Heritage-Crystal Clean, Inc. - Quarter Report: 2008 March (Form 10-Q)

Heritage-Crystal Clean, Inc.

Consolidated Balance Sheets

(Unaudited)

		March 22, 2008				December 29, 2007
ASSETS
Current Assets:
Cash and cash equivalents		$	278,730			$	479,364
Accounts 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				13,446,073
Inventory			12,006,044				10,447,373
Deferred income taxes			764,734				-
Prepaid and other current assets			1,283,107				1,207,426
Total Current Assets			28,466,396				25,580,236
Fixed assets, net of accumulated depreciation			19,977,594				19,420,294
Deferred offering costs			-				1,275,694
Deferred income taxes			662,759				-
Software costs, net of accumulated amortization			1,725,664				1,707,395
Total Assets		$	50,832,413			$	47,983,619
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable		$	7,160,674			$	7,257,643
Accrued salaries, wages, and benefits			1,225,313				1,559,941
Taxes payable			867,400				983,128
Other accrued expenses			1,155,233				1,169,260
Total Current Liabilities			10,408,620				10,969,972
Note payable – bank			755,000				22,045,000
Total Liabilities		$	11,163,620			$	33,014,972
Redeemable Capital Units		$	-			$	2,261,391
STOCKHOLDERS' EQUITY:
Preferred members capital		$	-			$	14,703,813
Common members capital			-				367,932
Common stock - 15,000,000 Shares authorized at $0.01 par value 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			$	12,707,256
Total Liabilities and Stockholders' Equity		$	50,832,413			$	47,983,619

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

3

---

	December 30, 2007 through March 22, 2008
Current:
Federal		$	58,253
State			6,408
Total current		$	64,661
Deferred: Change in tax status		$	2,210,535
Federal			(1,121,494	)
State			(173,534	)
Total deferred		$	915,507
Income tax provision		$	980,168
Pro forma tax for period prior to conversion			497,246
Total pro forma tax provision		$	1,477,414

 

		December 30, 2007 through March 22, 2008
Tax 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, 2008
Deferred tax assets:
Tax intangible assets		$	2,343,000
Allowances			719,382
Accrued other			279,834
Stock compensation			1,295,028
Total deferred tax asset		$	4,637,244
Deferred tax liabilities:
Prepaids			(234,482	)
Depreciation and amortization			(2,975,269	)
Total deferred tax liability		$	(3,209,751	)
Net deferred tax asset		$	1,427,493
Current deferred tax asset		$	764,734
Noncurrent deferred tax asset			662,759
Net 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 million 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:

		Options Available For Grant			Number of Options			Weighted Average Fair Value Per Option			Weighted Average Exercise Price Per Option
Balance at December 29, 2007			—			—			—			—
Shares reserved			1,902,077			—			—			—
Options granted			(732,045	)		732,045		$	3.90		$	11.50
Balance 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 Ended
		March 22, 2008				March 24, 2007
Pro-forma net income (loss) available to common stockholders		$	(3,637,990	)		$	942,173
Basic earnings (loss) per share:
Weighted-average number of common shares outstanding			7,619,719				7,202,290
Basic pro-forma earnings (loss) per share		$	(0.48	)		$	0.13
Diluted earnings (loss) per share:
Weighted-average number of common shares outstanding — diluted			7,619,719				7,202,290
Diluted 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.