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 March 22, 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 R 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 R No £
 
 Number of
shares outstanding of registrant’s class of common stock as of May 9, 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 1.
      LEGAL PROCEEDINGS
            20ITEM
      1A. RISK FACTORS
            20ITEM 2.
      UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
PROCEEDS
            20ITEM 3.
      DEFAULTS UPON SENIOR SECURITIES
            20ITEM 4.
      SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
            20ITEM 5.
      OTHER INFORMATION
            20ITEM 6.
      EXHIBITS
            21SIGNATURES
            22
  2
 
 PART
I
 ITEM
1. FINANCIAL STATEMENTS
 
 Heritage-Crystal
Clean, Inc.
 Consolidated
Balance Sheets
 (Unaudited)
 
 March
      22, 2008
            
            
            December
      29, 2007ASSETSCurrent
      Assets:Cash
      and cash equivalents
            
            $
            278,730
            
            
            $
            479,364Accounts
      receivable, net of allowance for doubtful accounts of 
      $693,540 and $1,129,657 at March 22, 2008 and December 29, 2007,
      respectively
            
            
            14,133,781
            
            
            
            13,446,073Inventory
            
            
            12,006,044
            
            
            
            10,447,373Deferred
      income taxes
            
            
            764,734
            
            
            
            -Prepaid
      and other current assets
            
            
            1,283,107
            
            
            
            1,207,426Total
      Current Assets
            
            
            28,466,396
            
            
            
            25,580,236Fixed
      assets, net of accumulated depreciation
            
            
            19,977,594
            
            
            
            19,420,294Deferred
      offering costs
            
            
            -
            
            
            
            1,275,694Deferred
      income taxes
            
            
            662,759
            
            
            
            -Software
      costs, net of accumulated amortization
            
            
            1,725,664
            
            
            
            1,707,395Total
      Assets
            
            $
            50,832,413
            
            
            $
            47,983,619LIABILITIES
      AND STOCKHOLDERS' EQUITYCurrent
      Liabilities:Accounts
      payable
            
            $
            7,160,674
            
            
            $
            7,257,643Accrued
      salaries, wages, and benefits
            
            
            1,225,313
            
            
            
            1,559,941Taxes
      payable
            
            
            867,400
            
            
            
            983,128Other
      accrued expenses
            
            
            1,155,233
            
            
            
            1,169,260Total
      Current Liabilities
            
            
            10,408,620
            
            
            
            10,969,972Note
      payable – bank
            
            
            755,000
            
            
            
            22,045,000Total
      Liabilities
            
            $
            11,163,620
            
            
            $
            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 March 22, 2008
            
            
            106,754
            
            
            
            -Additional
      paid-in capital
            
            
            42,351,798
            
            
            
            -Accumulated
      deficit
            
            
            (2,789,759
            )
            
            
            (2,364,489
            )Total
      Stockholders' Equity
            
            $
            39,668,793
            
            
            $
            12,707,256Total
      Liabilities and Stockholders' Equity
            
            $
            50,832,413
            
            
            $
            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)
 
 Quarters
      EndedMarch
      22, 2008
            
            
            March
      24, 2007Sales
            
            $
            22,997,443
            
            
            $
            19,188,100Cost of
      sales
            
            
            6,285,691
            
            
            
            5,004,195Cost of
      sales - inventory impairment
            
            
            -
            
            
            
            2,182,330Gross
      profit
            
            $
            16,711,752
            
            
            $
            12,001,575Operating
      costs
            
            
            11,516,055
            
            
            
            9,281,083Selling,
      general, and administrative expenses
            
            
            6,631,109
            
            
            
            3,100,592Proceeds
      from contract termination
            
            
            -
            
            
            
            (3,000,000
            )Operating
      income (loss)
            
            $
            (1,435,412
            )
            
            $
            2,619,900Other
      (income) expenses:Interest
      expense - net
            
            
            352,690
            
            
            
            340,027Income
      (loss) before income taxes
            
            
            (1,788,102
            )
            
            
            2,279,873Provision
      for income taxes
            
            
            980,168
            
            
            
            -Net
      income (loss)
            
            
            (2,768,270
            )
            
            
            2,279,873Preferred
      return
            
            
            339,188
            
            
            
            390,299Net
      income (loss) available to common shareholders
            
            $
            (3,107,458
            )
            
            $
            1,889,574Pro
      forma data:Net
      income (loss)
            
            $
            (2,768,270
            )
            
            $
            2,279,873Pro
      forma provision for income taxes
            
            
            497,246
            
            
            
            932,468Return
      on preferred and mandatorily redeemable capital units
            
            
            372,474
            
            
            
            405,232Pro
      forma net income (loss) available to common members
            
            $
            (3,637,990
            )
            
            $
            942,173Net
      income (loss) per share: basic and diluted
            
            $
            (0.48
            )
            
            $
            0.13Number
      of weighted average common shares outstanding: basic and
      diluted
            
            
            7,619,719
            
            
            
            7,202,290
 
 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
            )
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (424,471
            )Reorganization
            
            
            6,642,690
            
            
            
            (3,760,448
            )
            
            
            66,427
            
            
            
            3,694,021
            
            
            
            -
            
            
            
            -Income
      tax benefit of reorganization
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            2,343,000
            
            
            
            2,343,000Net
      loss
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            -
            
            
            
            (2,768,270
            )
            
            
            (2,768,270
            )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
            
            
            
            3,190,931
            
            
            
            -
            
            
            
            3,191,606Balance,
      March 22, 2008
            
            
            10,675,390
            
            
            $
            -
            
            
            $
            106,754
            
            
            $
            42,351,798
            
            
            $
            (2,789,759
            )
            
            $
            39,668,793
 
 
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
 
 
 5
 
 
 
 Heritage-Crystal
Clean, Inc.
 Consolidated
Statements of Cash Flows
 (Unaudited)
 
 Quarters
      EndedMarch
      22, 2008
            
            
            March
      24, 2007Cash
      Flows from Operating Activities:Net
      income (loss)
            
            $
            (2,768,270
            )
            
            $
            2,279,873Adjustments
      to reconcile net income to net cash provided by operating
      activities:Depreciation
      and amortization
            
            
            776,189
            
            
            
            605,167Bad
      debt provision
            
            
            180,783
            
            
            
            143,889Share-based
      compensation
            
            
            3,191,606
            
            
            
            -Non-cash
      inventory charge related to contract termination
            
            
            -
            
            
            
            2,182,330Deferred
      tax expense
            
            
            915,507
            
            
            
            -Changes
      in operating assets and liabilities:Decrease
      (increase) in accounts receivables
            
            
            (868,491
            )
            
            
            (733,987
            )Decrease
      (increase) in inventory
            
            
            (1,558,671
            )
            
            
            (1,097,373
            )Decrease
      (increase) in prepaid and other current assets
            
            
            (75,681
            )
            
            
            141,782Increase
      (decrease) in accounts payable
            
            
            (507,389
            )
            
            
            1,074,592Increase
      (decrease) in accrued expenses
            
            
            (467,244
            )
            
            
            (352,042
            )Cash
      provided by (used in) operating activities
            
            $
            (1,181,661
            )
            
            $
            4,244,231Cash
      flows from Investing Activities:Capital
      expenditures
            
            $
            (1,313,797
            )
            
            $
            (1,078,375
            )Software
      costs
            
            
            (90,415
            )
            
            
            (52,836
            )Cash
      used in investing activities
            
            $
            (1,404,212
            )
            
            $
            (1,131,211
            )Cash
      flows from Financing Activities:Proceeds
      from issuance of common stock, net of offering costs
            
            $
            35,075,677
            
            
            $
            -Proceeds
      from note payable - bank
            
            
            16,665,000
            
            
            
            7,425,000Repayments
      of note payable – bank
            
            
            (37,955,000
            )
            
            
            (9,450,000
            )Common
      member contributions
            
            
            -
            
            
            
            100Distributions
      to preferred members
            
            
            (11,400,438
            )
            
            
            (1,003,820
            )Cash
      provided by (used in) financing activities
            
            $
            2,385,239
            
            
            $
            (3,028,720
            )Net
      increase (decrease) in cash and cash equivalents
            
            
            (200,634
            )
            
            
            84,300Cash
      and cash equivalents, beginning of period
            
            
            479,364
            
            
            
            271,308Cash
      and cash equivalents, end of period
            
            $
            278,730
            
            
            $
            355,608Supplemental
      disclosure of cash flow information:Cash
      paid for interest
            
            $
            415,807
            
            
            $
            371,868Payables
      for construction in process
            
            
            19,308
            
            
            
            -Payables
      for offering costs
            
            
            958,667
            
            
            
            -
 
 
 The
accompanying notes are an integral part of these unaudited consolidated
financial statements.
 
 6
  HERITAGE-CRYSTAL
CLEAN, INC.
 
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 
 March
22, 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 a distribution 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”). Under Section 362 of the Internal Revenue
Code of 1986, as amended, this distribution and reorganization resulted in an
increase in the tax basis of the Company's assets. In accordance with Emerging
Issues Task Force (EITF) 94-10, Accounting by a Company for
the Income Tax Effects of Transactions Among or with Shareholdersunder FASB Statement No. 109, the tax benefit associated with this
reorganization was recorded as an equity transaction. There was no change in the
book basis of assets and liabilities associated with this
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.
 
 As of March
22, 2008, the Company had 10,675,390 common shares outstanding following the
reorganization, initial public offering and direct placement.
 
 (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 ended
March 22, 2008 and March 24, 2007 each referred to as “fiscal quarters ended” or
“first quarter ended” or “first fiscal quarters 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 7
 
 
  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.
 
 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 and will be evaluated as such
if an acquisition is considered.
 
 (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
 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:
 
 March
      22,2008
            
            
            December 29,2007Machines
            
            $
            2,186,391
            
            
            $
            2,227,933Solvents
            
            
            7,938,117
            
            
            
            6,379,013Drums
            
            
            964,929
            
            
            
            1,004,077Accessories
            
            
            916,607
            
            
            
            836,350Total
      inventory
            
            $
            12,006,044
            
            
            $
            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 March 22, 2008 and
December 29, 2007 $0.8 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 6.95% and 8.34% at March 22, 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 March 22, 2008, the Company was in compliance with all covenants
under its credit facility. As of March 22, 2008 and
December 29, 2007 $24.2 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 $1,842,507 and $1,517,265 for the first quarters of 2008 and 2007,
respectively.
 
 Future
minimum lease payments under noncancelable operating leases as of March 22, 2008
are as follows:
 
 Fiscal
      period:2008
            
            $
            5,120,0432009
            
            
            6,386,2582010
            
            
            4,993,5962011
            
            
            3,656,1472012
            
            
            2,848,558Thereafter
            
            
            3,169,711Total
            
            $
            26,174,313
 
 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 March 22,
2008, including the $2.2 million deferred tax charge discussed above, are
as follows:
 
 December
      30, 2007
              through
              March
      22, 2008Current:Federal
            
            $
            58,253State
            
            
            6,408Total
      current
            
            $
            64,661Deferred:
              Change
      in tax status
            
            $
            2,210,535Federal
            
            
            (1,121,494
            )State
            
            
            (173,534
            )Total
      deferred
            
            $
            915,507Income
      tax provision
            
            $
            980,168Pro
      forma tax for period prior to conversion
            
            
            497,246Total
      pro forma tax provision
            
            $
            1,477,414
  A reconciliation of
the statutory federal income tax rate to the Company's effective tax rate for
December 30, 2007 through March 22, 2008, is as follows:
 
 December
      30, 2007throughMarch
      22, 2008Tax
      benefit at statutory federal rate
            
            $
            (607,950
            )
            
            
            (34.0
            )
            %State
      and local tax, net of federal benefit
            
            
            (110,303
            )
            
            
            (6.2
            )
            %Other
            
            
            (14,868
            )
            
            
            (0.8
            )
            %Change
      in tax status
            
            
            2,210,535
            
            
            
            123.6
            
            %Earnings
      for period prior to conversion
            
            
            (497,246
            )
            
            
            (27.8
            )
            %Total
      income
      tax provision
            
            $
            980,168
            
            
            
            54.8
            
            %Pro
      forma tax for period prior to conversion
            
            
            497,246
            
            
            
            27.8
            
            %Total
      pro forma tax provision
            
            $
            1,477,414
            
            
            
            82.6
            
            %
  10
   Components of
deferred tax assets (liabilities) are as follows:
 
 March 22, 2008Deferred
      tax assets:Tax
      intangible assets
            
            $
            2,343,000Allowances
            
            
            719,382Accrued
      other
            
            
            279,834Stock
      compensation
            
            
            1,295,028Total
      deferred tax asset
            
            $
            4,637,244Deferred
      tax liabilities:Prepaids
            
            
            (234,482
            )Depreciation
      and amortization
            
            
            (2,975,269
            )Total
      deferred tax liability
            
            $
            (3,209,751
            )Net
      deferred tax asset
            
            $
            1,427,493Current
      deferred tax asset
            
            $
            764,734Noncurrent
      deferred tax asset
            
            
            662,759Net
      deferred tax asset
            
            $
            1,427,493
 
  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;
 •Recorded a cumulative net deferred
      tax asset of $0.1 million with a corresponding credit
      to equity of $2.3 million and a charge of $2.2 millionto 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:
 
 Options Available For
      Grant
            
            Number of Options
            
            Weighted
              Average
      Fair
              Value
      Per
              Option
            
            Weighted
              Average
              Exercise
              Price
      Per
              OptionBalance
      at December 29, 2007
            
            
            —
            
            
            —
            
            
            —
            
            
            —Shares
      reserved
            
            
            1,902,077
            
            
            —
            
            
            —
            
            
            —Options
      granted
            
            
            (732,045
            )
            
            732,045
            
            $
            3.90
            
            $
            11.50Balance
      at March 22, 2008
            
            
            1,170,032
            
            
            732,045
            
            $
            3.90
            
            $
            11.50
 
 At
March 22, 2008 732,045 options were outstanding and had a weighted-average
remaining contractual life of 9.99 years and an exercise price of $11.50. All of
these options are fully vested 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 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 March
22, 2008, the Company believes that the performance criteria will be met and has
recorded compensation expense of $33,000 during the first quarter 2008. At March
22, 2008, there was $0.5 million of unrecognized compensation expense related to
these awards which will be recorded through 2011.
 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 basic and diluted net income per common
share:
 
 Quarters
      EndedMarch
      22,2008
            
            
            March
      24,2007Pro-forma
      net income (loss) available to common stockholders
            
            $
            (3,637,990
            )
            
            $
            942,173Basic
      earnings (loss) per share:Weighted-average
      number of common shares outstanding
            
            
            7,619,719
            
            
            
            7,202,290Basic
      pro-forma earnings (loss) per share
            
            $
            (0.48
            )
            
            $
            0.13Diluted
      earnings (loss) per share:Weighted-average
      number of common shares outstanding — diluted
            
            
            7,619,719
            
            
            
            7,202,290Diluted
      earnings (loss) per share
            
            $
            (0.48
            )
            
            $
            0.13
 
 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.
 
 As of March 22, 2008, the Company has excluded the
effects of the stock options 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;
 • Recorded a cumulative net deferred
      tax asset of $0.1 million with a corresponding credit to equity
      of $2.3 million and a charge of $2.2 million 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
   Management
believes that there have been no significant changes during the first fiscal
quarter ended March 22, 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 and will
be evaluated as such if an acquisition is considered.
 
 RESULTS
OF OPERATIONS
 
 Quarter
ended March 22, 2008 compared to quarter ended March 24, 2007
 
 Sales,
Cost of sales, and Gross profit
 
 Quarter Ended(Dollars
      in thousands)March
      22,2008
            
            March
      24,2007
            
            ChangeSales
            
            $
            22,997
            
            
            $
            19,188
            
            
            $
            3,809Cost of
      sales
            
            
            6,286
            
            
            
            5,004
            
            
            
            1,282Cost of
      sales - inventory impairment
            
            
            -
            
            
            
            2,182
            
            
            
            (2,182
            )Gross
      profit
            
            $
            16,711
            
            
            $
            12,002
            
            
            $
            4,709Gross
      profit as % of sales
            
            
            73%
            
            
            
            63%
 
 For the
quarter ended March 22, 2008, sales increased $3.8 million, or 20%, to $23.0
million from $19.2 million for the quarter ended March 24, 2007. At the end of
the first fiscal quarter of 2008, we were operating 54 branch locations compared
with 48 at the end of fiscal first quarter 2007. There were 46 branches
that were in operation during both the first fiscal quarters of 2008 and 2007,
which experienced same-branch sales growth of $3.2 million, or
17%.  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 March 22, 2008, total cost of sales decreased $0.9 million, or
13%, to $6.3 million from $7.2 million for the quarter ended March 24, 2007. In
the first fiscal 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. Within cost of sales, increased solvent costs
related to higher energy costs were largely mitigated by improved margins on the
reuse solvent, as we sold solvent that had been carried in inventory at
historically lower values.
 15
 
 Operating
costs
 
 Quarter Ended(Dollars
      in thousands)March
      22,2008
            
            March
      24, 2007
            
            ChangeOperating
      costs
            
            $
            11,516
            
            
            $
            9,281
            
            
            $
            2,235As a %
      of sales
            
            
            50%
            
            
            
            48%
 
 For the
quarter ended March 22, 2008, operating costs increased $2.2 million, or 24%, to
$11.5 million from $9.3 million in the quarter ended March 24, 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 commodity
prices.
 
 Selling,
general & administrative
 
 
 
 Quarter Ended(Dollars
      in thousands)March
      22,2008
            
            March
      24,2007
            
            ChangeSelling,
      general & administrative
            
            $
            6,631
            
            
            $
            3,101
            
            
            $
            3,530As a %
      of sales
            
            
            29%
            
            
            
            16%
 
  For the
quarter ended March 22, 2008, selling, general and administrative expense
increased $3.5 million, or 114%, to $6.6 million from $3.1 million in the
quarter ended March 24, 2007. The 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.
  
 Proceeds
from contract termination
 
 Quarter Ended(Dollars
      in thousands)March 22,2008
            
            March
      24,2007
            
            ChangeProceeds
      from contract termination
            
            $
            -
            
            
            $
            3,000
            
            
            $
            (3,000
            )As a %
      of sales
            
            
            
            
            
            
            16%
 
 In the first
fiscal 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.”
 
 Interest
expense
 
 Quarter Ended(Dollars
      in thousands)March
      22,2008
            
            March
      24,2007
            
            ChangeInterest
      expense
            
            $
            353
            
            
            $
            340
            
            
            $
            13As a %
      of sales
            
            
            2%
            
            
            
            2%
 
  For the
quarter ended March 22, 2008, interest expense increased slightly, or 4%, to
$0.4 million from $0.3 million in the first quarter of 2007.  While
interest rates declined, average total debt outstanding increased due to the
investment in our solvent distillation system and greater working capital
requirements.
  16
 
 Provision
for income taxes
 
 Quarter Ended(Dollars
      in thousands)March
      22,2008
            
            March
      24,2007
            
            ChangeProvision
      for income taxes
            
            $
            980
            
            
            $
            -
            
            
            $
            980As a %
      of sales
            
            
            4%
 
 Income tax
expense for the first quarter 2008 was approximately$1.0 million. 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 have 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.
  FINANCIAL
CONDITION
 
 Liquidity
and Capital Resources
 
 Quarter Ended(Dollars
      in thousands)Net
      cash provided by (used in):
            
            March
      22, 2008
            
            
            March
      24, 2007Operating
      activities
            
            $
            (1,182
            )
            
            $
            4,244Investing
      activities
            
            
            (1,404
            )
            
            
            (1,131
            )Financing
      activities
            
            
            2,385
            
            
            
            (3,029
            )Net
      increase (decrease) in cash and cash equivalents
            
            $
            (201
            )
            
            $
            84
 
 We had
$0.3 million of cash and cash equivalents at March 22, 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 $1.0 million accrued but not yet paid as of March 22, 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 a distribution 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 March 22, 2008 and December 29, 2007 $0.8 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 6.95% and 8.34% at March 22,
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 March 22, 2008, the Company was
in compliance with all covenants under the credit facility.As of March 22, 2008,and December 29, 2007 $24.2
million and $3.0 million respectively, were available under the credit
facility.
 At March 22,
2008, our working capital was $18.1 million compared to $14.6 million at
December 29, 2007. The increase was primarily due to the $1.6 million increase
in inventory, a $0.8 million deferred tax asset and a $0.7 million increase in
accounts receivable.  This increase in inventory was due to rising
solvent prices and the seasonality of our reuse product shipments. 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 (used in) operations was $(1.2) million and $4.2 million
in the first fiscal 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 $1.6 million in the first quarter of 2008.
 
 Net cash used
in investing activities was $1.4
million and $1.1 million in the first fiscal quarters of 2008 and 2007
respectively. Approximately $0.7 million of the capital expenditures made
in the first fiscal quarter of 2008 was for purchases of parts cleaning
machines, and $0.7 million was for other items including office equipment,
leasehold improvements and software. As we grow and secure more parts cleaning
business, this leads to a requirement for additional capital investment for
parts cleaning machines.
 17
 
 Net cash
provided by (used in) financing activities was $2.4 million and $(3.0)
million in the first fiscal quarters 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. We may seek additional funding through public or
private financings or other arrangements. Adequate funds may not be available
when needed or may not be available on terms favorable to us. If additional
funds are raised by issuing equity securities, dilution to existing stockholders
may result. If we raise additional funds by obtaining loans from third parties,
the terms of those financing arrangements may include negative covenants or
other restrictions on our business that could impair our operational
flexibility, and would also require us to fund additional interest expense. If
funding is insufficient at any time in the future, we may be unable to develop
or enhance our products or services, take advantage of business opportunities or
respond to competitive pressures, any of which could have a material adverse
effect on our business, financial condition and results of
operations.
 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 fiscal quarter of 2008 was $22.0 million and the annual effective
interest rate for the first fiscal quarter of 2008 was 6.9%. 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
$0.1 million change to our interest expense in the first fiscal quarter 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 March 22,
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
1. LEGAL PROCEEDINGS
 
 There have
been no material changes in the legal proceedings of the Company previously
disclosed in "Business--Legal Proceedings" in our Registration Statement on Form
S-1, as amended (SEC No. 333-143864), which disclosure is incorporated herein by
reference.
 
 ITEM
1A. RISK FACTORS
  There have
been no material changes in the risk factors previously disclosed in “Risk
Factors” in our Registration Statement on Form S-1, as amended (Reg. No.
333-143864). These risk factors are incorporated herein by
reference.
  ITEM
2. UNREGISTERED
SALES OF EQUITY SERVICES AND USE OF PROCEEDS
  On March 17,
2008, the Company received approximately $39.1 million (or $35.1 million after
deducting the underwriting discounts of $2.7 million and estimated offering
expense of $1.3 million paid in the
first quarter of 2008) from the sale of 3,401,100 shares of common stock
for $11.50 per share. The Registration Statement on Form S-1 relating to the
sales of shares (SEC Reg. No. 333-143864) was declared effective by the
Securities and Exchange Commission on March 11, 2008 and the offering commenced
shortly thereafter. William Blair & Company, L.L.C. and Piper Jaffray &
Co. acted as underwriters with respect to 2,201,100 shares of common stock sold
under this Registration Statement in the Company’s initial public
offering.
  Of the net
proceeds received, the Company used approximately $32.2 million to repay
indebtedness under its credit facility (including $10.9 million borrowed to
redeem preferred units in connection with the reorganization of the Company that
occurred in connection with the Company’s initial public offering). None of the
underwriting discounts and commissions or offering expense were incurred or paid
to the Company’s directors or officers or their associates or to persons owning
10 percent or more of common stock or to any of the Company’s affiliates. As disclosed
in the Registration Statement referenced above under “Relationships and
Transactions with Related Persons – Reorganization” certain directors, officers
and their associates and persons owning 10 percent or more of common stock of
the Company received amounts in the reorganization from the Company. This
disclosure in the Registration Statement is incorporated herein by
reference.
  Exchange
of Common stock
  On March 17,
2008, in connection with the completion of the initial public offering, we
exchanged 220,000 shares of common stock for the outstanding common units issued
under our Key Employee Membership Interest Trust Agreement of 2002.
 
 ITEM 3.  DEFAULTS UPON SENIOR
SECURITIES.
 
 None.
 
 ITEM
4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  Prior to the
completion of the Company’s initial public offering, the stockholder of the
Company, acting by written consent, dated as of March 10, 2008, approved the
following actions and/or documents (as
applicable):
  ·
            The
      exchange of units of Heritage Crystal Clean, LLC for common stock of the
      Company;
  ·
            The
      election of directors;
  ·
            The
      merger of BRS-HCC Investment Co., Inc. with and into the
      Company;
  ·
            The
      2008 Omnibus Incentive Plan;
  ·
            The
      Performance-Based Annual Incentive
Plan;
  ·
            The
      Non-Qualified Deferred Compensation Plan;
and
  ·
            The
      Heritage-Crystal Clean, Inc. Employee Stock Purchase Plan of
      2008.
 
 ITEM
5. OTHER INFORMATION
 
 None.
 
 20
 
 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
 21
 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: May 12,
      2008
            By:
            /s/Gregory
      RayGregory
      RayChief Financial Officer,
      Vice President, Business Management and
  Secretary
 
 22