Yes, definitely put holes in the bottom of the cups you transplant into. The second cup is used for bottom watering and/or for catching excess water that drains out. Using it is a preference. Last year I used a second cup for each plant, this year I'm just putting a bunch (that need watering) into a shallow tote and watering all at once. If you use two cups, you might want to put a small spacer, like a piece of styrofoam popcorn (kind that doesn't dissolve), or similar. This gives it little extra space to drain into if needed.