10-Q: Atlantic International Reports Q3 Loss Amid Rising Costs

Atlantic International Corp. reported increased net losses for the third quarter of 2025, driven by higher operating expenses, despite a slight revenue increase.

Summary

• Net service revenue increased by 2.2% to $110.1 million for the three months ended September 30, 2025, and by 0.9% to $315.8 million for the nine months ended September 30, 2025, compared to the same periods in 2024.
• Gross profit rose by 4.3% to $12.4 million for the three months and 3.4% to $35.0 million for the nine months ended September 30, 2025, with gross profit margins improving to 11.3% and 11.1% respectively, due to a focus on higher margin accounts.
• Selling, general, and administrative (SG&A) expenses increased significantly by 16.0% to $19.9 million for the three months and 26.3% to $58.2 million for the nine months ended September 30, 2025, primarily due to higher stock compensation expense and a full nine months of merger-related expenses.
• The company reported a net loss of $10.8 million for the three months ended September 30, 2025, a 53.5% increase from the $7.0 million loss in the prior year period.
• For the nine months ended September 30, 2025, the net loss was $32.3 million, a 51.7% improvement from the $66.8 million loss in the prior year, largely due to non-recurring advisory fees and debt extinguishment losses in 2024.
• Cash and cash equivalents decreased substantially to $83,406 as of September 30, 2025, from $678,676 at December 31, 2024.
• Total liabilities increased slightly to $132.3 million, while the stockholders' deficit worsened to $(22.1) million from $(12.0) million.
• The PEO (Professional Employer Organization) liability and accrued interest significantly increased to $28.8 million as of September 30, 2025, from $23.3 million at December 31, 2024.
• Material weaknesses in internal control over financial reporting were identified, specifically in accounting for complex financial transactions and segregation of duties, with plans for remediation by late 2025 or early 2026.

Sentiment

Score: 3

Explanation: The sentiment is negative due to worsening quarterly net losses, significant operational losses, a substantial decrease in cash, a growing stockholders' deficit, and increasing PEO liabilities. The company is in default on multiple debt instruments and has identified material weaknesses in internal controls. While nine-month net loss improved due to non-recurring prior-year expenses, the underlying operational performance and balance sheet health are concerning, necessitating future capital raises under potentially unfavorable terms.

Positives

• Service revenue increased by 2.2% for the three months and 0.9% for the nine months ended September 30, 2025, driven by strong sales initiatives and demand for temporary and permanent placement services.
• Gross profit margins improved to 11.3% for the three months and 11.1% for the nine months ended September 30, 2025, reflecting the company's strategy to sell higher margin accounts.
• The net loss for the nine months ended September 30, 2025, significantly decreased by 51.7% compared to the prior year, primarily due to the absence of large non-recurring expenses from the 2024 merger and debt extinguishment.
• A new $70 million senior secured revolving credit facility was closed on April 29, 2025, replacing the previous facility and providing increased borrowing capacity.
• Management believes that cash generated from operations and the new revolving credit facility will provide sufficient liquidity for normal working capital needs for at least the next 12 months.

Negatives

• Net loss for the three months ended September 30, 2025, increased by 53.5% to $10.8 million compared to the same period in 2024.
• Loss from operations worsened by 33.9% to $(8.7) million for the three months and 68.2% to $(26.9) million for the nine months ended September 30, 2025.
• Selling, general, and administrative expenses rose significantly by 16.0% for the three months and 26.3% for the nine months, largely due to increased stock compensation expense.
• Cash and cash equivalents decreased by 87.7% from $678,676 at December 31, 2024, to $83,406 at September 30, 2025.
• The stockholders' deficit worsened to $(22.1) million as of September 30, 2025, from $(12.0) million at December 31, 2024.
• The PEO liability and accrued interest increased by 23.6% to $28.8 million as of September 30, 2025.
• The company is in default of the Term Note, Seller Notes, and Earnout Notes, indicating significant debt repayment challenges.
• Material weaknesses in internal control over financial reporting were identified, raising concerns about financial reporting reliability.

Risks

• No assurance of future profitability, as the company has historically reported net losses and continues to do so.
• Significant debt obligations, including a $35 million Merger Note, and failure to restructure or pay these obligations when due could materially impact financial condition and long-term viability.
• Joint and several liability for IDC's debt obligations (approximately $70.4 million as of September 30, 2025), meaning the company could be responsible for repaying all of IDC's portion if IDC defaults.
• The company will be required to raise additional funds prior to the Merger Note's maturity (March 31, 2027) to repay it and other outstanding indebtedness, and to support future capital needs.
• Future equity or equity-linked securities issuances for capital raises could result in substantial dilution for current stockholders.
• Debt instruments contain covenants that could limit financing options and liquidity, potentially leading to events of default if not cured or waived.
• Client concentration risk, with the largest customer accounting for 9% of revenues for the nine months ended September 30, 2025, and the contract being terminable for convenience.
• Foreclosure on IDC's pledged shares of Atlantic International Corp. common stock by lenders could adversely affect the market price of the company's common stock.
• Material weaknesses in internal control over financial reporting exist in accounting for complex financial transactions and segregation of duties, which could adversely affect the ability to prevent or detect material misstatements.

Future Outlook

The company believes that cash generated from operations, together with the borrowing availability under the new Revolving Credit Facility, is sufficient to meet its normal working capital needs for at least the 12-month period following the issue date of its financial statements. However, the company does not believe it will have sufficient liquidity and capital resources to pay the $35 million Merger Note in full when due (March 31, 2027) and to restructure its joint and several debt obligations without selling additional equity or debt securities prior to the maturity date.

Management Comments

• "management believes, based on their knowledge of the industry, that it is one of the prominent and leading staffing firms in the ever-evolving staffing industry."
• "management also believes that it is an industry leader in permanent, temporary and temp-to-perm placement services in a wide variety of areas, including, but not limited to, accounting & finance, administrative & clerical, hospitality, IT, legal, light industrial and medical fields."
• "With a focus on integrity, transparency and customer service and a commitment to results over a 25-year period, management believes it has earned a reputation as one of the premier workforce solutions partners in the United States."

Industry Context

The company operates in the staffing industry, providing commercial staffing solutions across various industries throughout the USA. It serves both smalland medium-size businesses, relying on local or regional relationships, and large national and multinational clients, often through non-exclusive arrangements with several firms. Competition for smalland medium-size businesses primarily comes from locally owned businesses, while firms with large networks compete most effectively for larger clients, often with agreed-upon pricing or mark-up on services.

Management Changes

Corporate Governance

Legal Proceedings

• Michael Smith v. Infinity Staffing Solutions, LLC, et. al. (wage and hour claims): Final settlement funds of $300,000 disbursed on March 21, 2024.
• Rosanna Vargas v. DHL Express (USA), Inc. et. al. (personal injury, indemnification claim): Case closed, Lyneer agreed to pay approximately $1,030,000 over 36 months starting July 2023. As of September 30, 2025, $328,572 is owed and accrued.
• Enrique Briseno, et al. vs. Three Hands Corporation, et al. (class action wage and hour): Settled for $425,000, with $300,000 to be paid by the company. Settlement agreement signed December 17, 2024, awaiting court approval, payment anticipated Q4 2025. Full $300,000 accrued.
• Aguilar, et al v Lyneer Staffing Solutions, et al (minor employee injury): Settlement reached May 2, 2025, for $3,050,000 ($2,800,000 cash, $250,000 lien release), with the company responsible for $200,000. Final Settlement Agreement still being negotiated. Full $200,000 accrued.
• Theresa Alvarez and Mirna Reyes vs. Liquid Graphics, Inc., Lyneer Staffing Solutions, LLC, Liz Long, et. al (class action wage and hour): Settled for $750,000, with $650,000 to be paid by the company. Settlement agreement signed November 16, 2023. Full settlement amount of $671,858 (including employment taxes) paid on October 23, 2025.
• Maria I. Flores vs. Lyneer Staffing Solutions, LLC (class action wage and hour PAGA): Settled at a mandatory settlement conference on October 10, 2025, for $925,000. Settlement agreement still being prepared/negotiated. Funds due within 90 days after final approval, but no less than six months from October 10, 2025. Full $925,000 accrued.

Related Party Transactions

• **Transactions with Lyneer Management Holdings (LMH):** LMH, previously a 10% owner (90% owned by CEO and CFO), exercised its put right to IDC on February 28, 2024. Lyneer and IDC were co-borrowers on Year 1 ($5,127,218) and Year 2 ($2,013,041) Earnout Notes to LMH, which were deconsolidated by the company upon the merger. LMH entered into a $6,000,000 guarantee agreement with the PEO on June 18, 2024, which was terminated on December 31, 2024.
• **Transactions with IDC Technologies Inc. (IDC):** The company and IDC are co-borrowers and jointly and severally liable for principal and interest payments under the previous Revolver, Term Note, Seller Notes, and Earnout Notes. IDC generally makes certain payments and collects reimbursement from the company. The company recorded a liability payable to IDC for taxes attributable to its operations included on consolidated state and local income tax returns filed by IDC, amounting to $548,432 as of September 30, 2025, and December 31, 2024. Total amounts receivable from IDC were $7,417,863 as of September 30, 2025, and total amounts payable to IDC were $2,091,035 as of December 31, 2024, with no formalized repayment terms. On June 18, 2024, the company issued a $35,000,000 Merger Note to IDC and 25,423,729 shares of common stock (valued at $60,000,000) to IDC.

Stakeholder Impact

• **Shareholders:** Face potential significant dilution from future equity or equity-linked capital raises. The market price of common stock could be adversely affected by the sale of IDC's pledged shares by lenders. The worsening stockholders' deficit and ongoing losses indicate a reduction in shareholder value.
• **Employees:** The significant PEO liability for payroll and accrued interest could pose a risk to timely compensation if not managed effectively. Stock-based compensation plans are in place to incentivize employees.
• **Lenders:** Multiple debt instruments (Term Note, Seller Notes, Earnout Notes) are in default, increasing risk for these lenders. The new ABL lender has a senior secured position. The company's ability to repay the Merger Note and restructure joint debt is uncertain without further capital raises.
• **Customers:** The company's client concentration, with the largest customer accounting for 9% of revenues and having a terminable contract, presents a risk of material revenue decrease if that relationship is lost.
• **Creditors:** The company's overall financial distress, including high liabilities and defaults, increases credit risk for all creditors.

Next Steps

• Implement measures designed to improve internal control over financial reporting by the end of 2025 or early 2026.
• Continue negotiations with the lender to extend the Promissory Note agreement for two years, aiming for an extension at least through December 31, 2025.
• Await court approval for the Enrique Briseno class action settlement, with payment anticipated in Q4 2025.
• Finalize and obtain approval for the Maria Reyes class action settlement, with funds due within 90 days of final approval, but no less than six months from October 10, 2025.
• Implement a plan to refinance or otherwise satisfy the joint and several indebtedness with IDC, as agreed in the Allocation Agreement.
• Seek additional equity or debt financing to repay the Merger Note and other outstanding indebtedness, and to support future capital needs.

Key Dates

Recommendation

The company's financial position is highly precarious, characterized by worsening quarterly net losses, substantial operational losses, and a drastic reduction in cash reserves. The significant increase in PEO liability, coupled with defaults on multiple debt instruments (Term Note, Seller Notes, Earnout Notes), indicates severe liquidity and solvency challenges. While the nine-month net loss improved, this was primarily due to the absence of large, non-recurring expenses from the prior year, masking ongoing operational struggles. The explicit need for a substantial capital raise to address the Merger Note and other debt, under potentially dilutive terms, combined with identified material weaknesses in internal controls, presents an extremely high risk profile. The client concentration further exacerbates revenue stability concerns. Given these compounding factors, the company faces significant headwinds that threaten its long-term viability and shareholder value, making it a strong sell for investors.

Keywords

Staffing Solutions, Temporary Placement, Permanent Placement, Workforce Management, SEC Filing, 10-Q, Financial Results, Debt Restructuring, Merger, Atlantic International Corp, ATLN, Lyneer, Net Loss, Liquidity, Internal Controls