Vertical farms reach a tipping point

AppHarvest, a high-tech indoor farming and food sustainability company, has filed for Chapter 11 bankruptcy protection and is “pursuing a financial and operational transition to enable the company to reduce its outstanding liabilities,” according to an announcement Monday from the Morehead, Kentucky-based company. 

The announcement comes about a month and a half after Newark, New Jersey-based vertical farming company Aerofarms filed for Chapter 11 bankruptcy. 

Henry Gordon-Smith, founder and CEO of consulting firm Agritecture, which works with vertical farm companies, told Winsight Grocery Business that many companies in the vertical farm industry have reached a do-or-die moment, with investors demanding they begin delivering results.  

AppHarvest noted in an announcement that it has a commitment of approximately $30 million of debtor-in-possession financing from its largest secured creditor, Equilibrium, to maintain its farming operations in Morehead, Richmond and Somerset, all of which are in Kentucky. 

The company also plans to sell its operation in Berea, Kentucky, for $3.75 million, either to its distribution partner, Mastronardi Produce, or one of its other affiliates, the company said. The goal is to “restructure the operations at the company in an effort to maximize the value creditors can expect to achieve and to preserve jobs.” 

“The AppHarvest board of directors and executive leadership evaluated several strategic alternatives to maximize value for all stakeholders prior to the Chapter 11 filing,” said AppHarvest CEO Tony Martin in a statement. “The Chapter 11 filing provides protection while we work to transition operation of our strategic plan, Project New Leaf, which has shown strong progress toward operational efficiencies resulting in higher sales, cost savings and product quality.” 

AppHarvest is following the lead of its competitor, AeroFarms, which announced it was filing for Chapter 11 bankruptcy protection on June 8. Similarly, AeroFarms said it's working with investors to secure $10 million in debtor-in-possession financing, at the time of the announcement. The company said it also was exploring other financing “to maximize the value of the company and recovery to creditors.”  

"We are fortunate to have existing investors who continue to believe in AeroFarms and are confident that we can hit our targeted profitable operations for our Danville farm," said Guy Blanchard, president and CFO of AeroFarms, in early June. "There is incredible consumer and customer interest for our market-leading microgreens, and we are excited to continue be able to build our business to meet that demand." 

In April, Orlando-based vertical farm Kalera also filed for bankruptcy protection.

Gordon-Smith, who has written extensively about vertical farming, said that while there are numerous factors at play challenging the vertical farming industry, it’s mainly investor confidence that is causing the current shift in the market.

“This is what’s happening to everyone—the funding context shifted,” he said, adding that higher interest rates and the banking crisis earlier this year has investors demanding results. 

He noted in a column published June 13 in The Food Industry, that the vertical farm industry has experienced “a staggering 91% year-on-year decline in venture capital investments in indoor farming, according to Pitchbook.” 

Vertical farms also have a hype problem, according to Gordon-Smith, who explained that they frequently sell the idea to investors that their operation will be environmentally sustainable, but he recently wrote that “most vertical farms today are powered by non-renewable energy sources and emit significantly more carbon than their field-based counterparts.” 

Many have a problem with focusing too much of their efforts on both advertising and research and development. “That's fine and I don’t blame, because that’s where the money was flowing, but that flow has shifted,” he said.  

Operating costs also pose challenges to the industry, particularly energy costs, which can be more volatile than other variable costs. But he added that the cost of energy in the U.S. has stayed relatively stable, compared to its European counterpart.  

Despite the bankruptcies of three players in the controlled-environment agriculture industry, Gordon-Smith said he believes the industry is resilient. 

Climate change and other factors will necessitate indoor farming. “Those fundamental drivers haven’t gone away,” he said.