Karman Holdings Inc. (KRMN) FY 2024 MD&A

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.

You should read the following discussion in conjunction with our audited consolidated financial statements, including the related notes thereto, contained within this Item 8 of this Annual Report. In addition to historical information, this discussion contains forward-looking statements that involve risks and uncertainties. You should read the sections of this prospectus titled “Risk Factors” and “Cautionary Note Regarding Forward-Looking Statements” for a discussion of the factors that could cause our actual results to differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. For purposes of this section, references to the “Company,” “Karman,” “we,” “us,” and “our” refer to TCFIII Spaceco Holdings and its other subsidiaries prior to the Corporate Conversion and to Karman Holdings Inc. or Karman Holdco and its consolidated subsidiaries for all periods following the Corporate Conversion.

Overview

We specialize in the upfront design, testing, manufacturing, and sale of mission-critical systems for existing and emerging missile, missile and defense, and space programs. Our integrated payload protection, propulsion, and interstage system solutions are deployed across a wide variety of existing and emerging programs supporting important Department of Defense and space sector initiatives. We estimate that no single program accounted for more than 12% of sales in the twelve months ended December 31, 2024 or the twelve months ended December 31, 2023, with revenue from over 100 active programs supporting current production and next-generation space, missile, hypersonics, and defense applications.

We believe that our engineering expertise and track record with critical piece, part and subcomponent manufacturing positions us to successfully serve customers who rely on us to deliver the technical design and scaled manufacturing of integrated system solutions that are required to withstand extreme environments and meet stringent performance requirements. Our highly engineered solutions are organized into three key families: Payload Protection and Deployment Systems, Propulsion Systems, and Aerodynamic and Interstage Systems:

Payload Protection Systems: involves the full design and manufacturing of the top section of a booster, launch vehicle, payload, or missile system.

Propulsion Systems: involves the integrated offering of solid rocket motor subsystems, launch systems, and ablative composites.

Aerodynamic and Interstage Systems: involves supporting metallic and composite subsystems designed for aerodynamics and interstage separation.

Our solutions are deployed across three growing, core end markets including: Hypersonics and Strategic Missile Defense, Missile and Tactical Integrated Defense Systems, and Space and Launch. We currently serve a diverse customer base supported by long-term relationships and engineering partnerships and believe that our differentiated technical design, intellectual property, and track record of mission success provides us with a value proposition that proves difficult to replicate by current competitors and potential future entrants. By utilizing our vertically integrated, concept-to-production capabilities, we have created a business model aimed at creating long-term, sustainable value for our customers, the programs we support, and the warfighter.

Our business is guided by a key, overarching mission – to expand what’s possible in space and defense through the relentless pursuit of innovation, integration, and collaboration. Our business model is focused on providing innovative and reliable integrated system solutions, utilizing our concept-to-production capabilities. which include comprehensive in-house design, analysis, testing and qualification, and production services. This strategy and these capabilities, coupled with a broad and highly integrated IP portfolio, have provided what we believe to be a competitive advantage and market leading position.

We are focused on delivering innovative and customized solutions for our customers, with more than 204 multi-discipline engineers supporting our comprehensive in-house design and manufacturing capabilities. Our unique set of capabilities is supported by decades of experience across advanced material design, proprietary digital models, material science and testing, and manufacturing expertise. We believe that this collection of vertically integrated capabilities provides a strong value proposition for our customers who seek to simplify their supply chains, increase their speed to market, and reduce costs – all while benefitting from quality integrated system solutions. Our differentiated market offering is supported by significant sole- and single-source contract positions.

Our IP portfolio is enabled by our differentiated technical design expertise, which affords us the ability to work collaboratively with customers earlier in the program development cycle to develop mission-critical solutions. Such early participation quite often leads to difficult-to-replicate solutions, as Karman solutions become part of the production specification. It is our belief that once a supplier has been qualified as a supplier on a particular program and delivers on the basis of quality, it is typically unlikely that a

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prime integrator would pursue re-qualification given a relatively lengthy and costly process. We believe this provides a strong competitive advantage for Karman, who benefits from the longevity of missile and space programs and the visible and recurring revenue streams provided. Furthermore, our key design philosophy is centered around solving for an optimal solution for the customer given a specified set of performance requirements. These optimal solutions quite often integrate our patented materials, subcomponents, and proprietary manufacturing processes that have been developed over the past 40+ years.

TCFIII Spaceco Holdings operates through its wholly owned subsidiary, Karman Space and Defense, originally formed in 2020 as a limited liability company.

Our Consolidated Financial Statements and Management’s Discussion and Analysis of Financial Condition and Results of Operations reflect estimates and assumptions made by management. Events and changes in circumstances arising after December 31, 2024, including those resulting from the continuing impacts of the current unfavorable macroeconomic climate, will be reflected in management’s estimates for future periods.

Corporate Conversion

We currently operate as a corporation under the name Karman Holdings Inc. Prior to our initial public offering, we converted from a Delaware limited liability company named TCFIII Spaceco Holdings LLC. In the conversion, all of our outstanding equity interests were converted into shares of common stock of Karman Holdings Inc. The purpose of the Corporate Conversion was to reorganize our structure so that the entity that is offering our common stock to the public in this offering is a corporation rather than a limited liability company and so that our existing investors and new investors in this offering will own our common stock rather than equity interests in a limited liability company.

Key Factors Impacting Our Performance

U.S. Government Spending and Federal Budget Uncertainty

Changes in the volume and relative mix of U.S. government spending as well as areas of spending growth could impact our business and results of operations. In particular, our results can be affected by shifts in strategies and priorities on homeland security, intelligence, defense-related programs, infrastructure and urbanization and continued increased spending on technology and innovation, including cybersecurity, artificial intelligence, connected communities and physical infrastructure. Cost-cutting and efficiency initiatives, along with current and future budget restrictions, spending cuts, and shifts in priorities, could lead our customers—those conducting significant business through U.S. government contracts—to reduce or delay funding. This may result in inconsistent or reduced investments of appropriated funds, potentially diminishing demand for our solutions and services. Furthermore, any disruption in the functioning of government agencies, including as a result of government closures and shutdowns, could have a negative impact on our operations and cause us to lose revenue or incur additional costs due to, among other things, our inability to maintain access and schedules for government testing or deploy our staff to customer locations or facilities as a result of such disruptions.

There is also uncertainty around the timing, extent, nature and effect of Congressional and other U.S. government actions to address budgetary constraints, caps on the discretionary budget for defense and non-defense departments and agencies, and the ability of Congress to determine how to allocate the available budget authority and pass appropriations bills to fund both U.S. government departments and agencies that are, and those that are not, subject to the caps. Additionally, budget deficits and the growing U.S. national debt may increase pressure on the U.S. government to reduce federal spending across all federal agencies, with uncertainty about the size and timing of those reductions. Furthermore, delays in the completion of future U.S. government budgets could in the future delay procurement of the federal government services we provide. A reduction in the amount of, or reductions, delays, or cancellations of funding for, services that we are contracted to provide to the U.S. government as a result of any of these impacts or related initiatives, legislation or otherwise could have a material adverse effect on our business and results of operations. Significant delays or reductions in appropriations for our programs and changes in U.S. government priorities and spending levels more broadly may negatively impact our business and could have a material adverse impact on our business, financial condition and results of operations.

Operational Performance on Contracts

Revenue, net income, and the timing of our cash flows depend on our ability to perform on our contracts. When agreeing to contractual terms, our management team makes assumptions and projections about future conditions and events. The accounting for our contracts and programs requires assumptions and estimates about these conditions and events. These projections and estimates assess:

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the productivity and availability of labor;

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the allocation of indirect costs to labor and material costs incurred;

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the complexity of the work to be performed;

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the cost and availability of materials and components; and

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schedule requirements.

If there is a significant change in one or more of these circumstances, estimates or assumptions, or if the risks under our contracts are not managed adequately, the profitability of contracts could be adversely affected. This could affect net income and margin materially.

In particular, profitability can fluctuate predicated on the type of contract awarded. Typically fixed-price development programs on complex systems represent a higher risk profile to complete on-budget. To the extent our fixed-price development efforts create a larger portion of our revenue output, this may result in reduced operating margins given the higher risk profile.

Additionally, the timing of our cash flows is impacted by the achievement of billable milestones on contracts. For instance, delays in reaching these milestones can lead to temporary cash flow shortfalls, while early completions compared to initial estimates can result in cash flow influxes. Historically, this has resulted and could continue to result in fluctuations in working capital levels and quarterly free cash flow results.

To manage these fluctuations, we have implemented several strategies, such as maintaining a buffer of liquid assets and closely monitoring project timelines to anticipate cash flow needs. Despite these measures, the inherent variability in milestone achievements means that quarter-to-quarter comparisons of our results of operations may not necessarily be meaningful and should not be relied upon as indicators of future performance.

We expect these fluctuations to persist, particularly as we take on more complex and long-term projects. However, we believe that our proactive cash flow management strategies will help mitigate the impact of our overall financial stability.

Regulations

Increased audit, review, investigation and general scrutiny by U.S. government agencies of performance under government contracts and compliance with the terms of those contracts and applicable laws could affect our operating results. Negative publicity and increased scrutiny of government contractors in general, including us, relating to government expenditures for contractor services and incidents involving the mishandling of sensitive or classified information as well as the increasingly complex requirements of the DoD and the United States intelligence community, including those related to cybersecurity, could impact our ability to perform in the markets we serve.

If a government inquiry or investigation reveals improper or illegal activities, we may face civil or criminal penalties or administrative sanctions, including contract termination, fines, fee forfeiture, payment suspension, or suspension and debarment from conducting business with U.S. Government agencies. Any of these actions could materially and adversely impact our reputation, business, financial condition, results of operations, and cash flows.

Additionally, U.S. Government procurement regulations impose various operational requirements on government contractors. Non-compliance with these regulations could lead to civil or criminal penalties, which may materially adversely affect our operating results.

Acquisitions

We consider the acquisition of businesses and investments that we believe will expand or complement our current portfolio and allow access to new customers or technologies. We also may explore the divestiture of businesses that no longer meet our needs or strategy or that could perform better outside of our organization.

Industry Background

Our defense operations are affected by U.S. Department of Defense (“DoD”) budget and spending levels, changes in demand, changes in policy positions or priorities, the domestic and global political and economic environment, and the evolving nature of the global and national security threat environment. Changes in these budget and spending levels, policies, or priorities, which are subject to U.S. domestic and foreign geopolitical risks and threats, may impact our defense businesses, including the timing of and delays in U.S. government licenses and approvals for sales, the risk of sanctions, or other restrictions.

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We believe that our business is well positioned in areas that the DoD and other customers indicate are priorities for future defense spending, including those based on the 2023 National Security Strategy document, the 2024 U.S. National Security related budget and the National Defense Authorization Act (“NDAA”), and also the related Future Years Defense Program or five- year projection of the forces, resources and programs needed to support the DoD’s strategy and operations.

Components of Operations

Revenues

We generate our revenue primarily from the design, development and deployment of systems and subsystems (Propulsion Systems, Aerodynamic Interstage Systems, and Payload Protection and Deployment Systems) across three end markets (Hypersonics and Strategic Missile Defense, Missile and Integrated Defense Systems, and Space and Launch). We do not believe our revenues are subject to significant seasonal variations.

Cost of Goods Sold

Cost of goods sold consists of direct costs and allocated indirect costs. Direct costs include labor, materials, subcontracts and other costs directly related to the execution of a specific contract. Indirect costs include overhead expenses, fringe benefits and depreciation.

General and Administrative Expenses

Our general and administrative expenses (“G&A”) include salaries, fringe benefits (such as health insurance, retirement plans, vacation and sick days), and other expenses related to selling, marketing and proposal activities, certain administrative costs, operational overhead expenses, share-based compensation expenses and amortization of acquired intangible assets. Some G&A expenses relate to marketing and business development activities that support both ongoing business areas as well as new and emerging market areas. These activities can be directly associated with developing requirements for applications of capabilities created in our business development activities as well as managing human capital. G&A is an important financial metric that we analyze to help us evaluate the contribution of our selling, marketing and proposal activities to revenue generation.

Results of Operations

Comparison of the Years Ended December 31, 2024 and 2023

The following table sets forth, for the years ended December 31, 2024 and 2023, certain operating data of the Company, including presentation of the changes in amounts between reporting periods:

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Revenue

Revenue for the year ended December 31, 2024 increased $64,545,494, or 23.0%, to $345,251,064 as compared to $280,705,570 for the year ended December 31, 2023. Revenue represents sales from our existing businesses over comparable periods.

The increase in revenues for the year ended December 31, 2024 as compared to the year ended December 31, 2023 was primarily attributable to organic growth across all end-markets, Tactical Missile and Integrated Defense Systems, followed by Space and Launch and Missile and Hypersonics and Strategic Missile Defense.

As described in additional detail below, the results of operations include the following disaggregation of end market revenues:

Our revenues for the year ended December 31, 2024 continued to benefit from increased U.S. Government spending in response to evolving global threats, including conflicts in the Middle East, such as the Hamas-Israel conflict and actions by Iran’s proxies against the United States and its allies, alongside ongoing challenges from the Russia-Ukraine war, North Korean provocations, and rising tensions with China. The Company believes it is positioned to address the growing spending needs of the United States and its allies.

The increase in Hypersonics and Strategic Missile Defense revenue was driven by well-funded development and production programs, alongside increased government spending. Revenue growth for the year ended December 31, 2024 was more moderate compared to the year ended December 31, 2023 due to the number of programs within the Hypersonics and Strategic Missile Defense revenue end market being within qualification and testing, compared to other end markets where more programs are in full or initial production phases of the program life cycle.

Space and Launch revenues were supported by new launch vehicle programs, including Blue Origin’s New Glenn and ULA’s Vulcan and the acquisition of Rapid Machine Solutions – Wolcott Design Services, LLC (RMS). From the acquisition date of February 16, 2024, to December 31, 2024, RMS generated revenue of $11,692,260. These programs are expected to continue expanding as the commercial space launch market exceeds Federal Aviation Administration (FAA) projections.

Tactical Missile and Integrated Defense Systems revenues increased, primarily due to key programs entering or continuing production phases of our program lifecycles. This market’s growth continues to be supported by successful system deployments in the Ukraine and Middle East conflicts, which continue generating significant global demand.

Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $213,139,980 for the year ended December 31, 2024, from $175,156,456 for the year ended December 31, 2023. The $37,983,524, or 21.7%, increase in cost of goods sold was primarily a result of increased materials and labor costs. Since the acquisition of RMS on February 16, 2024, RMS has incurred $4,967,447 of cost of sales, which was not reflected in our prior period results.

Our success in program expansions and the continued maturation of existing programs across our end markets contributed to the 0.7% increase in gross profit as a percentage of revenues to 38.3% for the year ended December 31, 2024, compared to 37.6% for the year ended December 31, 2023.

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Operating Expenses:

General and Administrative Expenses

General and administrative expenses increased to $44,420,816 for the year ended December 31, 2024 from $36,623,263 for the year ended December 31, 2023. General and administrative expenses and the related percentage changes for the year ended December 31, 2024 and 2023 were as follows:

The 21.3% increase in general and administrative expenses between the year ended December 31, 2024 and 2023 was primarily driven by an increase in professional fees for legal, tax, accounting, and consulting fees. Additionally, payroll increased due to increased benefit expenses and headcount growth. These additional costs reflect the continued expansion of our operational support capabilities and the integration of newly established regional campuses and acquisitions. Since the acquisition of RMS on February 16, 2024, RMS has incurred $2,562,107 to our total general and administrative expenses, which was not reflected in our prior period results. The increase in general and administrative expenses was partially offset by decreases in recruitment costs, bad debt expenses and travel and entertainment costs.

Depreciation and Amortization

Depreciation and amortization expense increased to $24,130,519 for the year ended December 31, 2024 compared to $20,432,034 for the year ended December 31, 2023. The increase in amortization expense for the year ended December 31, 2024, is primarily attributable to the amortization of $18,300,000 of newly acquired intangible assets from the RMS acquisition on February 14, 2024. The acquired RMS intangible assets will be amortized over a weighted average period of 12.1 years. Depreciation of fixed assets used in the production of goods sold is included in cost of goods sold.

Interest Expense, net

Interest expense, net for the year ended December 31, 2024 increased by $2,865,898, or 6.0%, to $50,732,903 compared to $47,867,005 during the year ended December 31, 2023. This increase in interest expense is primarily attributable to the $35,000,000 increase in borrowings under the TCW Term Note incurred to finance the acquisition of RMS on February 16, 2024. Both the Revolving Credit Facility and TCW Term Note payable are variable interest rate loans with an applicable spread. For additional information related to debt, see Note 7, Debt, in the Notes to the Consolidated Financial Statements.

Other Income (expense)

Other income (expense) for the year ended December 31, 2024 and 2023 was $1,502,156 and $563,772, respectively. The difference between periods was attributable to a settlement of a shareholder note in the year ended December 31, 2024.

(Provision for) and Benefit From Income Taxes

The provision for income taxes was ($1,627,963) for the year ended December 31, 2024 compared to a tax benefit of $3,168,821 for the year ended December 31, 2023. The increase in provision for income taxes was attributable to substantially larger pre-tax book income during the year ended December 31, 2024. For additional information regarding provisions for taxes, see Note 14, Provision for Income Taxes, in the Notes to the Consolidated Financial Statements.

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Comparison of the Years Ended December 31, 2023 and 2022

The following table sets forth, for the years ended December 31, 2023 and 2022, certain operating data of the Company, including presentation of the changes in amounts between reporting periods:

Revenue

Revenue for the year ended December 31, 2023 increased $54,359,271, or 24.0%, to $280,705,570 as compared to $226,310,299 for the year ended December 31, 2022. Revenue represents sales from our existing businesses for comparable periods.

The increase in revenues for fiscal 2023 as compared to fiscal 2022 was primarily attributable to organic growth across all end-markets, Hypersonics and Strategic Missile Defense, followed by Space and Launch and Tactical Missile and Integrated Defense Systems.

As described in additional detail below, the results of operations include the following disaggregation of product mix:

The Company’s 2023 revenues benefited from increased U.S. Government spending in response to evolving global threats, including conflicts in the Middle East, such as the Hamas-Israel conflict and actions by Iran’s proxies against the U.S. and its allies, alongside ongoing challenges from the Russia-Ukraine war, North Korean provocations, and rising tensions with China. The Company is positioned to address the growing spending needs of the U.S. and its allies.

The Hypersonics and Strategic Missile Defense market saw significant growth driven by well-funded development and production programs, alongside increased government spending. Revenues from these programs increased year-over-year by 37.9%, 34.2%, and 42.0% across the Aerodynamic Interstage, Payload Protection and Deployment, and Propulsion Systems product families, respectively.

Space and Launch revenues were supported by new launch vehicle programs, including Blue Origin’s New Glenn and ULA’s Vulcan. These programs are expected to continue expanding as the commercial space launch market exceeds Federal Aviation Administration (FAA) projections. Year-over-year, Space and Launch revenues increased by 79.3% in Payload Protection and Deployment and 16.3% in Propulsion Systems.

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Tactical Missile and Integrated Defense Systems revenues increased, primarily due to an increase of 74.3% in Payload Protection and Deployment and an increase of 13.3% in Propulsion Systems. This market’s growth was supported by successful system deployments during the Ukraine conflict, generating significant global demand.

Cost of Goods Sold and Gross Profit

Cost of goods sold increased to $175,156,456 for the year ended December 31, 2023, from $145,364,015 for the year ended December 31, 2022. The $29,792,441, or 20.5%, increase in cost of goods sold was primarily a result of increased materials and labor costs.

Our success in program expansions and the maturation of existing programs across our end markets contributed to the 1.8% increase in gross profit as a percentage of revenues to 37.6% for the year ended December 31, 2023, compared to 35.8% for the year ended December 31, 2022.

Operating Expenses:

General and Administrative Expenses

General and administrative expenses increased to $36,623,263 for the year ended December 31, 2023 from $30,036,084 for the year ended December 31, 2022. General and administrative expenses and the related percentage changes for the years ended December 31, 2023 and 2022 were as follows:

The 21.9% increase in general and administrative expenses between the years ended December 31, 2023 and 2022, respectively, was primarily driven by an increase in payroll expenses for salaries, bonuses, and retirement benefits. Additionally, total personnel compensation increased as a result of headcount increases. These additional costs reflect the expansion of our operational support capabilities and the integration of newly established regional campuses. The increase in general and administrative expenses was partially offset by decreases in share-based compensation expense and professional fees for legal, tax, accounting, and consulting fees.

Depreciation and Amortization

Depreciation and amortization expense decreased to $20,432,034 for the year ended December 31, 2023 compared to $30,475,370 for the year ended December 31, 2022. The decrease in amortization expense for the year ended December 31, 2023, is primarily attributable to the full amortization of certain backlog assets in 2022, which did not extend into fiscal year 2023. Depreciation of fixed assets used in the production of goods sold is included in cost of goods sold. The $10,043,336 decrease in depreciation and amortization expense is also attributable to a decrease in purchases of property and equipment.

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Interest Expense, net

Interest expense, net for the year ended December 31, 2023 increased by $10,366,247, or 27.6%, to $47,867,005 compared to $37,500,758 for the year ended December 31, 2022. This increase in interest is primarily attributable to the increase in additional borrowings under the Revolving Credit Facility to fund working capital needs and to manage cash flow requirements. Both the Revolving Credit Facility and note payable are variable interest rate loans with an applicable spread. For additional information related to debt, see Note 7, Debt, in the Notes to the Consolidated Financial Statements.

Other Income (expense)

Other income (expense) for the years ended December 31, 2023 and 2022 of $563,772 and $(205,604), respectively, was attributable to an increase in gains from the sale of assets.

Benefit From Income Taxes

The benefit from income taxes was $3,168,821 for the year ended December 31, 2023 compared to benefit from income taxes of $3,172,913 for the year ended December 31, 2022. The decrease in provision for income taxes was attributable to an increase in deferred taxable income. The timing differences between provisions for income taxes recognizable under US GAAP compared to statutory taxes may create different amounts of current and deferred tax amounts. For additional information regarding provisions for taxes, see Note 14, Provision for Income Taxes, in the Notes to the Consolidated Financial Statements.

Key Financial and Non-GAAP Operating Measures

We measure our business using both key financial and operating data including key performance indicators (“KPIs”) and non-GAAP financial measures and use the following metrics to manage our business, monitor results of operations and ensure proper allocation of capital: (i) Revenue, (ii) Funded Backlog, (iii) EBITDA, (iv) Adjusted EBITDA and (v) Adjusted EBITDA Margin. We believe that these financial performance metrics represent the primary drivers of value enhancement, balancing both short and long-term indicators of increased shareholder value. These are the metrics we use to measure our results and evaluate our business and related contract performance.

Financial and Operating Data

1.
Funded Backlog - Represents the total value of existing contracts, less amounts previously invoiced. Contract types include but are not limited to purchase orders, long term agreements and contractual authorization to proceed.

2.
Note on non-GAAP financial measures: Throughout the discussion of our results of operations we use non-GAAP financial measures EBITDA, Adjusted EBITDA and Adjusted EBITDA Margin, as measures of our overall performance. Definitions and reconciliations of these measures to the most directly comparable financial measure calculated and presented in accordance with U.S. GAAP are included below.

Non-GAAP Financial Measures

We believe the non-GAAP financial measures will help investors understand our financial condition and operating results and assess our future prospects. We believe these non-GAAP financial measures, each of which is discussed in greater detail below, are important supplemental measures because they exclude unusual or non-recurring items as well as non-cash items that are unrelated to or may not be indicative of our ongoing operating results. Further, when read in conjunction with our U.S. GAAP results, these non-GAAP financial measures provide a baseline for analyzing trends in our underlying businesses and can be used by management as a tool to help make financial, operational and planning decisions. We may use non-GAAP financial metrics in certain Management

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compensation plans, debt covenants, internal budgetary decision making, and other resource allocation decisions. Finally, these measures are often used by analysts and other interested parties to evaluate companies in our industry by providing more comparable measures that are less affected by factors such as capital structure.

We recognize that these non-GAAP financial measures have limitations, including that they may be calculated differently by other companies or may be used under different circumstances or for different purposes, thereby affecting their comparability from company to company. In order to compensate for these and the other limitations discussed below, management does not consider these measures in isolation from or as alternatives to the comparable financial measures determined in accordance with U.S. GAAP. Readers should review the reconciliations below and should not rely on any single financial measure to evaluate our business.

We define these non-GAAP financial measures as:

EBITDA/Adjusted EBITDA - We define EBITDA as our net income before income taxes, depreciation and amortization and interest expense. References to Adjusted EBITDA refer to EBITDA plus, as applicable for each period any non-cash share-based compensation expenses, including non-cash gains and losses on equity, non-cash gains and losses on derivative instruments associated with equity, termination expenses, and personnel expenses from discontinued operations. Additionally, Adjusted EBITDA excludes certain nonrecurring costs that management excludes in contemplation of budget decisions and are not costs of operating the business such as entity wide re-branding initiatives or acquisition integration costs. Adjusted EBITDA excludes the costs associated with lender and administrative agent fees associated with one-off amendments, as these are not directly related to the operations of the business and are non-recurring. Lastly, Management excludes other non-recurring costs including net gains from disposition of assets, non-cash gains and losses from any hedging arrangements, non-cash impairment losses, business interruption insurance proceeds, and any non-recurring transaction expenses.

Adjusted EBITDA Margin - Adjusted EBITDA Margin is calculated by dividing Adjusted EBITDA by revenue. Adjusted EBITDA and Adjusted EBITDA Margin are not measures calculated in accordance with U.S. GAAP, and they should not be considered an alternative to any financial measures that were calculated under U.S. GAAP.

Adjusted EBITDA and Adjusted EBITDA Margin are used to facilitate a comparison of the ordinary, ongoing and customary course of our operations on a consistent basis from period to period and provide an additional understanding of factors and trends affecting our business. Adjusted EBITDA and Adjusted EBITDA Margin are driven by changes in volume, performance, contract mix and general and administrative expenses and investment levels. Performance, as used in this definition, refers to changes in profitability and is primarily based on adjustments to estimates at completion on individual contracts. These adjustments result from increases or decreases to the estimated value of the contract, the estimated costs to complete the contract, or both. These measures therefore assist management and our board and may be useful to investors in comparing our operating performance consistently over time as they remove the impact of our capital structure, asset base and items outside the control of the management team and expenses that do not relate to our core operations. Adjusted EBITDA and Adjusted EBITDA Margin may not be comparable to similarly titled non-GAAP measures used by other companies as other companies may have calculated the measures differently. The reconciliation of EBITDA and Adjusted EBITDA to net income (loss) is provided below:

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EBITDA and Adjusted EBITDA Reconciliation:

1.
Depreciation and amortization expense includes $8,828,596, $6,747,180 and $4,506,464 of allocated depreciation and amortization from cost of goods sold for the years ended December 31, 2024, 2023 and 2022, respectively.

2.
Represents legal and due diligence fees incurred in connection with planned and completed acquisitions, which are required to be expensed as incurred. During the periods presented, these costs were incurred for due diligence and legal fees related to an acquisition of equipment and intangible assets. Additionally, the Company incurred certain professional service fees related to its IPO that did not meet the requirements to be deferred issuance costs, these costs are considered non-recurring and outside the ordinary course of business, and therefore are not indicative of ongoing operating performance.

3.
These costs include company-wide system implementation expenses and Company re-branding costs. This category also includes post-acquisition integration costs, and employee expenses related to acquisitions or restructuring activities.

4.
Reflects non-recurring lender fees associated with one-off amendments to the Company’s credit agreement, separate from ongoing administrative fees.

5.
Other non-recurring costs consisted primarily of non-cash impairment losses during the year ended December 31, 2023 and net gains on disposals of property held for sale and acquisition costs during the twelve months ended December 31, 2022.

6.
Reflects non-cash share-based compensation expenses associated with the Company's P Units.

Although we use EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin as measures to assess the performance of our business and for the other purposes set forth above, the use of non-GAAP financial measures as analytical tools has limitations, and you should not consider any of them in isolation, or as a substitute for analysis of our results of operations as reported in accordance with U.S. GAAP. Some of these limitations are:

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EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin do not reflect the significant interest expense, or the cash requirements, necessary to service interest payments on our indebtedness;

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although depreciation and amortization are non-cash charges, the assets being depreciated and amortized will often have to be replaced in the future, and the cash requirements for such replacements are not reflected in EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin;

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EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin exclude the cash expense we have incurred to integrate acquired businesses into our operations, which is a necessary element of certain of our acquisitions;

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the omission of the substantial amortization expense associated with our intangible assets further limits the usefulness of EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin; and

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EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin do not include the payment of taxes, which is a necessary element of our operations.

Because of these limitations, EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin should not be considered as measures of cash available to us to invest in the growth of our business. Management compensates for these limitations by not viewing EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin in isolation and specifically by using other U.S. GAAP measures, such

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as net sales and operating profit, to measure our operating performance. EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin are not measurements of financial performance under U.S. GAAP, and they should not be considered as alternatives to net income/(loss) or cash flow from operations determined in accordance with U.S. GAAP. Our calculations of EBITDA, Adjusted EBITDA, and Adjusted EBITDA Margin may not be comparable to the calculations of similarly titled measures reported by other companies.

Critical Accounting Estimates

Our discussion and analysis of financial condition and results of operations discusses our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. When we prepare these consolidated financial statements, we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Some of our accounting policies require that we make subjective judgments, including estimates that involve matters that are inherently uncertain. Our most critical estimates include those related to revenue recognition, intangible assets acquired in a business combination and goodwill. We base our estimates and judgments on historical experience and on various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for our judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Our actual results may differ from these estimates under different assumptions or conditions.

Revenue Recognition

Significant management judgments and estimates must be made and used in connection with the recognition of revenue in any accounting period. Material differences in the amount of revenue in any given period may result if these judgments or estimates prove to be incorrect or if management’s estimates change on the basis of development of the business or market conditions. Management judgments and estimates have been applied consistently and have been reliable historically.

The majority of our revenue is generated pursuant to written contractual arrangements to design, develop, manufacture and/or modify complex products, and to provide related engineering, technical and other services according to customer specifications. In most cases, goods or services provided under the Company’s contracts are accounted for as a single performance obligation due to the complex and integrated nature of its products and services. These contracts generally require significant integration of a group of goods and services to deliver a combined output. These contracts may be cost-plus fixed price or time and materials. Revenue is recognized over time using the input method, by tracking costs incurred, which measures progress toward completion and control is transferred as the Company performs its contractual obligations due to the performance having no alternative use and the Company’s enforceable right to payment. The Company estimates profit on these contracts as the difference between total estimated revenues and total estimated costs at completion (EAC) and recognizes profit as costs are incurred. Significant judgment is used to estimate total costs at completion. EAC’s are estimated using historical actual margins as a percentage of revenue, applied to open jobs. Unforeseen events and circumstances can alter the estimate of the costs and potential benefits associated with a particular contract. Changes in job performance, job conditions, estimated profitability, and final contract settlements may result in revisions to costs and income. The Company recognizes changes in contract estimates on a cumulative “catch-up” basis in the period in which the changes are identified. Such changes in contract estimates can result in the recognition of revenue in a current period for performance obligations which were satisfied or partially satisfied in a prior period. Changes in contract estimates may also result in the reversal of previously recognized revenue if the current estimate differs from the previous estimate.

Goodwill and Intangible Assets

Goodwill represents the excess of the cost of an acquired entity over the fair value of the acquired net assets. We test goodwill for impairment annually during the fourth quarter of our fiscal year or when events or circumstances change in a manner that indicates goodwill might be impaired.

For the impairment test, we first assess qualitative factors, macroeconomic conditions, industry and market considerations, triggering events, cost factors, and overall financial performance, to determine whether it is necessary to perform a quantitative goodwill impairment test. Alternatively, we may bypass the qualitative assessment for some or all of its reporting units and apply the quantitative impairment test. If determined to be necessary, the quantitative impairment test shall be used to identify goodwill impairment and measure the amount of a goodwill impairment loss to be recognized (if any). For the quantitative impairment test we estimate the fair value by weighting the results from the income approach and the market approach. These valuation approaches consider a number of factors that include, but are not limited to, prospective financial information, growth rates, terminal value, discount rates, and comparable multiples from publicly traded companies in our industry and require us to make certain assumptions and estimates regarding industry economic factors and future profitability of its business. For purposes of testing goodwill for

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impairment, we operate as a single reporting unit. Based upon the annual goodwill impairment testing performed in the fourth quarter of each year, we determined that there was no impairment of our goodwill during the years ended December 31, 2024, 2023, or 2022.

Acquired intangible assets include: customer relationships, customer production backlog, patents and know-how. Finite-lived intangible assets are amortized over their estimated useful lives using the straight-line method which approximates the pattern in which the economic benefits of such assets are consumed. We assess amortized intangible assets for impairment when events or circumstances suggest that the carrying values may not be recoverable. This assessment involves comparing the carrying value of the assets to their undiscounted expected future cash flows. If the total undiscounted future cash flows are less than the carrying amount, we recognize an impairment loss equal to the difference between the carrying amount and the fair value of the assets. Determining fair value requires management to make estimates and judgments based on various factors, including projected revenues and associated earnings. We did not recognize any impairment losses in the year ended December 31, 2024, 2023 or 2022.

Material Weaknesses

As a privately-held company, we were not required to evaluate our internal control over financial reporting in a manner that meets the standards of publicly traded companies required by Section 404(a) of the Sarbanes- Oxley Act (“Section 404”). As a public company, we will be subject to significant requirements for enhanced financial reporting and internal controls. The process of designing and implementing effective internal controls is a continuous effort that requires us to anticipate and react to changes in our business and the economic and regulatory environments and to expend significant resources to maintain a system of internal controls that is adequate to satisfy our reporting obligations as a public company. In addition, we will be required, pursuant to Section 404, to furnish a report by management on, among other things, the effectiveness of our internal control over financial reporting.

The rules governing the standards that must be met for our management to assess our internal control over financial reporting are complex and require significant documentation, testing, and possible remediation. Testing and maintaining internal controls may divert our management’s attention from other matters that are important to our business.

During the preparation of our financial statements, we identified material weaknesses in our internal control over financial reporting. The SEC defines a material weakness as “a deficiency, or a combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis.”

The following entity-level material weaknesses have been identified:

•
we did not fully maintain components of the COSO framework, including elements of the control environment, risk assessment, control activities, information and communication and monitoring activities components, relating to (i) sufficiency of processes related to identifying and analyzing risks to the achievement of objectives, including technology, across the entity, (ii) developing general control activities over technology to support the achievement of objectives across the entity, (iii) sufficiency of selecting and developing control activities that contribute to the mitigation of risks to the achievement of objectives to acceptable levels, and (iv) sufficiency of monitoring activities to ascertain whether the components of internal control are present and functioning.

The entity-level material weaknesses contributed to other material weaknesses within our system of internal control over financial reporting as follows:

•
we did not design and maintain effective information technology general controls for certain information systems supporting its key financial reporting processes. Specifically, we did not design and maintain sufficient change management, security, operations, and system development controls for management-identified in-scope on-premise applications and vendor-supported applications; and

•
we did not design and maintain effective process-level controls for all significant business process cycles;

We have begun the process of evaluating the material weaknesses and developing our full remediation plan. The elements of our remediation plan can only be accomplished over time, and we can offer no assurance that these initiatives will ultimately have the intended effects. Until the remediation plan is implemented, tested and deemed effective, we cannot assure that our actions will adequately remediate the material weaknesses or that additional material weaknesses in our internal controls will not be identified in the future. If we are unable to remediate the material weaknesses, our ability to record, process and report financial information accurately, and to prepare financial statements within the time periods specified by the rules and forms of the Securities and Exchange Commission could be adversely affected and could reduce the market’s confidence in our financial statements and harm our stock price. While we will work to remediate the material weaknesses as quickly and efficiently as possible, we cannot at this time provide

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an expected timeline in connection with any remediation plan. These remediation measures may be time consuming and costly and might place significant demands on our financial and operational resources.

As permitted under the U.S. securities laws, neither we nor our independent registered public accounting firm have performed or are required to perform an evaluation of the effectiveness of our internal control over financial reporting. In the future, we may identify additional material weaknesses or significant deficiencies in our internal control over financial reporting.

Our ability to comply with the annual internal control reporting requirements will depend on the effectiveness of our financial reporting and data systems and controls across our company. Any weaknesses or deficiencies or any failure to implement new or improved controls, or difficulties encountered in the implementation or operation of these controls, could harm our operating results and cause us to fail to meet our financial reporting obligations, or result in material misstatements in our consolidated financial statements, which could adversely affect our business and reduce the price of our common stock.

If we are unable to conclude that we have effective internal control over financial reporting, investors could lose confidence in our reported financial information, which could have a material adverse effect on the trading price of our common stock. Failure to remedy any material weakness in our internal control over financial reporting, or to implement or maintain other effective control systems required of public companies, could also restrict our future access to the capital market.

Liquidity and Capital Resources

The following table summarizes our capitalization:

Our principal historical liquidity requirements have been for organic growth, acquisitions, capital expenditures, servicing indebtedness, including finance lease liability payments, and working capital needs. We do not expect there to be substantial changes in our future capital requirements. We anticipate that over the next 12 months, we will meet our liquidity needs, including debt servicing, through cash generated from operations, available cash balances, and, if necessary, sales of accounts receivable and borrowings from our revolving credit facility. We fund our investing activities primarily from cash provided by our operating and financing activities.

On March 25, 2025, we extended the final maturity date of the term note payable and revolving line of credit with TCW from March 20, 2026 to April 15, 2026. All other material terms of the term note and revolving line of credit are unchanged.

In April, 2025, the Company entered into a new Credit Agreement (the “Citi Credit Agreement”) by and among Karman, the lenders from time to time party thereto and Citibank, N.A. (“Citi”), as the administrative agent for the lenders, and, substantially contemporaneously therewith, certain direct and indirect subsidiaries of Karman terminated all outstanding commitments and repaid all outstanding obligations under the TCW Credit Agreement and the Citi Credit Agreement provided for the issuance of a new $300.0 million term loan and $50.0 million revolving line of credit. The new term loan will mature on April 1, 2032 and the new revolving line of credit will mature on April 30, 2030.

Based on our current outlook, we believe that net cash provided by operating activities, net proceeds of $147.3 million from the IPO offering and financing capability under the new Credit Agreement will be sufficient to fund expansion of our business, including any acquisitions we may make, or additional working capital for increased costs of operations.

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Operating Activities

Net cash provided by operating activities was $26,645,535 in the year ended December 31, 2024 compared to $20,326,561 in the year ended December 31, 2023. The changes in accounts receivable, contract assets, and contract liabilities during the year ended December 31, 2024 were due to initial and subsequent measurement of contracts with customers, changes in business volume, and progress of existing contracts. Changes in operating assets and liabilities including accounts receivable, contract assets, and contract liabilities between the year ended December 31, 2024 and 2023 were $692,427, $9,827,882, and $(26,212,351), respectively. The increase in the source of cash of $6,318,974 was primarily attributable to the increase in revenues, favorable timing of cash payments to vendors and positive net income from RMS since the acquisition date on February 16, 2024.

Net cash provided by operating activities was $20,326,561 in the year ended December 31, 2023 compared to ($5,892,750) in the year ended December 31, 2022. The changes in accounts receivable, contract assets, contract liabilities during 2023 were due to initial and subsequent measurement of contracts with customers, changes in business volume, and progress of existing contracts. Changes in operating assets and liabilities including accounts receivable, contract assets, and contract liabilities between the year ended December 31, 2023 and 2022 were $18,706,182, $(14,743,542), and $11,357,534, respectively. The increase in the source of cash of $26,219,311 was primarily attributable to the increase in revenues and related timing of cash receipts. We actively manage our accounts receivable, contract assets, and contract liabilities, along with the related aging and collection efforts.

Investing Activities

Net cash used in investing activities totaled $46,236,162 for the year ended December 31, 2024, $16,211,837 for the year ended December 31, 2023 and $21,258,081 for the year ended December 31, 2022. For the year ended December 31, 2024, total purchases of property and equipment of $15,251,761 were added to the $31,290,439 of cash paid to acquire RMS, net of cash acquired, and partially offset by $306,038 of proceeds from the sale of property and equipment. For the year ended December 31, 2023, total purchases of property and equipment of $16,775,297 was partially offset by the sale of marketable securities of $563,460. The change of $(30,024,325) between the years ended December 31, 2024 and 2023 was principally attributable to the RMS acquisition in 2024.

For the year ended December 31, 2022, property and equipment purchases of $21,268,504 were partially offset by sales of marketable securities of $10,423. The change of $5,046,244 was principally attributable to decrease in purchases of property and equipment. No material commitments for capital expenditures exist.

Financing Activities

Net cash provided by financing activities in the year ended December 31, 2024, totaled $25,665,687. For the year ended December 31, 2024, we increased our TCW Term Note agreement by $35,000,000 which was partially offset by principal repayments of $9,125,000 made during the period. We also paid $962,500 of debt issuance costs related to the new debt and paid $2,868,896 for finance leases. Additionally, we made $422,006 of principal payments on the term note payable to a seller of TMX and paid $800,000 of contingent consideration related to previous acquisitions. For the year ended December 31, 2024, we refinanced $41,500,000 of our Revolving Credit Facility to repay $36,500,000 previously owed under the Revolving Credit Facility.

Net cash used in financing activities in the year ended December 31, 2023, totaled $5,285,828. For the year ended December 31, 2023, we refinanced $33,500,000 of our Revolving Credit Facility to repay $30,000,000 previously owed under the Revolving Credit Facility. This activity compares to borrowings of $17,500,000 for the year ended December 31, 2022. For the year ended December 31, 2023, we repaid $8,250,000 of principal related to the TCW Term Note, paid $6,250,000 for contingent consideration related to previous acquisitions, and $1,532,011 for finance leases. Lastly, equipment financing proceeds of $8,034,775 were generated during the year ended December 31, 2023.

Net cash provided by financing activities in the year ended December 31, 2022 totaled $16,730,570. We made payments of $14,338,318 for principal related to the TCW Term Note, raised an additional $31,774,108 in equity financing, and paid $109,352 of distributions to members. We also paid $1,095,868 for finance leases and drew $17,500,000 from our Revolving Credit Facility, all of which was repaid during the year.

Other Obligations and Commitments

See Note 7 through Note 8, of the Notes to the Consolidated Financial Statements for information regarding our other obligations and commitments.

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Leases

We lease certain facilities and equipment under financing and operating leases that expire at various dates through 2041. Future aggregate rental payments under financing and operating leases as of December 31, 2024 were as follows: $12,748,968 in 2025, $12,466,055 in 2026, $12,634,446 in 2027, $12,289,212 in 2028, $9,690,865 in 2029 and $91,386,623 thereafter. See Note 8, Leases, of the Notes to the Consolidated Financial Statements for information pertaining to future minimum lease payments relating to our operating and finance lease obligations.

Under the provisions of ASC 842, the Company has both finance and operating leases. The Company has recorded both a right-of-use (“ROU”) asset for each applicable lease and an associated liability for the right to use the asset and the obligation for future lease payments. Separate ROUs and liabilities have been recorded for finance and operating leases. ROUs for both lease categories are included in lease assets on the financial statements. Liabilities for both lease categories are included in short-term lease liabilities for amounts due within one year and in noncurrent lease liabilities, net of current portion for remaining amounts due. ROU calculations include management’s assessment of the probability of exercise of lease extensions ranging from 1 to 18 years. No leases include variable lease payments.

Consolidated Lease Summary

On a consolidated basis, lease activity for the years ended December 31, 2024, December 31, 2023 and 2022 were as follows:

On a consolidated basis, supplemental cash flow information for the years ended December 31, 2024, 2023 and 2022 were as follows:

Off-Balance Sheet Arrangements

As of December 31, 2024 and 2023, we did not have any off-balance sheet arrangements, as defined in Regulation S-K, that have or are reasonably likely to have a current or future effect on our financial condition, results of operations, or cash flows.

Recent Accounting Pronouncements

See Note 2, Summary of Significant Accounting Policies—Recent Accounting Pronouncements, of the Notes to the Consolidated Financial Statements for additional information.

JOBS Act Election

We are currently an “emerging growth company,” as defined in the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards until such time as those standards apply to private companies. We have elected to use this extended transition period for complying with new or revised accounting standards that have different

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effective dates for public and private companies until the earlier of the date we (i) are no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act. As a result, our financial statements may not be comparable to companies that comply with new or revised accounting pronouncements as of public company effective dates.

Internal Controls and Procedures

We are not currently required to comply with the SEC’s rules implementing Section 404 of the Sarbanes-Oxley Act and are therefore not required to make a formal assessment of the effectiveness of our internal control over financial reporting for that purpose. Upon becoming a public company, we will be required to comply with the SEC’s rules implementing Section 302 of the Sarbanes-Oxley Act, which will require our management to certify financial and other information in our quarterly and annual reports and provide an annual management report on the effectiveness of our internal control over financial reporting. Though we will be required to disclose material changes made to our internal controls and procedures on a quarterly basis, we will not be required to make our first assessment of the effectiveness of our internal control over financial reporting under Section 404 until our second annual report on Form 10-K after we become a public company.

Further, our independent registered public accounting firm is not yet required to formally attest to the effectiveness of our internal controls over financial reporting and will not be required to do so for as long as we are an “emerging growth company” pursuant to the provisions of the JOBS Act. See “Summary—JOBS Act Election.”

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