Quarter Ended(Dollars
      in thousands)June
      14, 2008
                  
                  
                  June
      16, 2007
                  
                  
                  ChangeSales
                  
                  $
                  24,838
                  
                  
                  $
                  20,386
                  
                  
                  $
                  4,452Cost
      of sales
                  
                  
                  5,630
                  
                  
                  
                  4,877
                  
                  
                  
                  753Gross
      profit
                  
                  $
                  19,208
                  
                  
                  $
                  15,509
                  
                  
                  $
                  3,699Gross
      profit as % of sales
                  
                  
                  77
                  %
                  
                  
                  76
                  %First
      Half Ended(Dollars
      in thousands)June
      14, 2008
                  
                  
                  June
      16, 2007
                  
                  
                  ChangeSales
                  
                  $
                  47,835
                  
                  
                  $
                  39,574
                  
                  
                  $
                  8,261Cost
      of sales
                  
                  
                  11,916
                  
                  
                  
                  9,881
                  
                  
                  
                  2,035Cost
      of sales - inventory impairment
                  
                  
                  -
                  
                  
                  
                  2,182
                  
                  
                  
                  (2,182
                  )Gross
      profit
                  
                  $
                  35,919
                  
                  
                  $
                  27,511
                  
                  
                  $
                  8,408Gross
      profit as % of sales
                  
                  
                  75
                  %
                  
                  
                  70
                  %
  For the
quarter ended June 14, 2008, sales increased $4.4 million, or 22%, to $24.8
million from $20.4 million for the quarter ended June 16, 2007. For the first
half ended June 14, 2008, sales increased $8.2 million, or 21%, to $47.8 million
from $39.6 million for the first half ended June 16, 2007. At the end of the
second fiscal quarter of 2008, we were operating 54 branch locations compared
with 48 at the end of the second fiscal quarter 2007. There were
47 branches that were in operation during both the second fiscal quarters
of 2008 and 2007, which experienced same-branch sales growth of
$3.8 million, or 19%.  Excluding the 5 branches in this group
that gave up customers to new branch openings, the remaining 41 branches
experienced same-branch sales growth of 18%.
 
 For the
quarter ended June 14, 2008, total cost of sales increased $0.7 million, or 15%,
to $5.6 million from $4.9 million for the quarter ended June 16, 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 half ended June 14, 2008, total cost of sales decreased $0.1 million, or
1%, to $11.9 million from $12.0 million for the first half ended June 16, 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
 Second
      Quarter Ended(Dollars
      in thousands)June
      14, 2008
              
              
              June
      16, 2007
              
              
              ChangeOperating
      costs
              
              $
              12,601
              
              
              $
              9,888
              
              
              $
              2,713As
      a % of sales
              
              
              51
              %
              
              
              49
              %First
      Half Ended(Dollars
      in thousands)June
      14, 2008
              
              
              June
      16, 2007
              
              
              ChangeOperating
      costs
              
              $
              24,117
              
              
              $
              19,169
              
              
              $
              4,948As
      a % of sales
              
              
              50
              %
              
              
              48
              %
  For the
quarter ended June 14, 2008, operating costs increased $2.7 million, or 27%, to
$12.6 million from $9.9 million in the quarter ended June 16, 2007. For the
first half ended June 14, 2008, operating costs increased $4.9 million, or 26%,
to $24.1 million from $19.2 million for the first half ended June 16, 2007.
Operating costs, including branch labor and collection truck costs, increased
primarily due to volume increases. Overall, operating costs increased as a
percentage of sales due to higher costs for fuel and transportation related to
fuel prices.
 
 Selling,
general & administrative
  Second
      Quarter Ended(Dollars
      in thousands)June
      14, 2008
                
                
                June
      16, 2007
                
                
                ChangeSelling,
      general & administrative
                
                $
                4,131
                
                
                $
                3,518
                
                
                $
                613As
      a % of sales
                
                
                17
                %
                
                
                17
                %First
      Half Ended(Dollars
      in thousands)June
      14, 2008
                
                
                June
      16, 2007
                
                
                ChangeSelling,
      general & administrative
                
                $
                10,763
                
                
                $
                6,619
                
                
                $
                4,144As
      a % of sales
                
                
                22
                %
                
                
                17
                %
  For the
quarter ended June 14, 2008, selling, general and administrative expense
increased $0.6 million, or 17%, to $4.1 million from $3.5 million in the quarter
ended June 16, 2007. Selling, general and administrative expense increased by
approximately $0.3 million due to costs associated with being a public
company.
 
 For the
first half ended June 14, 2008, selling, general and administrative expense
increased $4.1 million, or 63%, to $10.7 million from $6.6 million for the first
half ended June 16, 2007. Selling, general and administrative expense included
employee share-based compensation charges of $3.2 million ($1.9 million net of
tax) 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.
 
 Proceeds
from contract termination
  First
      Half Ended(Dollars
      in thousands)June
      14, 2008
                
                
                June
      16, 2007
                
                
                ChangeProceeds
      from contract termination
                
                $
                -
                
                
                $
                3,000
                
                
                $
                (3,000
                )As
      a % of sales
                
                
                0
                %
                
                
                8
                %
  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
 Second
      Quarter Ended(Dollars
      in thousands)June
      14, 2008
              
              
              June
      16, 2007
              
              
              ChangeInterest
      expense - net
              
              $
              19
              
              
              $
              302
              
              
              $
              (283
              )As
      a % of sales
              
              
              0
              %
              
              
              1
              %First
      Half Ended(Dollars
      in thousands)June
      14, 2008
              
              
              June
      16, 2007
              
              
              ChangeInterest
      expense - net
              
              $
              371
              
              
              $
              642
              
              
              $
              (271
              )As
      a % of sales
              
              
              1
              %
              
              
              2
              %
  For the
quarter ended June 14, 2008, interest expense decreased by $0.3 million, or 94%,
from $0.3 million in the quarter ended June 16, 2007. For the first half ended
June 14, 2008, interest expense decreased $0.3 million, or 42%, to $0.4 million
from $0.7 million for the first half ended June 16, 2007. The decrease was due
to our reduction in total debt outstanding in part due to our initial public
offering in March 2008.
 
 Provision
for income taxes
  Second
      Quarter Ended(Dollars
      in thousands)June
      14, 2008
              
              
              June
      16, 2007
              
              
              ChangeProvision
      for income taxes
              
              $
              1,047
              
              
              $
              -
              
              
              $
              1,047As
      a % of sales
              
              
              4
              %
              
              
              0
              %First
      Half Ended(Dollars
      in thousands)June
      14, 2008
              
              
              June
      16, 2007
              
              
              ChangeProvision
      for income taxes
              
              $
              2,027
              
              
              $
              -
              
              
              $
              2,027As
      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.  This was offset by the tax benefit recorded
as a result of the net loss generated during the period the Company was a ‘C’
corporation.
  17
 FINANCIAL
CONDITION
 
 Liquidity
and Capital Resources
  First
      Half Ended(Dollars
      in thousands)June
      14, 2008
                  
                  
                  June
      16, 2007Net
      cash provided by (used in):Operating
      activities
                  
                  $
                  391
                  
                  
                  $
                  6,106Investing
      activities
                  
                  
                  (2,581
                  )
                  
                  
                  (2,798
                  )Financing
      activities
                  
                  
                  2,146
                  
                  
                  
                  (3,155
                  )Net
      increase (decrease) in cash and cash equivalents
                  
                  $
                  (44
                  )
                  
                  $
                  153
  We had
$0.4 million of cash and cash equivalents at June 14, 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 June 14,
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, the Company amended the facility to extend the maturity date to
December 31, 2010. As of June 14, 2008 and December 29, 2007 $1.7 million
and $22.0 million respectively, was 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 6.83% and 8.34% at June 14,
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 June 14, 2008, the Company was
in compliance with all covenants under the credit facility. As of June 14, 2008
and December 29, 2007, $23.3 million and $3.0 million respectively, were
available under the credit facility.
 
 At June
14, 2008, our working capital was $20.0 million compared to $14.6 million
at December 29, 2007. The increase was primarily due to the $3.0 million
increase in inventory, a $1.4 million increase in net accounts receivable and a
$0.8 million deferred tax asset.  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 $0.4 million and $6.1 million in the first
half 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 $3.0 million and an
increase in accounts receivable of $1.4 million in the first half of
2008.
 
 Net cash
used in investing activities was $2.6 million and $2.8 million in the first half
of 2008 and 2007, respectively. Approximately $1.6 million of the capital
expenditures made in the first half of 2008 was for purchases of parts cleaning
machines, and $1.0 million was for other items including office equipment,
leasehold improvements, software and intangible assets. As we grow and secure
more parts cleaning business, this leads to a requirement for additional capital
investment for parts cleaning machines.
 
 Net cash
provided by (used in) financing activities was $2.1 million and $(3.2)
million in the first half 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 half ended June 14, 2008 was $11.8 million and the annual effective
interest rate for the first half ended June 14, 2008 was 6.83%. 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 $30,000 change
to our interest expense in the first half 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 June 14, 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: July 25,
2008
                    By:
                    /s/
      Gregory RayGregory
      RayChief Financial Officer,
      Vice President, Business Management and
  Secretary
      21