In August 2007 and December 2008, the Company made an aggregate investment of $7.5 million in kaléo, a privately held specialty pharmaceutical company dedicated to building innovative solutions for serious and life-threatening medical conditions. The mission of kaléo is to provide products that empower patients to confidently take control of their medical conditions. Tredegar’s ownership interest on a fully diluted basis was approximately 19% at September 30, 2016, and the investment is accounted for under the fair value method. At the time of the initial investment, the Company elected the fair value option over the equity method of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests.

The estimated fair value of the investment in kaléo (also the carrying value, which is included in “Other assets and deferred charges” in the consolidated balance sheets) was $18.4 million at September 30, 2016 and $18.6 million at December 31, 2015. Unrealized losses of $1.3 million and $0.2 million were recognized in the third quarter and first nine months of 2016, respectively (no unrealized gains or losses were recorded in the first nine months of 2015). The change in the estimated fair value of the Company’s holding in kaléo in the third quarter of 2016 primarily related to the continuing assessment of market dynamics and pricing uncertainties associated with the reintroduction of the Auvi-Q product, with current quarter changes in the projections being revised to reflect a more conservative outlook. The change in the estimated fair value of the Company’s holding in kaléo in the first nine months of 2016 was primarily attributed to the aforementioned uncertainties about reintroducing Auvi-Q, partially offset by favorable adjustments in the fair value for the passage of time and with the negotiated terms of the termination of Sanofi’s exclusive rights license for Auvi-Q and Allerject in North America and the return of such rights to kaléo.

Unrealized gains (losses) associated with this investment are included in “Other income (expense), net” in the consolidated statements of income and separately stated in the net sales and operating profit by segment table in Note 9. Subsequent to its most recent investment (December 15, 2008), and until the next round of financing, the Company believes fair value estimates are based upon Level 3 inputs since there is no secondary market for its ownership interest. Accordingly, until the next round of financing or any other significant financial transaction, value estimates will primarily be based on assumptions relating to achieving product development and commercialization milestones, cash flow projections (projections of sales, costs, expenses, capital expenditures and working capital investment) and discounting of these factors for their high degree of risk. If kaléo does not meet its development and commercialization milestones or there are indications that the amount or timing of its projected cash flows or related risks are unfavorable versus the most recent valuation, or a new round of financing or other significant financial transaction indicates a lower enterprise value, then the Company’s estimate of the fair value of its ownership interest in kaléo is likely to decline. Adjustments to the estimated fair value of this investment will be made in the period upon which such changes can be quantified.

In addition to the impact on valuation of the possible changes in assumptions, Level 3 inputs and projections from changes in business conditions, the fair market valuation of the Company’s interest in kaléo is sensitive to changes in the weighted average cost of capital used to discount cash flow projections for the high degree of risk associated with meeting development and commercialization milestones as anticipated. The weighted average cost of capital used in the fair market valuation of Tredegar’s interest in kaléo was 45% at both September 30, 2016 and December 31, 2015. At September 30, 2016, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have increased the fair value of the Company’s interest in kaléo by approximately $5 million, and a 500 basis point increase in the weighted average cost of capital assumption would have decreased the fair value of the Company’s interest by approximately $4 million.

Had the Company not elected to account for its investment under the fair value method, it would have been required to use the equity method of accounting. The condensed balance sheets for kaléo at September 30, 2016 and December 31, 2015 and condensed statements of operations for the three and nine months ended September 30, 2016 and 2015, as reported to the Company by kaléo, are provided below:



(In Thousands)	September 30, 2016		December 31, 2015			September 30, 2016			December 31, 2015
Assets:					Liabilities & Equity:
Cash & short-term investments	$	111,305	$	91,844
Restricted cash	30		8,182
Other current assets	16,361		9,070		Current liabilities	$	54,434		$	10,261
Property & equipment	14,072		8,453		Long term debt, net	143,212			142,696
Patents	2,865		2,811		Other noncurrent liabilities	767			552
Other long-term assets	93		92		Equity	(53,687		)	(33,057		)
Total assets	$	144,726	$	120,452	Total liabilities & equity	$	144,726		$	120,452



	Three Months Ended September 30,						Nine Months Ended September 30,
	2016			2015			2016			2015
Revenues & Expenses:
Revenues, net	$	17,377		$	28,084		$	29,347		$	43,002
Cost of goods sold	(2,956		)	(3,438		)	(10,564		)	(8,575		)
Expenses and other, net (a)	(22,216		)	(17,337		)	(39,815		)	(45,727		)
Income tax benefit (expense)	—			—			(8		)	(4		)
Net income (loss)	$	(7,795	)	$	7,309		$	(21,040	)	$	(11,304	)
(a) “Expenses and other, net” includes selling, general and administrative expense, research and development expense, gain on contract termination, interest expense and other income (expense), net. Excluding the gain on contract termination, “Expenses and other, net” would have been a net deduction of $22.2 million and $57.9 million in the third quarter and first nine months of 2016, respectively.

The Company’s investment in the Harbinger Capital Partners Special Situations Fund, L.P. (“Harbinger Fund”) had a carrying value (included in “Other assets and deferred charges”) of $1.7 million at September 30, 2016 and December 31, 2015. The carrying value at September 30, 2016 reflected Tredegar’s cost basis in its investment in the Harbinger Fund, net of total withdrawal proceeds received and unrealized losses. Withdrawal proceeds received were $0.1 million in the first nine months of 2015 (none in 2016). The timing and amount of future installments of withdrawal proceeds, which commenced in August 2010, were not known as of September 30, 2016. Gains on the Company’s investment in the Harbinger Fund will be recognized when the amounts expected to be collected from any withdrawal from the investment are known, which will likely be when cash in excess of the remaining carrying value is received. Losses will be recognized when management believes it is probable that future withdrawal proceeds will not exceed the remaining carrying value.