Employees of Atlantic Diving Supply in Virginia Beach. (Hyunsoo Leo Kim/The Virginian-Pilot/Associated Press)

A dive shop that became one of the Pentagon’s biggest suppliers of military equipment, medical supplies and tactical special forces gear has been stripped of its small business status, pumping the brakes on a fantastical decade-long run for the Virginia Beach-based company.

Atlantic Diving Supply has benefited from privileges associated with being a small business for the better part of two decades, limiting its competition in an insular but lucrative military equipment market. The company received more than $2.5 billion from federal agencies last year and won defense contracts set aside for small businesses as recently as last month.

But the U.S. Small Business Administration, which determines eligibility for government contract set-aside programs, recently ruled that it no longer qualifies as a small business, representatives from the company and the SBA said Monday.

The decision threatens to disrupt an astonishing growth arc that was fueled in large part by contracts set aside for small businesses. The company is not allowed to bid on new small business set-aside contracts unless the decision is overturned.

ADS spokeswoman Caitlin Stojanovich said the SBA’s decision was “deeply flawed” and based on “outdated or incorrect information” tying it to another firm. She said the company has stayed below the 500-employee cap applied to it “at all times,” and currently has 447 employees.

“Unfortunately, for a small business like ADS, such a flawed ruling has far reaching consequences,” Stojanovich said in an email. “There is immediate impact on our people and families, our suppliers, and ultimately our customers, the American war fighter. Hopefully this will get resolved soon and ADS can get back to the business of what we do best — serving those who serve.”

She said the company has already appealed the decision, which was related to a contract with the Defense Logistics Agency, and that the ruling does not affect the numerous small business contracts ADS is currently servicing.

“ADS expects the [SBA] to overrule the size determination and [the Defense Logistics Agency] to award ADS the contract at issue immediately thereafter,” Stojanovich said.

More than a year ago, ADS settled federal charges that it used a network of affiliated businesses to fraudulently obtain small business set-aside contracts. The $16 million settlement, which the Justice Department called one of the largest ever in connection with small business contracting eligibility, was resolved without a determination of liability, allowing the company to continue to win work as a small business.

Federal small business contracting programs are designed to give small businesses a chance to compete in a defense contracting landscape that is dominated by a handful of behemoths. By requiring that certain contracts be awarded only to small businesses, numerous agencies have worked with the SBA to diversify the pool of suppliers that benefit from taxpayer-funded government programs.

There is a concern, however, that midsize and large companies could find ways to game the system as they grow.

In 2017, Atlantic Diving Supply settled charges that it violated the False Claims Act, a law that refers to defrauding government programs. The Justice Department accused ADS of relying on an elaborate network of affiliated businesses ― Mythics, London Bridge Trading, MJL Enterprises, SEK Solutions and Karda Systems ― to obtain contracts that were set aside for small businesses and for service-disabled veterans.

Two of those alleged affiliate businesses ― Karda Systems and SEK Solutions ― were named in a more recent small business contracting fraud case. Ron Villanueva, a former state lawmaker from Virginia Beach, last month pleaded guilty to charges that he conspired to defraud the United States. Villanueva and a friend pretended that both companies were run by people who qualified for particular grants and helped draft a misleading letter to the SBA that mischaracterized the degree to which one firm relied on other suppliers

Its 2017 settlement was arrived at without a determination of liability, so ADS was able to continue bidding on contracts as a small business. Much of the company’s business comes as a reseller of other companies’ brand-name equipment, a lucrative line of business that requires in-depth knowledge of military procurement processes.

According to government spending data maintained by USASpending.gov, the company’s total annual contract receipts fluctuated around $1 billion from 2010 to 2017 before spiking to $2.5 billion last year.

In January, it was one of five businesses to win a $90 million contract modification for generators and associated supplies, which was set aside for small businesses. The contract was awarded by the Defense Logistics Agency and the generators were supplied to the Federal Emergency Management Agency disaster relief agency. In February, it was awarded a seat on another $90 million small business contract to provide fire and emergency services equipment for the Army, Navy, Air Force, Marine Corps and Coast Guard.

In March, it was one of six businesses to win a seat on a $4 billion small business set-aside contract with the Defense Logistics Agency contract for special operations equipment. The same month, it won a seat on another $20 million Army contract for medical supplies.

In comments on the settlement Monday, Stojanovich said the SBA has on two previous occasions found ADS to be a small business in response to size protests.

“ADS cooperated with the Government throughout the investigation, and there was never any finding of wrongdoing as to ADS,” Stojanovich said in an email. “Since that time, ADS has received and continues to receive competed contracts and awards from almost every agency in the US Government, including the Department of Defense and its branches.”

Rachel Weiner contributed to this report.