A New Jersey-based company that touts itself as a pioneer in indoor vertical farming is seeking bankruptcy protection, the latest company to face woes in an industry that some critics fear could be heading for a shakeout.

AeroFarms, headquartered in Newark, filed for voluntary Chapter 11 relief Thursday in U.S. Bankruptcy Court for the District of Delaware. In a statement, the company said it will seek to restructure and recapitalize "with limited disruptions to its ongoing core business operations."

The company also said it had entered into an agreement with an existing group of its investors to provide $10 million in debtor-in-possession financing, as part of a larger round of financing that includes those investors. Upon approval by the court, the DIP financing, together with cash generated from ongoing operations, AeroFarms said it expects it will have enough liquidity to support its operations during the bankruptcy process.

Vertical farming, where crops are grown indoors with less water than traditional farming and artificial lighting, has been a darling of venture capital firms for several years now, in part because of its cutting-edge technology. The vertical farms, essentially high-tech indoor greenhouses, were positioned as being able to produce food such as lettuce on a year-round basis, with no pesticides and little water, at a time when climate change is a concern.

The companies were also seen as a new kind of tenant for not only industrial space, but office space in places like Chicago. But the industry has stumbled, as exemplified by AeroFarms, and just may not have a viable business model because their operating costs are so high, according to some critics.

Recently a number of vertical farming businesses, both domestic and international, have filed for bankruptcy, dramatically downsized or simply suspended operations. Fifth Season, based in Pittsburgh, shut down. AppHarvet expressed concerns about its ability to continue operations. In Europe, Infarm had layoffs; Future Crops Cooperative declared bankruptcy; and Agricool went into receivership.

In its statement, AeroFarms conceded that "the vertical farming industry has recently faced significant industry and capital market headwinds."

But the company expressed optimism about its ability to move forward and said it expects "to quickly emerge from Chapter 11."

It has facilities in Newark, where it is based; a 138,670-square-foot vertical farm in Danville, Virginia; and a research and development farm in Abu Dhabi. In fact, the company said its "Virginia farm continues to scale according to plan, and AeroFarms microgreens have become the dominant market leader at retail." But AeroFarms did say it plans to downsize its workforce in Newark.

The company also unveiled a management shuffle. David Rosenberg, AeroFarms co-founder and CEO, has stepped down and will work as a special adviser to its board. Chief Financial Officer Guy Blanchard will assume the additional role of president.

"While projections show the creation of a profitable business, the company’s business is capital intensive at this stage, and attempts to raise sufficient capital to maintain operations have fallen short," Blanchard said in an affidavit filed with the bankruptcy court. "Through these bankruptcy proceedings, the company expects to address its liquidity constraints, address certain legacy liabilities and quickly emerge from bankruptcy either through a chapter 11 plan of reorganization or sale. ... The company expects to file its plan for emergence from bankruptcy or a bidding procedures motion in the coming days.

AeroFarms, started in 2004, "is a pioneer in large-scale commercial indoor vertical farming, using proprietary aeroponic technology to grow differentiated leafy greens products while using up to 95% less water and zero pesticides," Blanchard said. "AeroFarms products are consistently celebrated by top chefs and taste makers for their quality, taste and texture."

AeroFarms plants crops in stacked trays, misting their suspended roots with water, oxygen and nutrients. But Blanchard said this kind of controlled environment agriculture is capital intensive.

"AeroFarms must expend significant resources to complete the build-out of its facilities, scale its production capacity, and invest in its technology platform, capabilities and new products," Blanchard said. "These expenditures include costs of constructing and commissioning new farms, costs associated with growing plants for sale, such as electricity and packaging, working capital, cost of attracting and retaining a skilled local labor force, and costs associated with research and development in support of future commercial opportunities."

AeroFarms has raised $238 million in funding by 13 investors, according to startup tracker Crunchbase. They include the Abu Dhabi Investment Office, with an amount unknown; Ingka Group, $100 million; and Meraas, $40.5 million, Crunchbase said.

AeroFarms’ new state-of-the-art farm in Virginia "has required significant capital outlay, which has further depleted the company’s available liquidity," according to Blanchard.

In March 2021, AeroFarms announced plans to go public following a merger with Spring Valley Acquisition Corp., a special-purpose acquisition company, in a deal valued at $1.2 billion. But in October that same year the deal fell through.

Several critics questioned the business model of vertical farming firms such as AeroFarms, which have such high costs — for power, for example, because they use artificial light not the sun — to produce low-margin goods like microgreens and lettuce.

"It's not an effective way to grow," Joe Swartz, a vice president at AmHydro and a controlled environment agriculture consultant, told CoStar News on Friday. "A number of companies have failed, and many more will."

He added, "Farming is a very competitive and low-margin industry."

Vertical farming company failures were the topic of a panel in February at the Indoor Ag-Con conference in Las Vegas. In an interview later, one of the panelists, Chris Cerveny, a former vice president at failed Fifth Season, offered his take on what happened at his company and the issues that vertical farmers face.

"We had tech investors in Silicon Valley, and they had expectations of how fast things were going to come out," Cerveny said. "At the same time, everybody was pulling back. So the funding was not readily available, like had previously been, to build a farm of this size and build a national brand."

He added, "Also, the burn [in vertical farming] is very high — not just in the utilities and the growing but in the cost of customer acquisition and all the things that you have to do to try to build a national brand. It’s all designed to be profitable later. That’s a reasonable strategy when you have capital coming in all the time, but when you don’t, there’s no cash flow to pay the bills. Ultimately, I think that’s what" closed Fifth Season.

AeroFarm's Chapter 11 filing spurred a number of discussions on LinkedIn, with some likening vertical farming's problems to the dot-com crash in 2000.

"I know the team at AeroFarms poured their hearts into trying to make #verticalfarming work in North America, and they very nearly got there," wrote B. David Vosburg, chief innovation officer at Local Bounti. "Energy, labor and construction costs were simply too high for vertical farming in the [North American] geography."

George Irwin, founder of Green Living Technologies, was among those posting a response to Vosburg.

"Said this years ago ... not just for them but for most leafy green hydro growers," he said. "Margins just are not there. I recall them coming out of Ithaca, New York, with a Tupperware container pitching aeroponic leafy greens. I have said it a million times, you can't survive on margins from leafy greens when everyone else is growing them."

AeroFarms didn't respond to an email seeking a response to its critics.

But on Friday Henry Gordon-Smith, founder and CEO of Agritecture, a urban agriculture blog and consultancy, on LinkedIn said he had just spoken to one of AeroFarms' executives, co-founder and chief marketing officer Marc Oshima.

"AeroFarms wants to push further on what works and cut some of the expenses on innovative and cool [research and development] they have done to date," Gordon-Smith said. "That makes sense to me when less capital is available and investors are focused on unit economics in vertical farming. We are all feeling that pressure these days across several sectors. Marc also told me that their current investors are in line with the new plan and that they can execute a large-scale commercial vertical farm (Danville is 140K sqf and can produce up to 6M lbs of Microgreens annually). If they can prove that, then they might just get through these challenges. ... It will be interesting to see how this restructuring and pivot plays out."

AeroFarms is represented by DLA Piper as counsel, Cloudpoint Capital as investment banker and ICR as strategic communications adviser.