Heritage-Crystal Clean, Inc. - Quarter Report: 2020 June (Form 10-Q)

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 13, 2020

☐

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						26-0351454
State or other jurisdiction of						(I.R.S. Employer
Incorporation						Identification No.)

2175 Point Boulevard

Suite 375

Elgin, IL 60123

(Address of principal executive offices and zip code)

Registrant’s telephone number, including area code: (847) 836-5670

Securities registered pursuant to Section 12(b) of the Act:

Title of each Class

Trading Symbol

Name of Exchange on which registered

Common Stock, par value $0.01 per share

HCCI

NASDAQ

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o

Indicate by check mark whether the registrant has submitted electronically, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” "smaller reporting company," and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o

Accelerated filer x

Non-accelerated filer o

(Do not check if a smaller reporting company)

Smaller reporting company ☐

Emerging growth company ☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No x

On July 20, 2020, there were outstanding 23,270,068 shares of Common Stock, $0.01 par value, of Heritage-Crystal Clean, Inc.

Table of Contents


PART I

ITEM 1. FINANCIAL STATEMENTS			4
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS			29
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK			37
ITEM 4. CONTROLS AND PROCEDURES			37

PART II

ITEM 1. LEGAL PROCEEDINGS			38


ITEM 6. EXHIBITS			39

SIGNATURES			40

PART I

ITEM 1. FINANCIAL STATEMENTS

Heritage-Crystal Clean, Inc.

Condensed Consolidated Balance Sheets

(In Thousands, Except Share and Par Value Amounts)


	June 13, 2020		December 28, 2019
	(unaudited)
ASSETS
Current assets:
Cash and cash equivalents	$	50,782	$	60,694
Accounts receivable - net	47,101		55,586
Inventory - net	25,622		29,373
Other current assets	6,355		7,104
Total current assets	129,860		152,757
Property, plant and equipment - net	159,102		154,911
Right of use assets	83,975		89,525
Equipment at customers - net	24,007		24,232
Software and intangible assets - net	18,338		16,892
Goodwill	37,510		32,997
Total assets	$	452,792	$	471,314

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable	$	31,607	$	38,058
Current portion of lease liabilities	21,909		20,407
Contract liabilities - net	2,153		2,252
Accrued salaries, wages, and benefits	5,737		6,771
Taxes payable	8,610		6,538
Other current liabilities	5,515		16,418
Total current liabilities	75,531		90,444
Lease liabilities, net of current portion	63,215		68,734
Long-term debt, less current maturities	29,487		29,348
Deferred income taxes	18,519		17,157
Total liabilities	$	186,752	$	205,683

STOCKHOLDERS' EQUITY:
Common stock - 26,000,000 shares authorized at $0.01 par value, 23,269,462 and 23,191,498 shares issued and outstanding at June 13, 2020 and December 28, 2019, respectively	$	233	$	232
Additional paid-in capital	198,992		200,583
Retained earnings	66,815		64,182
Total Heritage-Crystal Clean, Inc. stockholders' equity	266,040		264,997
Noncontrolling interest	—		634
Total equity	266,040		265,631
Total liabilities and stockholders' equity	$	452,792	$	471,314

See accompanying notes to financial statements.

Heritage-Crystal Clean, Inc.

Condensed Consolidated Statements of Income/(Loss)

(In Thousands, Except per Share Amounts)

(Unaudited)


		Second Quarter Ended,												First Half Ended,
		June 13, 2020				June 15, 2019				June 13, 2020				June 15, 2019

Revenues
	Service revenues	$	52,247			$	57,936			$	116,004			$	114,309
	Product revenues	21,863				41,302				59,584				77,160
	Rental income	5,408				5,762				11,194				9,304
Total revenues				$	79,518			$	105,000			$	186,782			$	200,773

Operating expenses
	Operating costs	$	72,293			$	78,849			$	155,543			$	161,332
	Selling, general, and administrative expenses	11,134				11,042				22,656				23,438
	Depreciation and amortization	5,455				4,061				10,723				8,196
	Other (income) expense - net	(6,796)				1,514				(6,525)				1,457
Operating (loss) income				(2,568)				9,534				4,385				6,350
Interest expense – net				344				219				558				449
(Loss) income before income taxes				(2,912)				9,315				3,827				5,901
(Benefit from) provision for income taxes				(254)				2,151				1,194				1,165
Net (loss) income				(2,658)				7,164				2,633				4,736
Income attributable to noncontrolling interest				—				108				—				192
Net (loss) income attributable to Heritage-Crystal Clean, Inc. common stockholders				$	(2,658)			$	7,056			$	2,633			$	4,544

Net (loss) income per share: basic				$	(0.11)			$	0.30			$	0.11			$	0.20
Net (loss) income per share: diluted				$	(0.11)			$	0.30			$	0.11			$	0.19

Number of weighted average shares outstanding: basic				23,260				23,137				23,249				23,127
Number of weighted average shares outstanding: diluted				23,260				23,368				23,434				23,366

See accompanying notes to financial statements.

Heritage-Crystal Clean, Inc.

Condensed Consolidated Statement of Stockholders’ Equity

(In Thousands, Except Share Amounts)

For the Second Quarter Ended June 13, 2020 and June 15, 2019

(Unaudited)


Second Quarter Ended,
June 13, 2020
	Shares	Par Value Common		Additional Paid–in Capital		Retained Earnings		Total Heritage-Crystal Clean, Inc. Stockholders' Equity		Non-controlling Interest		Total Equity

Balance at March 21, 2020	23,247,912	$	232	$	198,305	$	69,473	$	268,010	$	—	$	268,010
Net loss	—	—		—		(2,658)		(2,658)		—		(2,658)


Issuance of common stock – ESPP	9,159	—		135		—		135		—		135
Share-based compensation	12,391	1		552		—		553		—		553

Balance at June 13, 2020	23,269,462	$	233	$	198,992	$	66,815	$	266,040	$	—	$	266,040



Second Quarter Ended,
June 15, 2019
	Shares	Par Value Common		Additional Paid–in Capital		Retained Earnings		Total Heritage-Crystal Clean, Inc. Stockholders' Equity		Non-controlling Interest		Total Equity
Balance at March 23, 2019	23,120,998	$	231	$	197,909	$	53,307	$	251,447	$	731	$	252,178
Net income	—	—		—		7,056		7,056		108		7,164
Distribution	—	—		—		—		—		(399)		(399)
Issuance of common stock – ESPP	4,476	—		117		—		117		—		117
Share-based compensation	54,538	1		831		—		832		—		832
Share repurchases to satisfy tax withholding obligations	—	—		(783)		—		(783)		—		(783)
Balance at June 15, 2019	23,180,012	$	232	$	198,074	$	60,363	$	258,669	$	440	$	259,109

Condensed Consolidated Statement of Stockholders’ Equity

(In Thousands, Except Share Amounts)

For the First Half Ended June 13, 2020 and June 15, 2019

(Unaudited)


First Half Ended,
June 13, 2020
	Shares	Par Value Common		Additional Paid–in Capital		Retained Earnings		Total Heritage-Crystal Clean, Inc. Stockholders' Equity		Non-controlling Interest		Total Equity

Balance at December 28, 2019	23,191,498	$	232	$	200,583	$	64,182	$	264,997	$	634	$	265,631
Net income	—	—		—		2,633		2,633		—		2,633
Non-controlling interest acquisition	—	—		(2,678)		—		(2,678)		—		(2,678)
Distribution	—	—		—		—		—		(634)		(634)
Issuance of common stock – ESPP	13,261	—		257		—		257		—		257
Share-based compensation	64,703	1		1,621		—		1,622		—		1,622
Share repurchases to satisfy tax withholding obligations	—	—		(791)		—		(791)		—		(791)
Balance at June 13, 2020	23,269,462	$	233	$	198,992	$	66,815	$	266,040	$	—	$	266,040



First Half Ended,
June 15, 2019
	Shares	Par Value Common		Additional Paid–in Capital		Retained Earnings		Total Heritage-Crystal Clean, Inc. Stockholders' Equity		Non-controlling Interest		Total Equity
Balance at December 29, 2018	23,058,584	$	231	$	197,533	$	55,819	$	253,583	$	648	$	254,231
Net income	—	—		—		4,544		4,544		192		4,736
Distribution	—	—		—		—		—		(400)		(400)
Issuance of common stock – ESPP	9,451	—		228		—		228		—		228
Exercise of stock options	2,760	—		20		—		20		—		20
Share-based compensation	109,217	1		1,720		—		1,721		—		1,721
Share repurchases to satisfy tax withholding obligations	—	—		(1,427)		—		(1,427)		—		(1,427)
Balance at June 15, 2019	23,180,012	$	232	$	198,074	$	60,363	$	258,669	$	440	$	259,109

Heritage-Crystal Clean, Inc.

Condensed Consolidated Statements of Cash Flows

(In Thousands)

(Unaudited)


	First Half Ended,
	June 13, 2020		June 15, 2019
Cash flows from Operating Activities:
Net income	$	2,633	$	4,736
Adjustments to reconcile net income to net cash provided by (used in) operating activities:
Depreciation and amortization	10,723		8,196
Reversal of provision for class action settlement in excess of payout	(6,502)		—
Bad debt provision	1,110		572
Share-based compensation	1,622		1,721
Deferred taxes	1,361		1,151
Other, net	(126)		(248)
Changes in operating assets and liabilities:
Decrease (increase) in accounts receivable	8,128		(3,410)
Decrease in inventory	3,751		4,344
Decrease (increase) in other current assets	747		(587)
(Decrease) increase in accounts payable	(4,823)		5,899

(Decrease) increase in accrued liabilities	(764)		2,964
Cash provided by operating activities	$	17,860	$	25,338

Cash flows from Investing Activities:
Capital expenditures	$	(13,137)	$	(12,597)

Business acquisitions, net of cash acquired	(10,129)		(2,573)

Cash used in investing activities	$	(23,266)	$	(15,170)

Cash flows from Financing Activities:
Proceeds from the exercise of stock options	$	—	$	20
Repayment of principal on finance leases	(462)		—
Share repurchases to satisfy tax withholding obligations	(791)		(1,427)
Proceeds from the issuance of common stock	257		228
Payments of deferred and contingent consideration	(198)		—
Distributions to and acquisition of noncontrolling interest	(3,312)		(400)
Cash used in financing activities	$	(4,506)	$	(1,579)
Net (decrease) increase in cash and cash equivalents	(9,912)		8,589
Cash and cash equivalents, beginning of period	60,694		43,579
Cash and cash equivalents, end of period	$	50,782	$	52,168

Supplemental disclosure of cash flow information:
Income taxes paid	$	61	$	979
Cash paid for interest	370		659
Supplemental disclosure of non-cash information:
Payables for construction in progress	937		931

See accompanying notes to financial statements.

HERITAGE-CRYSTAL CLEAN, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

June 13, 2020

(1) ORGANIZATION AND NATURE OF OPERATIONS

Heritage-Crystal Clean, Inc., a Delaware corporation and its subsidiaries (collectively the “Company”), provide parts cleaning, hazardous and non-hazardous containerized waste, used oil collection, vacuum, antifreeze recycling and field services primarily to small and mid-sized industrial and vehicle maintenance customers. The Company owns and operates a used oil re-refinery where it re-refines used oils and sells high quality base oil for lubricants as well as other re-refinery products. The Company also has multiple locations where it dehydrates used oil. The oil processed at these locations is primarily sold as recycled fuel oil. The Company also operates multiple wastewater treatment plants and antifreeze recycling facilities at which it produces virgin-quality antifreeze. The Company's locations are in the United States and Ontario, Canada. 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 Company has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists of the Company's parts cleaning, containerized waste management, vacuum truck services, antifreeze recycling activities, and field services. The Oil Business segment consists of the Company's used oil collection, recycled fuel oil sales, used oil re-refining activities, and used oil filter removal and disposal services. No customer represented greater than 10% of consolidated revenues for any of the periods presented. There were no intersegment revenues. Both segments operate in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not disclosing operating results by geographic segment.

The Company’s fiscal year ends on the Saturday closest to December 31. The most recent fiscal year ended on December 28, 2019. Each of the Company's first three fiscal quarters consists of twelve weeks while the last fiscal quarter consists of sixteen or seventeen weeks.

In the Company's Environmental Services segment, product revenues include sales of solvent, machines, absorbent, accessories, and antifreeze; service revenues include servicing of parts cleaning machines, drum waste removal services, vacuum truck services, field services, and other services; rental income includes embedded lease income from certain of our parts cleaning contracts. In the Company's Oil Business segment, product revenues primarily consist of sales of re-refined base oil, re-refinery co-products and recycled fuel oil; service revenues include revenues from used oil collection activities, collecting and disposing of waste water and removal and disposal of used oil filters. Due to the Company's integrated business model, it is impracticable to separately present costs of tangible products and costs of services.

COVID-19 Pandemic

We are closely monitoring the spread and impact of the COVID-19 pandemic and are continually assessing its potential effects on our business and our financial performance as well as the businesses of our customers and vendors. The Company cannot predict the duration or severity of the COVID-19 pandemic, and we cannot reasonably estimate the financial impact the COVID-19 outbreak will have on our results and significant estimates going forward.

(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The Company's significant accounting policies are described in Note 2, "Summary of Significant Accounting Policies," in the Company's Annual Report on Form 10-K for the fiscal year ended December 28, 2019. There have been no material changes in these policies or their application during the second quarter of fiscal 2020.

Recently Issued Accounting Standards Adopted

Standard

Issuance Date

Description

Effective Date

Effect on the Financial Statements

ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.”

June 2016

This update modifies the impairment model for most financial assets and certain other instruments. For trade and other receivables, held-to-maturity debt securities, loans and other instruments, entities will be required to utilize a new forward-looking “expected loss” methodology that generally will result in the earlier recognition of allowance for losses.

December 29, 2019

The Company adopted ASU 2016-13, “Financial Instruments - Credit Losses (Topic 326) on December 29, 2019 and determined there was no material impact on the financial statements with no adjustment to retained earnings.

(3) BUSINESS COMBINATIONS

On March 31, 2020, Heritage-Crystal Clean completed the acquisition of certain assets of Gro America (“Gro”), which has expanded our network of wastewater processing facilities and augmented our field services capabilities to better serve our customers throughout the Midwestern United States. The purchase price was $10.1 million subject to certain adjustments, including a working capital adjustment, and is preliminarily allocated based on our estimates and assumptions of the approximate fair values of assets acquired and liabilities assumed on the acquisition date. We are still in the process of completing our valuation, and accordingly our estimates and assumptions are subject to change within the measurement period. The Company is continuing to examine facts and circumstances that existed at the acquisition date and how those affect the estimated fair value of working capital and the allocation of the estimated purchase price to other tangible and intangible assets. Goodwill recognized from the acquisition of Gro America represents the excess of the estimated purchase consideration transferred over the estimated fair value of the assets acquired and liabilities assumed. Factors leading to goodwill being recognized consist of the Company's expectations of synergies from combining operations of Gro America and the Company as well as the value of intangible assets that are not separately recognized, such as assembled workforce. Transaction costs incurred in conjunction with the acquisition of Gro America were immaterial. The results of Gro America are consolidated into the Company’s Environmental Services segment.

On January 28, 2020, the Company acquired the remaining ownership interest in one of our subsidiaries in the amount of $2.7 million.

On October 8, 2019, Heritage-Crystal Clean completed the acquisition of certain assets of California Environmental & Litho, Inc., which provide transportation, manifesting, labeling and profiling services to printing, photographic, automotive and body shop industries in the Bay Area, Central Valley & Northern California. No facilities were acquired in the transaction and all service employees and activity have been consolidated in existing branch territories. Total consideration for the acquisition was approximately $0.5 million. Factors leading to goodwill being recognized are the Company's expectations of synergies from combining operations of California Environmental & Litho, Inc. and the Company as well as the value of intangible assets that are not separately recognized, such as an assembled workforce.

On March 25, 2019, the Company completed the acquisition of certain assets of All Valley Disposal, Inc., an environmental services provider based in Fresno, California. Consideration for the acquisition paid at closing was $0.6 million. Contingent upon the achievement of certain business performance metrics, total consideration for the acquisition could reach a maximum of approximately $1.0 million. Factors leading to goodwill being recognized are the Company's expectations of synergies from combining operations of All Valley Disposal, Inc. and the Company as well as the value of intangible assets that are not separately recognized, such as an assembled workforce. The results of All Valley Disposal are consolidated into the Company’s Environmental Services segment.

On February 1, 2019, the Company purchased the assets of W.S. Supplies, Inc. ("WSS") pursuant to an Asset Purchase Agreement. The Company purchased the assets of WSS to expand the Company’s Environmental Services segment in the mid-west. The purchase price was $0.5 million subject to certain adjustments, including a contingent consideration provision, and is allocated based on our estimates and assumptions of the approximate fair values of assets acquired on the acquisition date. The results of WSS are consolidated into the Company’s Environmental Services segment.

On January 11, 2019, the Company purchased the assets of the consumer division of GlyEco, Inc. ("GlyEco") pursuant to an Asset Purchase Agreement. The Company purchased the assets of GlyEco's consumer division to expand the Company’s antifreeze line of business while expanding geographically. The purchase price was $1.6 million subject to certain adjustments, including working capital adjustments, and is allocated based on our estimates and assumptions of the approximate fair values of assets acquired on the acquisition date. Factors leading to goodwill being recognized are the Company's expectations of synergies from combining operations of GlyEco and the Company as well as the value of intangible assets that are not separately recognized, such as an assembled workforce. The results of GlyEco are consolidated into the Company’s Environmental Services segment.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed, net of cash acquired, related to each acquisition:


	As of June 13, 2020
_(thousands)	Gro America		California Environmental & Litho		All Valley Disposal		GlyEco		WSS

Accounts receivable	$	752	$	67	$	36	$	107	$	—
Inventory	—		3		18		291		28


Property, plant, & equipment	1,859		15		252		746		154
Equipment at customers	—		—		—		—		24
Intangible assets	3,080		445		310		251		298
Goodwill	4,516		3		384		251		—
Accounts payable	(76)		—		—		—		—





Total purchase price, net of cash acquired	$	10,131	$	533	$	1,000	$	1,646	$	504
Less: working capital adjustment	2		—		—		23		—

Less: contingent consideration	—		120		250		—		—
Less: to be placed in escrow	—		—		100		—		—
Net cash paid	$	10,129	$	413	$	650	$	1,623	$	504

Unaudited Pro Forma Financial Information

The pro forma financial information in the table below presents the combined results of the Company as if the Gro America and GlyEco acquisitions had occurred December 30, 2018. The pro forma information is shown for illustrative purposes only and is not necessarily indicative of future results of operations of the Company or results of operations of the Company that would have actually occurred had the transactions been in effect for the period presented.


	Second Quarter Ended,		Second Quarter Ended,
(thousands, except per share data)	June 13, 2020		June 15, 2019
Total revenues	$	79,623	$	106,416
Net (loss) income attributable to HCCI shareholders	(2,645)		7,324

Net (loss) income per share: basic	$	(0.11)	$	0.32
Net (loss) income per share: diluted	(0.11)		0.31

	First Half Ended,		First Half Ended,
(thousands, except per share data)	June 13, 2020		June 15, 2019
Total revenues	$	187,737	$	203,806
Net income attributable to HCCI shareholders	2,748		5,057

Net income per share: basic	$	0.12	$	0.22
Net income per share: diluted	0.12		0.22

(4) REVENUE

We account for a contract when it has approval and commitment from both parties, the rights of the parties are identified, payment terms are identified, the contract has commercial substance and collectability of consideration is probable. Revenue is recognized when our performance obligations under the terms of a contract with our customers are satisfied. Recognition occurs when the Company transfers control by completing the specified services at the point in time the customer benefits from the services performed or once our products are delivered. The Company measures progress toward complete satisfaction of a performance obligation satisfied over time using a cost-based input method. This method of measuring progress provides a faithful depiction of the transfer of goods or services because the costs incurred are expected to be substantially proportionate to the Company’s satisfaction of the performance obligation. Revenue is measured as the amount of consideration we expect to receive in exchange for completing our performance obligations. Sales tax and other taxes we collect with revenue-producing activities are excluded from revenue. In the case of contracts with multiple performance obligations, the Company allocates the transaction price to each performance obligation based on the relative stand-alone selling prices of the various goods and/or services encompassed by the contract. We do not have any material significant payment terms as payment is generally due within 30 days after the performance obligation has been satisfactorily completed. The Company has elected the practical expedient to recognize the incremental costs of obtaining a contract as an expense when incurred if the amortization period of the asset that we otherwise would have recognized is one year or less. In applying the guidance in Topic 606, there were no judgments or estimates made that the Company deems significant.

Contract Balances — Contract assets primarily relate to the Company’s rights to consideration for work completed in relation to its services performed but not billed at the reporting date. Contract liabilities primarily consist of advance payments of performance obligations yet to be fully satisfied in the period reported. Our contract liabilities and contract assets are reported in a net position at the end of each reporting period.

We disaggregate our revenue from contracts with customers by major lines of business for each of our segments, as we believe it best depicts how the nature, amount, timing and uncertainty of our revenue and cash flows are affected by economic factors.

The following table disaggregates our revenue by major lines:


	Second Quarter Ended,
	June 13, 2020										June 15, 2019
Total Net Sales by Major Lines of Business (thousands)	Environmental Services		Oil Business		Total		Environmental Services		Oil Business		Total
Parts cleaning, containerized waste, & related products/services	$	33,283	$	—	$	33,283	$	39,431	$	—	$	39,431
Vacuum Services & Wastewater Treatment	11,558		—		11,558		14,622		—		14,622
Field Services	4,562		—		4,562		3,961		—		3,961
Antifreeze Business	4,562		—		4,562		6,139		—		6,139
Environmental Services - Other	427		—		427		357		—		357
Re-refinery Product Sales	—		12,051		12,051		—		27,292		27,292
Oil Collection Services & RFO	—		6,658		6,658		—		6,330		6,330
Oil Filter Business	—		1,009		1,009		—		1,106		1,106
Revenues from Contracts with Customers	54,392		19,718		74,110		64,510		34,728		99,238
Rental income	5,408		—		5,408		5,686		76		5,762
Total Revenues	$	59,800	$	19,718	$	79,518	$	70,196	$	34,804	$	105,000


	First Half Ended,
	June 13, 2020										June 15, 2019
Total Net Sales by Major Lines of Business (thousands)	Environmental Services		Oil Business		Total		Environmental Services		Oil Business		Total
Parts cleaning, containerized waste, & related products/services	$	73,573	$	—	$	73,573	$	77,565	$	—	$	77,565
Vacuum Services & Wastewater Treatment	26,176		—		26,176		28,598		—		28,598
Field Services	14,185		—		14,185		7,802		—		7,802
Antifreeze Business	11,238		—		11,238		12,797		—		12,797
Environmental Services - Other	907		—		907		760		—		760
Re-refinery Product Sales	—		37,488		37,488		—		51,326		51,326
Oil Collection Services & RFO	—		9,947		9,947		—		10,300		10,300
Oil Filter Business	—		2,074		2,074		—		2,321		2,321
Revenues from Contracts with Customers	126,079		49,509		175,588		127,522		63,947		191,469
Rental income	11,173		21		11,194		9,171		133		9,304
Total Revenues	$	137,252	$	49,530	$	186,782	$	136,693	$	64,080	$	200,773

The following table provides information about contract assets and contract liabilities from contracts with customers:


(thousands)	June 13, 2020		December 28, 2019
Contract assets	$	86	$	64
Contract liabilities	2,239		2,316
Contract liabilities - net	$	2,153	$	2,252

During the fiscal quarter ended June 13, 2020, the Company recognized $2.3 million of revenue that was included in the contract liabilities balance as of December 28, 2019. During the two fiscal quarters ended June 13, 2020, the Company recognized $2.3 million of revenue that was included in the contract liabilities balance as of December 28, 2019. The Company has no assets recognized from costs to obtain or fulfill a contract with a customer. We do not disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less.

(5) ACCOUNTS RECEIVABLE

Accounts Receivable — Net, includes amounts billed and currently due from customers. The amounts due are stated at their net estimated realizable value. The allowance for doubtful accounts is our best estimate of the amount of probable lifetime-expected credit losses in existing accounts receivable and is determined based on our historical collections experience, age of the receivable, knowledge of the customer and the condition of the general economy and industry as a whole. The Company does not have any off-balance-sheet credit exposure related to its customers.

Accounts receivable for the second quarter ended June 13, 2020, and the fiscal year ended December 28, 2019 consisted of the following:


(thousands)	June 13, 2020		December 28, 2019
Trade	$	46,290	$	54,420
Less: allowance for doubtful accounts	2,258		2,221
Trade - net	44,032		52,199
Related parties	2,451		1,560
Other	618		1,827
Total accounts receivable - net	$	47,101	$	55,586

The following table provides the changes in the Company’s allowance for doubtful accounts for the second quarter ended June 13, 2020, and the fiscal year ended December 28, 2019:



(thousands)	June 13, 2020		December 28, 2019
Balance at beginning of period	$	2,221	$	1,816
Provision for bad debts	1,110		1,486
Accounts written off, net of recoveries	(1,073)		(1,081)
Balance at end of period	$	2,258	$	2,221

(6) INVENTORY

The carrying value of inventory consisted of the following:


(thousands)	June 13, 2020		December 28, 2019
Used oil and processed oil	$	7,364	$	8,349
Solvents and solutions	7,231		8,694
Machines	4,738		5,440
Drums and supplies	4,262		4,697
Other	2,419		2,632
Total inventory	26,014		29,812
Less: machine refurbishing reserve	392		439
Total inventory - net	$	25,622	$	29,373

Inventory consists primarily of used oil, processed oil, solvents and solutions, new and refurbished parts cleaning machines, drums and supplies, and other items. Inventories are valued at the lower of first-in, first-out (FIFO) cost or net realizable value, net of any reserves for excess, obsolete, or unsalable inventory. The Company routinely monitors its inventory levels at each of its locations and evaluates inventories for excess or slow-moving items. If circumstances indicate the cost of inventories exceed their recoverable value, inventories are reduced to net realizable value.

(7) PROPERTY, PLANT, AND EQUIPMENT

Property, plant, and equipment consisted of the following:


(thousands)	June 13, 2020		December 28, 2019
Machinery, vehicles, and equipment	$	129,091	$	127,242
Buildings and storage tanks	71,924		71,616
Land	9,657		9,664
Leasehold improvements	6,568		6,523
Construction in progress	14,925		7,958
Assets held for sale	—		4
Total property, plant and equipment	232,165		223,007
Less: accumulated depreciation	73,063		68,096
Property, plant and equipment - net	$	159,102	$	154,911

(thousands)	June 13, 2020		December 28, 2019
Equipment at customers	$	80,021	$	77,914
Less: accumulated depreciation	56,014		53,682
Equipment at customers - net	$	24,007	$	24,232

Depreciation expense for the second quarters ended June 13, 2020 and June 15, 2019 was $4.5 million and $3.3 million, respectively, and depreciation expense for the first half ended June 13, 2020 and June 15, 2019 was $8.8 million and $6.4 million, respectively.

(8) GOODWILL AND OTHER INTANGIBLE ASSETS

Goodwill is measured as a residual amount as of the acquisition date, which in most cases results in measuring goodwill as an excess of the purchase consideration transferred plus the fair value of any noncontrolling interest in the acquiree over the fair value of the net assets acquired, including any contingent consideration. The Company tests goodwill for impairment annually in the fourth quarter and in interim periods if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company's determination of fair value requires certain assumptions and estimates, such as margin expectations, market conditions, growth expectations, expected changes in working capital, etc., regarding expected future profitability and expected future cash flows. The Company tests goodwill for impairment at each of its two reporting units, Environmental Services and Oil Business.

The following table shows changes to our goodwill balances by segment from December 28, 2019 to June 13, 2020:


_(thousands)	Oil Business		Environmental Services		Total






Goodwill at December 28, 2019
Gross carrying amount	$	3,952	$	32,997	$	36,949
Accumulated impairment loss	(3,952)		—		(3,952)
Net book value at December 28, 2019	$	—	$	32,997	$	32,997
Acquisitions	—		4,516		—
Measurement period and other adjustments	—		(3)		(3)
Goodwill at June 13, 2020
Gross carrying amount	3,952		37,510		41,462
Accumulated impairment loss	(3,952)		—		(3,952)
Net book value at June 13, 2020	$	—	$	37,510	$	37,510

The following is a summary of software and other intangible assets:


	June 13, 2020										December 28, 2019
_(thousands)	Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount		Gross Carrying Amount		Accumulated Amortization		Net Carrying Amount
Customer & supplier relationships	$	28,177	$	15,291	$	12,886	$	25,551	$	13,886	$	11,665
Software	8,341		5,182		3,159		8,093		4,887		3,206
Non-compete agreements	4,043		3,141		902		3,603		3,068		535
Patents, formulae, and licenses	1,769		809		960		1,769		774		995
Other	1,701		1,270		431		1,702		1,211		491
Total software and intangible assets - net	$	44,031	$	25,693	$	18,338	$	40,718	$	23,826	$	16,892

Amortization expense was $1.0 million for the second quarter ended June 13, 2020, and $0.7 million for the second quarter ended June 15, 2019. Amortization expense was $1.9 million for the first half ended June 13, 2020, and $1.8 million for the first half ended June 15, 2019.

The weighted average useful lives of software and other intangibles are as follows:


						Weighted Average Useful Life (years)
Patents, formulae, & licenses						15
Customer and supplier relationships						11
Software						9
Non-compete agreements						5
Other intangibles						7

The estimated amortization expense for the remainder of fiscal 2020 and each of the five succeeding fiscal years is as follows:


_(millions)
Fiscal Year						Amortization Expense
2020						$2.1
2021						3.7
2022						3.5
2023						3.0
2024						1.4
2025						1.2

The preceding expected amortization expense is an estimate. Actual amounts of amortization expense may differ from estimated amounts due to additional intangible asset acquisitions, the finalization of the fair value of intangible assets that have been acquired from business combinations, disposal of intangible assets, accelerated amortization of intangible assets, and other events.

(9) ACCOUNTS PAYABLE

Accounts payable consisted of the following:


_(thousands)	June 13, 2020		December 28, 2019
Accounts payable	$	31,178	$	37,690
Accounts payable - related parties	429		368
Total accounts payable	$	31,607	$	38,058

(10) DEBT AND FINANCING ARRANGEMENTS

Bank Credit Facility

The Company's Credit Agreement ("Credit Agreement"), dated February 21, 2017, provides for borrowings of up to $95.0 million, subject to the satisfaction of certain terms and conditions, comprised of a term loan of $30.0 million and up to $65.0 million of borrowings under a revolving loan. The actual amount of borrowings available under the revolving loan portion of the Credit Agreement is limited by the Company's total leverage ratio. The amount available to draw at any point in time would be further reduced by any standby letters of credit issued.

Loans made under the Credit Agreement may be Base Rate Loans or LIBOR Rate Loans, at the election of the Company subject to certain exceptions. Base Rate Loans have an interest rate equal to (i) the higher of (a) the federal funds rate plus 0.5%, (b) the London Interbank Offering Rate (“LIBOR”) plus 1%, or (c) Bank of America's prime rate, plus (ii) a variable margin of between 0.75% and 1.75% depending on the Company's total leverage ratio, calculated on a consolidated basis. LIBOR rate loans have an interest rate equal to (i) the LIBOR rate plus (ii) a variable margin of between 1.75% and 2.75% depending on the Company's total leverage ratio. Amounts borrowed under the Credit Agreement are secured by a security interest in substantially all of the Company's tangible and intangible assets.

On July 27, 2017, the Financial Conduct Authority, which regulates LIBOR, announced that it intends to phase out the London Interbank Offered Rate by the end of 2021. We expect that widespread use of LIBOR will transition to alternative interest rates in the near future. Since loans made under our Credit Agreement may be based on LIBOR based loans, the phasing out of LIBOR may adversely affect interest rates that could result in higher borrowing costs and higher interest expense. The Company is currently evaluating its options under our Credit Agreement, but at this time we cannot reasonably estimate the impact to our financial statements.

The Credit Agreement contains customary terms and provisions (including representations, covenants, and conditions) for transactions of this type. Certain covenants, among other things, restrict the Company's and its subsidiaries' ability to incur indebtedness, grant liens, make investments and sell assets. The Credit Agreement also contains customary events of default, covenants and representations and warranties. Financial covenants include:

•An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;

•A total leverage ratio no greater than 3.00 to 1.00, provided that in the event of a permitted acquisition having an aggregate consideration equal to $10.0 million or more, at the Borrower’s election, the total leverage ratio shall be deemed to be 3.25 to 1.00 for the fiscal quarter in which such permitted acquisition occurs and the three immediately following fiscal quarters and thereafter will revert to 3.00 to 1.00; and

•A capital expenditures covenant limiting capital expenditures to $100.0 million plus, if the capital expenditures permitted have been fully utilized, an additional amount for the remaining term of the Credit Agreement equal to 35% of EBITDA for the thirteen “four-week” periods most recently ended immediately prior to the full utilization of such $100.0 million basket.

The Credit Agreement places certain limitations on acquisitions and the payment of dividends.

Debt at June 13, 2020 and December 28, 2019 consisted of the following:


(thousands)	June 13, 2020		December 28, 2019
Principal amount	$	30,000	$	30,000
Less: unamortized debt issuance costs	513		652
Long-term debt, less current maturities	$	29,487	$	29,348

For both the second quarters ended June 13, 2020 and June 15, 2019, the Company recorded interest expense of $0.4 million of which $0.3 million is with respect to our term loan, and $0.1 million related to amortization of debt issuance costs.

For the first half ended June 13, 2020, the Company recorded interest expense of $0.9 million, of which $0.8 million is with respect to our term loan, and $0.1 million related to amortization of debt issuance costs. For the first half ended June 15, 2019, the Company recorded $0.8 million of interest expense.

The Company's weighted average interest rate for all debt as of June 13, 2020, and June 15, 2019 was 3.7% and 4.4%, respectively.

As of June 13, 2020 and December 28, 2019, the Company was in compliance with all covenants under its Credit Agreement. As of June 13, 2020 and December 28, 2019, the Company had $1.7 million and $1.1 million of standby letters of credit issued, respectively, and $63.3 million and $63.9 million was available for borrowing under the bank credit facility, respectively. We believe that the carrying value of our debt balance at June 13, 2020 approximates fair value.

(11) SEGMENT INFORMATION

The Company has two reportable segments: "Environmental Services" and "Oil Business." The Environmental Services segment consists primarily of the Company's parts cleaning, containerized waste management, vacuum truck service, antifreeze recycling activities, and field services. The Oil Business segment consists primarily of the Company's used oil collection, used oil re-refining activities, and the dehydration of used oil to be sold as recycled fuel oil.

No single customer in either segment accounted for more than 10.0% of consolidated revenues in any of the periods presented. There were no intersegment revenues. Both the Environmental Services and Oil Business segments operate in the United States and, to an immaterial degree, in Ontario, Canada. As such, the Company is not disclosing operating results by geographic segment.

Segment results for the second quarters ended June 13, 2020, and June 15, 2019 were as follows:


Second Quarter Ended,
June 13, 2020
(thousands)				Environmental Services				Oil Business				Corporate and Eliminations				Consolidated

Revenues
	Service revenues	$	46,097			$	6,150			$	—			$	52,247
	Product revenues	8,295				13,568				—				21,863
	Rental income	5,408				—				—				5,408
Total revenues				$	59,800			$	19,718			$	—			$	79,518
Operating expenses
	Operating costs	49,104				23,189				—				72,293
	Operating depreciation and amortization	2,348				2,082				—				4,430
Profit (loss) before corporate selling, general, and administrative expenses				$	8,348			$	(5,553)			$	—			$	2,795
Selling, general, and administrative expenses												11,134				11,134
Depreciation and amortization from SG&A												1,025				1,025
Total selling, general, and administrative expenses												$	12,159			$	12,159
Other income - net												(6,796)				(6,796)
Operating loss																(2,568)
Interest expense – net												344				344
Loss before income taxes																$	(2,912)


Second Quarter Ended,
June 15, 2019
(thousands)				Environmental Services				Oil Business				Corporate and Eliminations				Consolidated

Revenues
	Service revenues	$	54,332			$	3,604			$	—			$	57,936
	Product revenues	10,178				31,124				—				41,302
	Rental income	5,686				76				—				5,762
Total revenues				$	70,196			$	34,804			$	—			$	105,000
Operating expenses
	Operating costs	49,374				29,475				—				78,849
	Operating depreciation and amortization	1,872				1,436				—				3,308
Profit before corporate selling, general, and administrative expenses				$	18,950			$	3,893			$	—			$	22,843
Selling, general, and administrative expenses												11,042				11,042
Depreciation and amortization from SG&A												753				753
Total selling, general, and administrative expenses												$	11,795			$	11,795
Other expense - net												1,514				1,514
Operating income																9,534
Interest expense – net												219				219
Income before income taxes																$	9,315

Segment results for the first half ended June 13, 2020, and June 15, 2019 were as follows:


First Half Ended,
June 13, 2020
(thousands)	Environmental Services		Oil Business		Corporate and Eliminations		Consolidated

Revenues
Service revenues	$	107,056	$	8,948	$	—	$	116,004
Product revenues	19,023		40,561		—		59,584
Rental income	11,173		21		—		11,194
Total revenues	$	137,252	$	49,530	$	—	$	186,782
Operating expenses
Operating costs	105,508		50,035		—		155,543
Operating depreciation and amortization	4,618		4,136		—		8,754
Profit (loss) before corporate selling, general, and administrative expenses	$	27,126	$	(4,641)	$	—	$	22,485
Selling, general, and administrative expenses					22,656		22,656
Depreciation and amortization from SG&A					1,969		1,969
Total selling, general, and administrative expenses					$	24,625	$	24,625
Other income - net					(6,525)		(6,525)
Operating income							4,385
Interest expense – net					558		558
Income before income taxes							$	3,827


First Half Ended,
June 15, 2019
(thousands)	Environmental Services		Oil Business		Corporate and Eliminations		Consolidated

Revenues
Service revenues	$	107,207	$	7,102	$	—	$	114,309
Product revenues	20,315		56,845		—		77,160
Rental income	9,171		133		—		9,304
Total revenues	$	136,693	$	64,080	$	—	$	200,773
Operating expenses
Operating costs	99,538		61,794		—		161,332
Operating depreciation and amortization	3,508		2,868		—		6,376
Profit (loss) before corporate selling, general, and administrative expenses	$	33,647	$	(582)	$	—	$	33,065
Selling, general, and administrative expenses					23,438		23,438
Depreciation and amortization from SG&A					1,820		1,820
Total selling, general, and administrative expenses					$	25,258	$	25,258
Other expense - net					1,457		1,457
Operating income							6,350
Interest expense – net					449		449
Income before income taxes							$	5,901

Total assets by segment as of June 13, 2020, and December 28, 2019 were as follows:


(thousands)				June 13, 2020			December 28, 2019
Total Assets:
	Environmental Services	$	222,946		$	224,657
	Oil Business	164,675			171,104
	Unallocated Corporate Assets	65,171			75,553
	Total	$	452,792		$	471,314

Segment assets for the Environmental Services and Oil Business segments consist of property, plant, and equipment, right-of-use assets, intangible assets, accounts receivable, goodwill, and inventories. Assets for the corporate unallocated amounts consist of property, plant, and equipment used at the corporate headquarters as well as cash and net deferred tax assets.

(12) COMMITMENTS AND CONTINGENCIES

LEASES

Lessee

The Company leases buildings and property, railcars, machinery and equipment, trailers and various types of vehicles for use in our operations. Each arrangement is evaluated individually to determine if the arrangement is or contains a lease at inception. The Company has lease agreements with lease and non-lease components and we have elected to not separate lease and non-lease components for all classes of underlying assets. In addition, our lease agreements do not contain any material residual guarantees or restrictive covenants.

Leases may include variable lease payments for common area maintenance, real estate taxes, and truck lease mileage. No leases are tied to a market index rate or CPI. Variable lease payments are not included in the initial measurement of the right-of-use assets or lease liabilities, and are recorded as lease expense in the period incurred. Options to extend or terminate a lease are included in the lease term when it is reasonably certain that we will exercise that option. We have elected not to record leases with an initial term of 12 months or less on the balance sheet and instead recognize those lease payments on a straight-line basis over the lease term. Leases with initial terms in excess of 12 months are recorded as either operating or financing leases in our Consolidated Balance Sheet.

Right-of-use assets represent the Company's right to use an underlying asset during the lease term and lease liabilities represent the Company's obligation to make lease payments arising from the lease. Our leased right-of-use assets are measured at the initial measurement of the lease liability, adjusted for any lease payments made prior to the lease commencement date, less any lease incentives received and other initial direct costs incurred. Our lease liabilities are recognized based on the present value of the future minimum lease payments over the lease term at commencement date. As most of our leases do not provide an implicit rate, we use an incremental borrowing rate based on the information available at commencement date, including lease term, in determining the present value of future payments.

Our leases have remaining terms ranging from less than one month to approximately 11 years and may include options to extend or terminate the lease when it is reasonably certain that the option will be exercised. Lease expense is recognized on a straight-line basis over the lease term. Our finance leases include a fleet of mobile equipment.

The components of lease expense were as follows:


	For the Second Quarter Ended							For the First Half Ended
(thousands)	June 13, 2020		June 15, 2019		June 13, 2020			June 15, 2019
Finance lease cost:
Amortization of right-of-use assets	$	350	$	—	$	672		$	—
Interest on lease liabilities	78		—		151			—
Total finance lease cost	$	428	$	—	$	823		$	—

Operating lease cost	$	5,719	$	6,421	$	11,638		$	12,452
Short-term lease cost	1,694		667		3,182			2,071
Variable lease cost	813		874		1,847			1,967
Total lease cost	$	8,226	$	7,962	$	16,667		$	16,490

Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from financing leases	$	78	$	—	$	144		$	—
Operating cash flows from operating leases	$	6,219	$	6,554	$	12,676		$	13,251
Financing cash flows from financing leases	$	253	$	—	$	462		$	—
Right-of-use assets obtained in exchange for new finance lease liabilities	$	—	$	—	$	3,264		$	—
Right-of-use assets obtained in exchange for new operating lease liabilities	$	1,151	$	2,808	$	1,816		$	80,127

Weighted-average remaining lease term (years)
Finance leases					6.4			—
Operating leases					4.8			4.4

Weighted-average discount rate
Finance leases					3.4		%	—		%
Operating leases					5.8		%	5.6		%

Future annual minimum lease payment commitments as of June 13, 2020 were as follows:


(thousands)
Year 1	$	25,867
Year 2	20,380
Year 3	16,408
Year 4	12,287
Year 5	8,733
thereafter	13,857
Total minimum lease payments	$	97,532
Less: imputed interest	12,408
Lease liability	$	85,124

Lessor

The Company is a lessor of portions of a building and property, railcars, and equipment such as embedded leases of parts cleaning machines. Each of the Company’s leases is classified as an operating lease, and the vast majority are short-term leases. Variable lease payments include real and personal property taxes, which are based on the lessee’s pro rata portion of such amounts, and excess mileage charges which are computed as the actual miles traveled in a calendar year minus the maximum average mileage allowance as specified per the contract. Options to extend the lease beyond the original terms range from day-to-day renewals to increments of five-year extensions. Options to terminate the lease range from immediate termination upon return of the asset to various written notification periods following a minimum lease term. Options for a lessee to purchase the underlying asset are not contractually specified but may be negotiated on a case-by-case basis. Significant judgments made in determining whether a contract contains a lease include assessments as to whether or not the contract conveys the right to direct the use of an identified asset. Significant judgments made in allocating consideration between lease and non-lease components include techniques applied in estimating the relative stand-alone selling prices of the lease and non-lease components of the contract in cases where a stand-alone selling price is not directly observable. As of June 13, 2020, the Company is party to a contract under which it leases railcars to the related party Calumet Specialty Products Partners, L.P. No leased assets are covered by residual value guarantees. The Company manages the risk associated with the residual value of leased assets through such means as performing periodic maintenance and upkeep activities and the inclusion of contractual terms that hold the lessee responsible for damage incurred to leased assets. Contained in Note 7, “Property, plant, and equipment,” are disclosures concerning the Company’s underlying assets under operating leases. The Company has made an accounting policy election to exclude from the consideration in the contract, and from variable payments not included in the consideration in the contract, all taxes assessed by a governmental authority that are both imposed on and concurrent with a specific lease revenue-producing transaction and collected by the lessor from a lessee.

The Company recognizes rental income on a straight-line basis for that portion of the consideration allocated to the embedded lease component of certain of our parts cleaning contracts. We also recognize rental income on certain subleases of railcars and portions of a building and property.

Rental income was as follows:


	Second Quarter Ended,
	June 13, 2020										June 15, 2019
(thousands)	Environmental Services		Oil Business		Total		Environmental Services		Oil Business		Total
Parts Cleaning	$	5,408	$	—	$	5,408	$	5,686	$	—	$	5,686
Railcars	—		—		—		—		56		56
Property	—		—		—		—		20		20
Total rental income	$	5,408	$	—	$	5,408	$	5,686	$	76	$	5,762


	First Half Ended,
	June 13, 2020										June 15, 2019
(thousands)	Environmental Services		Oil Business		Total		Environmental Services		Oil Business		Total
Parts Cleaning	$	11,173	$	—	$	11,173	$	9,171	$	—	$	9,171
Railcars	—		16		16		—		113		113
Property	—		5		5		—		20		20
Total rental income	$	11,173	$	21	$	11,194	$	9,171	$	133	$	9,304

Purchase Obligations

The Company may enter into purchase obligations with certain vendors. They represent expected payments to third party service providers and other commitments entered into during the normal course of our business. These purchase obligations are generally cancelable with or without notice, without penalty, although certain vendor agreements provide for cancellation fees or penalties depending on the terms of the contract.

The Company has purchase obligations in the form of open purchase orders of $16.7 million as of June 13, 2020, and $28.3 million as of December 28, 2019, primarily for used oil, solvent, machine purchases, disposal and transportation expenses, and capital expenditures.

The Company may be subject to investigations, claims or lawsuits as a result of operating its business, including matters governed by environmental laws and regulations. The Company may also be subject to tax audits in a variety of jurisdictions. When claims are asserted, the Company evaluates the likelihood that a loss will occur and records a liability for those instances when the likelihood is deemed probable and the exposure is reasonably estimable. The Company carries insurance at levels it believes are adequate to cover loss contingencies based on historical claims activity. When the potential loss exposure is limited to the insurance deductible and the likelihood of loss is determined to be probable, the Company accrues for the amount of the required deductible, unless a lower amount of exposure is estimated. As of June 13, 2020 and December 28, 2019, the Company had accrued $3.9 million and $4.0 million related to loss contingencies and other contingent liabilities, respectively.

(13) INCOME TAXES

The Company deducted for federal income tax purposes accelerated "bonus" depreciation on the majority of its capital expenditures for assets placed in service in fiscal 2011 through the second quarter of 2020. Therefore, the Company recorded a noncurrent deferred tax liability as to the difference between the book basis and the tax basis of those assets. As of the second quarter of fiscal 2020, the Company's remaining Federal Net Operating Loss ("NOL") was $23.3 million, which will begin to expire in 2031. The unexpired balance on the federal NOL generated in 2011 is $4.1 million as of June 13, 2020. The Company's remaining balance of Federal NOLs recorded during 2012 - 2019 was $19.2 million as of June 13, 2020. There are also state NOLs of varying amounts, dependent on each state’s conformity with bonus depreciation. The remaining deferred tax asset related to the Company's state and federal NOL was a tax effected balance of $5.5 million.

The Company's effective tax rate for the second quarter of fiscal 2020 was 8.7% compared to 23.1% in the second quarter of fiscal 2019. The rate decrease is principally attributable to the opposing effect on the tax rate from changes in year to date earnings in an income quarter as compared to a loss quarter.

The Company’s effective rate for the first half of fiscal 2020 was 31.2% compared to 19.7% in the first half of fiscal 2019. The rate increase is principally attributable to income taxes which are computed on a tax base that reflects substantial modifications to federal taxable income, and that has created comparatively high anticipated tax expense due to relatively low pre-tax income for fiscal 2020.

The Company establishes reserves when it is more likely than not that the Company will not realize the full tax benefit of a position. The Company had a reserve of $2.7 million for uncertain tax positions as of June 13, 2020. The gross unrecognized tax benefits would, if recognized, decrease the Company's effective tax rate.

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) was enacted in response to the COVID-19 pandemic. The CARES Act permits NOLs incurred in 2018, 2019, and 2020 to be carried back to each of the five preceding taxable years to generate a refund of previously paid income taxes; increases the limitation on allowable business interest expense; allows for the refund of AMT credits not previously refunded among other things. The Company is currently evaluating the impact of the CARES Act. At present, the Company anticipates a cash benefit from the refundable AMT credit provisions but does not expect that the NOL carryback provisions or interest expense limitation provisions would result in a material cash benefit.

(14) SHARE-BASED COMPENSATION

Restricted Stock Compensation/Awards

Annually, the Company grants restricted shares to its Board of Directors. The shares become fully vested one year from their grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant. The Company amortizes the expense over the service period, which is the fiscal year in which the award is granted. In addition, the Company may grant restricted shares to certain members of management based on their services and contingent upon continued service with the Company. The restricted shares vest over a period of approximately three years from the grant date. The fair value of each restricted stock grant is based on the closing price of the Company's common stock on the date of grant.

The following table shows a summary of restricted share grants and expense resulting from the awards:


			Compensation Expense
(thousands, except share amounts)							First Half Ended,				Unrecognized Expense as of,
Recipient of Grant	Grant Date	Restricted Shares	June 13, 2020		June 15, 2019		June 13, 2020		June 15, 2019
Members of Management	February, 2017	146,564	$	—	$	160	$	—	$	207
Chief Executive Officer	February, 2017	500,000	213		422		294		808
Members of Management	February, 2018	116,958	248		233		367		943
Special Incentive Grant	April, 2018	350,000	251		317		2,371		4,231
Board of Directors	May, 2019	10,590	—		132		—		153
Members of Management	May, 2019	23,560	84		86		374		550
Members of Management	February, 2020	41,138	302		350		568		—
Board of Directors	April, 2020	14,988	132		—		153		—

In February 2017, as part of Mr. Recatto's employment agreement, the Company granted a restricted stock award of 500,000 shares of common stock, which vests through January 2021 in an amount based on the vesting table below, with the common stock price increase to be determined based on the increase in the price of the Company’s common stock (if any) from the closing price of the common stock as reported by Nasdaq on the employment commencement date ($15.00) and the common stock price on the potential vesting date (determined by using the weighted average closing price of a share of the Company's common stock for the 90-day period ending on the vesting date). If the stock price does not increase by $5.00, then no shares shall vest. During the first half of fiscal 2020, the Company recorded approximately $0.2 million of compensation expense related to this award. In the future, the Company expects to recognize compensation expense of approximately $0.3 million over the remaining requisite service period, which ends January 31, 2021. The fair value of this restricted stock award as of the grant date was estimated using a Monte Carlo simulation model. Key assumptions used in the Monte Carlo simulation to estimate the grant date fair value of this award are a risk-free rate of 1.70%, expected dividend yield of zero, and an expected volatility assumption of 41.73%.

Vesting Table

Increase in Stock Price From the Employment Commencement Date to the Vesting Date

Total Percentage of Restricted Stock
Shares to Be Vested

Less than $5 per share increase

—%

$5 per share increase

25%

$10 per share increase

50%

$15 per share increase

75%

$20 or more per share increase

100%

Provision for possible accelerated vesting of award

If the average closing price of the Company's common stock increases by the marginal levels set forth in the above vesting table for any consecutive 180 day period between the award date and final vesting date, Mr. Recatto shall become vested in 50% of the corresponding total percentage of restricted shares earned on the last day of the 180 day period.

Accelerated vestings achieved to date include the following:


Vesting Date	Marginal Level Target	Shares Fully Vested
March 14, 2018	25%	62,500
June 10, 2019	50%	62,500

The following table summarizes the restricted stock activity for the first half ended June 13, 2020:


Restricted Stock (Nonvested Shares)	Number of Shares	Weighted Average Grant-Date Fair Value Per Share
Nonvested shares outstanding at December 28, 2019	784,579	$	18.39
Granted	56,126	25.72
Vested	(74,998)	20.25
Forfeited	(48,887)	19.4
Nonvested shares outstanding at June 13, 2020	716,820	$	16.64

Employee Stock Purchase Plan

As of June 13, 2020, the Company had reserved 96,324 shares of common stock available for purchase under the Employee Stock Purchase Plan. In the first half of fiscal 2020, employees purchased 13,261 shares of the Company’s common stock with a weighted average fair market value of $20.36 per share.

(15) EARNINGS PER SHARE

The following table reconciles the number of shares outstanding for the second quarters and first half of fiscal 2020 and 2019, respectively, to the number of weighted average basic shares outstanding and the number of weighted average diluted shares outstanding for the purposes of calculating basic and diluted earnings per share:


	Second Quarter Ended,												First Half Ended,
(thousands, except per share amounts)	June 13, 2020				June 15, 2019				June 13, 2020				June 15, 2019
Net (loss) income	$	(2,658)			$	7,164			$	2,633			$	4,736
Less: income attributable to noncontrolling interest	—				108				—				192
Net (loss) income attributable to Heritage-Crystal Clean, Inc. common stockholders			$	(2,658)			$	7,056			$	2,633			$	4,544

Weighted average basic shares outstanding	23,260				23,137				23,249				23,127
Dilutive shares for share–based compensation plans	—				231				185				239
Weighted average diluted shares outstanding	23,260				23,368				23,434				23,366





Net (loss) income per share: basic	$	(0.11)			$	0.30			$	0.11			$	0.20
Net (loss) income per share: diluted	$	(0.11)			$	0.30			$	0.11			$	0.19

(16) OTHER (INCOME) EXPENSE - NET

Other (income) expense - net was $6.8 million of income for the second quarter of fiscal 2020 mainly driven by a $6.5 million reversal of settlement claims, compared to a net $1.5 million of other expense in the second quarter of 2019 mainly related to site closure costs. Other (income) expense - net was $6.5 million of income for the first half of fiscal 2020, compared to a net $1.5 million of other expense in the first half of 2019.

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

Disclosure Regarding Forward-Looking Statements

You should read the following discussion in conjunction with our consolidated financial statements and related notes in our Annual Report on Form 10-K filed with the SEC on March 3, 2020. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from our expectations. These statements can be identified by the fact that they do not relate strictly to historical or current facts. They use words such as "aim," "anticipate," "believe," "could," "estimate," "expect," "intend," "may," "plan," "project," "should," "will be," "will continue," "will likely result," "would" and other words and terms of similar meaning in conjunction with a discussion of future or estimated operating or financial performance. You should read statements that contain these words carefully, because they discuss our future expectations, contain projections of our future results of operations or of our financial position or state other “forward-looking” information. Forward-looking statements speak only as of the date of this quarterly report. Factors that could cause such differences include those described in the section titled “Risk Factors” and elsewhere in our Annual Report on Form 10-K for fiscal 2019 filed with the SEC on March 3, 2020. Except as required under federal securities laws and the rules and regulations of the SEC, we do not have any intention, and do not undertake, to update any forward-looking statements to reflect events or circumstances arising after the date of this quarterly report, whether as a result of new information, future events or otherwise. As a result of these risks and uncertainties, readers are cautioned not to place undue reliance on the forward-looking statements included in this quarterly report or that may be made elsewhere from time to time by, or on behalf of, us. All forward-looking statements attributable to us are expressly qualified by these cautionary statements. Certain tabular information may not foot due to rounding. Our fiscal year ends on the Saturday closest to December 31. Interim results are presented for the twelve weeks ("second quarter" or "quarter") ended, and twenty-four weeks ("first half") ended June 13, 2020 and June 15, 2019, respectively. "Fiscal 2019" represents the 52-week

period ended December 28, 2019 and "Fiscal 2020" represents the 53-week period beginning December 29, 2019, and ending on January 2, 2021.

Overview

We provide parts cleaning, containerized waste management, used oil collection, vacuum truck services, antifreeze recycling, and field services primarily to small and medium sized industrial customers as well as vehicle maintenance customers. We own and operate a used oil re-refinery, several wastewater treatment plants and multiple antifreeze recycling facilities. We believe we are the second largest provider of industrial and hazardous waste services to small and mid-sized customers in both the vehicle maintenance and industrial services sector in North America, and we have the second largest used oil re-refining capacity in North America. Our services help our customers manage their used chemicals and liquid and solid wastes while also helping to minimize their regulatory burdens. We operate from a network of 89 branch facilities providing services to customers in 45 states and parts of Canada. We conduct business through two segments: Environmental Services and Oil Business.

Our Environmental Services segment revenues are generated primarily from providing parts cleaning services, containerized waste management, vacuum truck services, antifreeze recycling, and field services. Revenues from this segment accounted for approximately 73% of our total Company revenues for the first half of fiscal 2020. In the Environmental Services segment, we define and measure same-branch revenues for a given period as the subset of all our branches that have been open and operating throughout and between the periods being compared, and we refer to these as established branches. We calculate average revenues per working day by dividing our revenues by the number of non-holiday weekdays in the applicable fiscal year or fiscal quarter.

Our Oil Business segment consists primarily of our used oil collection, used oil re-refining activities, and recycled fuel oil ("RFO") sales which together accounted for approximately 27% of our total Company revenues in the first half of fiscal 2020.

Our operating costs include the costs of the materials we use in our products and services, such as used oil collected from customers or purchased from third party collectors, solvent, and other chemicals. The used solvent that we retrieve from customers in our product reuse program is accounted for as a reduction in our net cost of solvent under operating costs, whether placed in inventory or sold to a purchaser for reuse. Changes in the price of crude oil can impact operating costs indirectly as it may impact the price we pay for solvent or used oil, although we attempt to offset volatility in the oil markets by managing the spread between the costs we pay for our materials and the prices we charge for our products and services. Operating costs also include transportation of solvents and waste, payments to third parties to recycle or dispose of the waste materials that we collect, and the costs of operating our re-refinery, recycling centers, waste water treatment facilities, hubs, and branch system including personnel costs (including commissions), facility rent, truck leases, fuel, and maintenance. Our operating costs as a percentage of sales generally increase in relation to the number of new branch openings. As new branches achieve route density and scale efficiencies, our operating costs as a percentage of sales generally decrease.

We use profit before corporate selling, general, and administrative expenses ("SG&A") as a key measure of segment profitability. We define profit before corporate SG&A expense as revenue less operating costs and depreciation and amortization from operations.

Our corporate selling, general, and administrative expenses include the costs of performing centralized business functions, including sales management at or above the regional level, business management and marketing, billing, receivables management, accounting and finance, procurement, real estate management, information technology, environmental health and safety, human resources and legal.

We operate a used oil re-refinery located in Indianapolis, Indiana, through which we recycle used oil into high quality lubricant base oil and other products. We supply the base oil to firms that produce and market finished lubricants. Our re-refinery has an annual nameplate capacity of approximately 75 million gallons of used oil feedstock, allowing it to produce approximately 49 million gallons of lubricating base oil per year when operating at full capacity.

Critical Accounting Policies

Critical accounting policies are those that are both 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 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.

There were no material changes during the second quarter of fiscal 2020 to the information provided under the heading "Critical Accounting Policies" included in our Annual Report on Form 10-K for the fiscal year ended December 28, 2019.

Impact of the COVID-19 Pandemic on Our Business

The COVID-19 pandemic has caused significant disruption and volatility on a global scale resulting in, among other things, an economic slowdown. In response to the COVID-19 outbreak, national and local governments around the world have instituted certain measures, including travel bans, prohibitions on group events and gatherings, shutdowns of certain businesses, curfews, shelter-in-place orders and recommendations to practice social distancing. As our operations have been deemed essential, we have taken several measures to combat the COVID-19 downturn which have resulted in attenuating activity and, in some cases, required temporary closures of certain of our facilities, among other impacts. The duration of these measures is unknown and may be extended, and additional measures may be necessary.

As a result of the impact of the COVID-19 outbreak, some of our customers have permanently or temporarily closed their businesses, limited our access to their businesses, or have a decreased demand for our products and services due to a slowdown in the demand for their own products or services. We have experienced a material decrease in activity in both our Environmental Services and our Oil Business segments during the second quarter of fiscal 2020, but we believe our second quarter results represent the bottom of this economic cycle for our business barring the wide-spread return of shelter-in-place orders. However, we cannot determine with certainty the full extent to which the COVID-19 pandemic will impact our business and operating results for the second half of fiscal 2020 and beyond. The ultimate impact of the COVID-19 pandemic on our business, results of operations, financial condition and cash flows is highly uncertain and cannot be accurately predicted and is dependent on future developments, including the duration of the pandemic and the related length of its impact on the global economy, and any new information that may emerge concerning the COVID-19 outbreak and the actions to contain it or treat its impact. The continued impact on our business as a result of COVID-19 pandemic could result in a material adverse effect on our business, results of operations, financial condition, prospects and the trading prices of our securities in the near-term and beyond 2020.

During the second quarter we took several actions to combat the COVID-19 outbreak induced downturn in our business including, but not limited to, the following:

•Salary reductions for all levels of management;

•Furlough and reduction in force programs;

•Suspension of all non-essential capital expenditures;

•A hiring freeze;

•Launched a COVID-19 cleaning service; and

•Moved into a material charge position for our used oil collection service.

In addition to the above actions, we have taken steps to minimize the negative impact of the COVID-19 pandemic on our business and to protect the safety of our employees and customers. Entering this economic downturn, we had a strong balance sheet and were in a net-cash position which we expected would position us to take advantage of some of the opportunities that we believed would be in front of us once as we emerged from this challenging time. As of the end of the second quarter of 2020, we continued to take steps to minimize the negative impact of the COVID-19 pandemic on our business and to protect the safety of our employees and customers. During the second quarter of fiscal 2020, we did not have to access our revolving lines of credit to address any liquidity concerns and we remained in compliance with the covenants in our bank Credit Facility as we were able to generate positive cash flow from operations and maintain a strong balance sheet and net-cash position.

RESULTS OF OPERATIONS

General

The following table sets forth certain operating data as a percentage of revenues for the periods indicated:


	Second Quarter Ended,																							First Half Ended,
(thousands)	June 13, 2020									June 15, 2019										June 13, 2020									June 15, 2019

Revenues
Service revenues	$	52,247	65.7		%			$	57,936	55.2		%			$	116,004	62.1		%			$	114,309	56.9		%
Product revenues	21,863		27.5		%			41,302		39.3		%			59,584		31.9		%			77,160		38.4		%
Rental income	5,408		6.8		%			5,762		5.5		%			11,194		6.0		%			9,304		4.6		%
Total revenues	$	79,518	100.0		%			$	105,000	100.0		%			$	186,782	100.0		%			$	200,773	100.0		%
Operating expenses
Operating costs	$	72,293	90.9		%			$	78,849	75.1		%			$	155,543	83.3		%			$	161,332	80.4		%
Selling, general, and administrative expenses	11,134		14.0		%			11,042		10.5		%			22,656		12.1		%			23,438		11.7		%
Depreciation and amortization	5,455		6.9		%			4,061		3.9		%			10,723		5.7		%			8,196		4.1		%
Other (income) expense - net	(6,796)		(8.5)		%			1,514		1.4		%			(6,525)		(3.5)		%			1,457		0.7		%
Operating (loss) income			(2,568)			(3.2)	%			9,534			9.1	%			4,385			2.3	%			6,350			3.2	%
Interest expense – net			344			0.4	%			219			0.2	%			558			0.3	%			449			0.2	%
(Loss) income before income taxes			(2,912)			(3.7)	%			9,315			8.9	%			3,827			2.0	%			5,901			2.9	%
(Benefit from) provision for income taxes			(254)			(0.3)	%			2,151			2.0	%			1,194			0.6	%			1,165			0.6	%
Net (loss) income			(2,658)			(3.3)	%			7,164			6.8	%			2,633			1.4	%			4,736			2.4	%
Income attributable to noncontrolling interest			—			—	%			108			0.1	%			—			—	%			192			0.1	%
Net (loss) income attributable to Heritage-Crystal Clean, Inc. common stockholders			$	(2,658)		(3.3)	%			$	7,056		6.7	%			$	2,633		1.4	%			$	4,544		2.3	%

Revenues

Revenue for the second quarter of 2020 was $79.5 million compared to $105.0 million for the same quarter of 2019, a decrease of $25.5 million, or (24.3)%. The $25.5 million decrease in revenues was mainly due to COVID-19 related volume declines in most of our product and service lines, partially offset by favorable pricing variances in our parts cleaning, containerized waste, and antifreeze lines of business, along with a significant decrease in the demand for finished lubricants which directly impacted demand for our base oil products. For the first half of fiscal 2020, revenues decreased $14.0 million, or (7.0)%, from $200.8 million in the first half of fiscal 2019 to $186.8 million in the first half of 2020 mainly driven mainly by COVID-19 related volume declines during the second quarter, partially offset by growth in most of our Environmental Services segment product and service lines during the first quarter of 2020.

Operating costs

Operating costs decreased $6.6 million, or (8.3)%, during the second quarter of 2020 compared to the second quarter of fiscal 2019, mainly due to lower demand for our products and services which mitigated, in part, the impact of lower revenues during the quarter. Operating costs decreased $5.8 million, or (3.6)%, in the first half of fiscal 2020 compared to the first half of fiscal 2019.

We expect that in the future our operating costs in both the Environmental Services and Oil Business segments may increase or decrease depending on our product and service volumes, changes in commodity pricing, along with other factors.

Selling, general, and administrative expenses

Selling, general, and administrative expenses were relatively flat at $11.1 million, compared to the second quarter of fiscal 2019 as efforts to lower SG&A expenses overall during the second quarter of 2020 were partially offset by higher bad debt and severance expense. Selling, general, and administrative expenses decreased $0.8 million, or (3.3)%, from the first half of fiscal 2019 to the first half of fiscal 2020.

Other (income) expense - net

Interest expense - net

Interest expense - net for the second quarters of fiscal 2020 and fiscal 2019 was $0.3 million and $0.2 million, respectively. Interest expense - net for the first half of fiscal 2020 and 2019 was $0.6 million and $0.4 million respectively.

Provision for income taxes

Segment Information

The following table presents revenues by reportable segment:


		Second Quarter Ended,									Change
(thousands)					June 13, 2020			June 15, 2019			$			%
Revenues:
	Environmental Services		$	59,800		$	70,196		$	(10,396)		(14.8)	%
	Oil Business		19,718			34,804			(15,086)			(43.3)	%
	Total		$	79,518		$	105,000		$	(25,482)		(24.3)	%


	First Half Ended,					Change
(thousands)		June 13, 2020		June 15, 2019		$		%
Revenues:
Environmental Services		$	137,252	$	136,693	$	559	0.4	%
Oil Business		49,530		64,080		(14,550)		(22.7)	%
Total		$	186,782	$	200,773	$	(13,991)	(7.0)	%

In the second quarter of fiscal 2020, Environmental Services revenue decreased by $10.4 million, or 14.8%, from $70.2 million in the second quarter of fiscal 2019 to $59.8 million in the second quarter of fiscal 2020. The 14.8% decrease in revenue was mainly due to COVID-19 related volume declines in most of our product and service lines, partially offset by favorable pricing variances in our parts cleaning, containerized waste, and antifreeze lines of business. For the first half of fiscal 2020, Environmental Services revenues were $137.3 million, compared to $136.7 million during the first half of fiscal 2019.

During the second quarter of fiscal 2020, Oil Business revenues were down $15.1 million, or 43.3%, to $19.7 million compared to $34.8 million in the second quarter of fiscal 2019. The decrease in revenue was mainly due to the COVID-19 pandemic and related shelter-in-place orders that led to a significant decrease in the demand for finished lubricants which directly impacted demand for our base oil products. Pandemic impacts also led to a significant decline in the generation of used oil which negatively impacted used oil collection and feedstock volumes used in our re-refinery. However, we were able to move into a material charge for our used oil collection services during the second quarter of fiscal 2020. For the first half of fiscal 2020, Oil Business revenues were $49.5 million, compared to $64.1 million during the first half of fiscal 2019.

Segment Profit (Loss) Before Corporate Selling, General and Administrative Expenses ("SG&A")

The following table presents profit (loss) by reportable segment before corporate SG&A expense:


		Second Quarter Ended,									Change

(thousands)					June 13, 2020			June 15, 2019			$		%
Profit (loss) before corporate SG&A*
	Environmental Services		$	8,348		$	18,950		$	(10,602)		(55.9)%
	Oil Business		(5,553)			3,893			(9,446)			N/M
	Total		$	2,795		$	22,843		$	(20,048)		(87.8)%


		First Half Ended,									Change

(thousands)					June 13, 2020			June 15, 2019			$		%
Profit (loss) before corporate SG&A*
	Environmental Services		$	27,126		$	33,647		$	(6,521)		(19.4)%
	Oil Business		(4,641)			(582)			(4,059)			697.4%
	Total		$	22,485		$	33,065		$	(10,580)		(32.0)%

*Includes depreciation and amortization related to operating activity but not depreciation and amortization related to corporate

selling, general, and administrative activity. For further discussion see Note 11 in our consolidated financial statements included elsewhere in this document.

Environmental Services profit before corporate SG&A expense decreased $10.6 million, or 55.9%, in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. The decrease was mainly due to lower revenues stemming from the COVID-19 pandemic and related shelter-in-place orders. Environmental Services profit before corporate SG&A expense decreased $6.5 million, or 19.4%, in the first half of fiscal 2020 compared to the first half of fiscal 2019.

Oil Business profit before corporate SG&A expense decreased $9.4 million in the second quarter of fiscal 2020 compared to the second quarter of fiscal 2019. The decrease in profit before corporate SG&A expense was mainly due to lower revenues stemming from the COVID-19 pandemic and related shelter-in-place orders that led to a significant decrease in the demand for finished lubricants which directly impacted demand for our base oil products. Oil Business profit before corporate SG&A expense decreased $4.1 million in the first half of fiscal 2020 compared to the first half of fiscal 2019.

FINANCIAL CONDITION

Liquidity and Capital Resources

Cash and Cash Equivalents

As of June 13, 2020 and December 28, 2019, cash and cash equivalents were $50.8 million and $60.7 million, respectively. Our primary sources of liquidity are cash flows from operations and funds available to borrow under our term loan and revolving bank credit facility.

Debt and Financing Arrangements

The Company's Credit Agreement as amended ("Credit Agreement") provides for borrowings of up to $95.0 million, subject to the satisfaction of certain terms and conditions, comprised of a term loan of $30.0 million and up to $65.0 million of borrowings under the revolving loan portion. The actual amount available under the revolving loan portion of the Credit Agreement is limited by the Company's total leverage ratio. The amount available to draw at any point in time would be further reduced by any standby letters of credit issued.

The Credit Agreement contains customary terms and provisions (including representations, covenants, and conditions) for transactions of this type. Certain covenants, among other things, restrict the Company's and its subsidiaries' ability to incur indebtedness, grant liens, make investments and sell assets. The Credit Agreement contains customary events of default, covenants and representations and warranties. Financial covenants include:

•An interest coverage ratio (based on interest expense and EBITDA) of at least 3.5 to 1.0;

•A capital expenditures covenant limiting capital expenditures to $100.0 million plus, if the capital expenditures permitted have been fully utilized, an additional amount for the remaining term of the Agreement equal to 35% of EBITDA for the thirteen “four-week” periods most recently ended immediately prior to the full utilization of such $100.0 million basket.

The Company's weighted average interest rate for all debt as of June 13, 2020, and June 15, 2019 was 3.7% and 4.4%, respectively.

We believe that our existing cash, cash equivalents, available borrowings, and other sources of financings will be sufficient to meet our anticipated cash needs for working capital and capital expenditures for at least the next 12 months. We cannot assure you that this will be the case or that our assumptions regarding revenues and expenses underlying this belief will be accurate. If, in the future, we require more liquidity than is available to us under our credit facility, we may need to raise additional funds through debt or equity offerings. 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.

Summary of Cash Flow Activity


	First Half Ended,
(thousands)	June 13, 2020		June 15, 2019
Net cash provided by (used in):
Operating activities	$	17,860	$	25,338
Investing activities	(23,266)		(15,170)
Financing activities	(4,506)		(1,579)
Net (decrease) increase in cash and cash equivalents	$	(9,912)	$	8,589

The most significant items affecting the comparison of our operating activities for the first half of fiscal 2020 and the first half of fiscal 2019 are summarized below:

Net Cash Provided by Operating Activities —

•Earnings — Our decrease in net income during the first half of 2020 unfavorably impacted our net cash provided by operating activities by $2.1 million compared to the first half of 2019.

•Accounts Receivable — The decrease in accounts receivable, had a favorable impact on cash provided by operating activities of $11.5 million in the first half of fiscal 2020.

•Accounts Payable — The decrease in accounts payable, had an unfavorable impact on cash provided by operating activities of $10.7 million in the first half of fiscal 2020.

Net Cash Used in Investing Activities —

•Capital expenditures — We made capital expenditures as follows:


	First Half Ended,
(thousands)	June 13, 2020		June 15, 2019
Re-refinery capital improvements	$	5.1	$	2.5
Trucks and trailers	3.0		3.7
Parts cleaning machines	2.3		2.1
IT projects	1.2		1.5
Various other projects	1.5		2.8
Total	$	13.1	$	12.6

• Net Cash Used in Investing Activities — We used $10.1 million of cash outflows for an acquisition during the second quarter of 2020. See footnote 3 — Business Combinations for more information.

•Net Cash Used in Financing Activities — The Company dispersed $2.8 million to acquire the remaining ownership interest in one of our subsidiaries.

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 this facility is based upon variable interest rates. Our weighted average borrowings under our Credit Facility during the first half of fiscal 2020 was $30.0 million, and the annual effective interest rate for the Credit Facility for the first half of fiscal 2020 was 3.7%. 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 change of $0.3 million to our interest expense in the first half of fiscal 2020.

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.

Changes in Internal Control Over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the second quarter ended June 13, 2020 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

ITEM 1. LEGAL PROCEEDINGS

In February 2016 the Company received an information request from the U.S. EPA ("EPA") regarding the operation of our Indianapolis, Indiana re-refinery in relation to our Clean Air Act permit for the facility. During 2016 we responded fully to the EPA's information request. On April 7, 2017 we received a notice of violation and finding of violation of the Clean Air Act related to our operation of the re-refinery. On June 16, 2020, we signed a consent agreement with the EPA where we settled the matter for $0.2 million.

In October 2016, the EPA issued a Notice of Intent to file an administrative complaint against the Company for certain alleged violations of the Emergency Planning and Community Right to Know Act (“EPCRA”) and regulations under the Clean Water Act ("CWA"). During the second quarter of 2020, we reached a settlement with the EPA involving the alleged CWA and EPCRA violation for $0.3 million.

In December 2019, the Company settled its putative class action lawsuit, Adelphia, Inc. d/b/a/ Village Auto and Dan’s One Stop Shop, LLC v. Heritage-Crystal Clean, Inc. and Heritage-Crystal Clean, LLC, Case No. 15-L-386, filed in the Circuit Court for the Sixteenth Judicial Circuit in Kane County, Illinois, alleging that the Company charged fees in violation of both its contracts and applicable state laws. During the second quarter of 2020 we paid a total of $4.5 million to resolve all claims asserted by the putative class.

ITEM 6. EXHIBITS



31.1			Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2			Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1			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 2002
32.2			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
101.INS*			XBRL Instance Document
101.SCH*			XBRL Taxonomy Extension Schema Document
101.CAL*			XBRL Taxonomy Extension Calculation Linkbase Document
101.LAB*			XBRL Taxonomy Extension Label Linkbase Document
101.PRE*			XBRL Taxonomy Extension Presentation Linkbase Document
101.DEF*			XBRL Taxonomy Extension Definition Linkbase Document

*In accordance with Regulation S-T, the XBRL-related information in Exhibits 101 to this Quarterly Report on Form 10-Q shall be deemed to be "furnished" and not "filed."

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 23, 2020	By:	/s/ Mark DeVita

			Mark DeVita
			Chief Financial Officer