Dive Brief:

• Waste broker and tech company Recycle Track Systems announced a $40 million capital round on Friday led by current investor Edison Partners with participation from Volition Capital, StepStone Capital Partners, and “other major stockholders.”
• The funding follows a lawsuit, previously reported by Bloomberg Law, filed by RTS this week alleging that its main investor K1 Investment Management is attempting to take control of the company.
• The Jan. 21 suit, filed in Delaware, alleges that K1 Managing Partner Ronald Cano recently maneuvered to acquire RTS at a steep discount by interfering with its debt and various business dealings.

Dive Insight:

The funding comes at a key moment for New York-based RTS and could allow financial flexibility for the legal process against K1 to play out. 

Co-founder and CEO Greg Lettieri said the new fundraising round will allow his company to accelerate investments in its Pello sensors and other initiatives. It exceeds prior equity offers disclosed in the K1 lawsuit.

“This round further strengthens RTS’s position as a pioneer in AI-powered waste management,” Lettieri said in a statement. “The continued support from our investors reflects the market’s trust in our innovative approach to sustainability.”

K1 became RTS' largest stockholder in 2022 when it invested $60 million. At that time, it appointed Cano to RTS' board of directors.

K1 has nearly $15 billion in assets under management, per the lawsuit, including a platform of waste-related companies. That includes other waste tech companies such as Compliance Publishing, Recyclist and Routeware, which purchased Rubicon’s fleet software assets last year.

The lawsuit alleges that in recent months, K1 has attempted to force RTS into default in an effort to acquire the company and/or merge it with another portfolio company.

RTS is accusing Cano and K1 of breaching their fiduciary duties to defend RTS' best interests. RTS is seeking damages from Cano and K1 that it estimates are “at least in the tens of millions of dollars.”

K1 was not immediately available for comment. RTS leadership declined to comment on the lawsuit.

The negotiations at issue stem from a loan agreement RTS entered with Trinity Capital in 2021 that provided RTS with about $45 million. Principal repayment on those loans was set to begin Feb. 1, 2025, and RTS was expected to pay $18 million in principal plus interest this year.

Seeking to become cash-flow positive, RTS made a deal with Trinity in which it could defer payments on its loans if it secured $10 million in additional equity financing from a third party. The company subsequently received an offer from an outside investor, which Cano through K1 attempted to counter. Their counter-offer included "significant changes to RTS's corporate governance," including granting K1 more control of the RTS board. 

A special committee of RTS board members ultimately chose the outside investor's proposal over K1.

At that same time, according to the suit, Cano and K1 were negotiating with Trinity to acquire RTS' debt. The lawsuit alleges Cano used confidential and proprietary knowledge of RTS' negotiations and financial position when negotiating to acquire the debt.

"As Cano knew, based on his possession of RTS’s confidential information, K1’s purchase of RTS’s debt would immediately sabotage RTS’s ability to reach a deal with Trinity and the Outside Investor," the lawsuit alleges. 

Cano resigned from RTS' board on Dec. 11. Three days later, RTS was notified that K1 had acquired the Trinity debt. Using the debt, K1 allegedly pressured RTS to accept a "predatory" offer that appeared to be an attempt at acquisition.

RTS notes that both the outside investor, which is described as "a leading sustainable investment firm," and K1 initially valued RTS at $325 million in their equity financing offers. Acquiring the company by taking control of its $45 million debt would allow K1 to take over the company at a significant discount, RTS argues.

This week’s funding announcement is the latest in various funding rounds for the company. In 2021, it closed $35 million in series C funding led by Citi Impact Fund. Its most recent capital raise was in 2022, to fund the purchase of Canadian company RecycleSmart. Other prior acquisitions by RTS include companies such as Cycle, Enevo and Elytus.

The RecycleSmart purchase came with the Pello hardware and software sensor technology, which ended up being the focus of another recent lawsuit. Competitor RoadRunner alleged that RecycleSmart misappropriated trade secrets from fellow sensor company Compology (later purchased by RoadRunner in 2022) to develop Pello. A federal judge granted a joint motion to dismiss the case in December following a settlement agreement.

In addition to touting the Pello technology, RTS’ funding release also noted growth potential from winning multiple contracts in New York City’s commercial waste zone system. That system’s first zone became officially active as of this month, with others to follow on an unspecified timeline.