INVESTMENTS

In August 2007 and December 2008, Tredegar made an aggregate investment of $7.5 million in kaleo, Inc. (“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 December 31, 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.

In 2009, kaléo licensed exclusive rights to sanofi-aventis U.S. LLC (“Sanofi”) to commercialize an epinephrine auto-injector in the U.S. and Canada. Sanofi began manufacturing and distributing the epinephrine auto-injector, under the names Auvi-Q® in the U.S. and Allerject® in Canada, in 2013. On October 28, 2015, Sanofi announced a voluntary recall of all Auvi-Q and Allerject epinephrine injectors that were on the market. In January 2017, kaléo announced that it would recommence sales of Auvi-Q in the U.S. starting in February 2017.

At December 31, 2016 and 2015, the estimated fair value of the Company’s investment (also the carrying value, which is included in “Other assets and deferred charges” in the consolidated balance sheets) was $20.2 million and $18.6 million, respectively. The Company recognized an unrealized gain on its investment in kaléo of $1.6 million ($1.2 million after taxes) in 2016. The change in the estimated fair value of the Company’s holding in kaléo in 2016 was primarily related to favorable adjustments in the fair value for the passage of time as anticipated cash flows associated with achieving product development and commercialization milestones are discounted at 45% for their high degree of risk.

The Company recognized a net unrealized loss of $20.5 million ($15.7 million after taxes) in 2015 that primarily related to the adverse impact of the product recall noted above.

The Company recognized an unrealized gain of $2.0 million ($1.0 million after taxes) in 2014 that primarily related to favorable adjustments in the fair value for the passage of time as anticipated cash flows associated with achieving product development and commercialization milestones were discounted at 45% for their high degree of risk and the impact of reducing the weighted average cost of capital used to discount cash flow projections from 55% after kaléo commercialized a second product, partially offset by unfavorable adjustments in the fair value due to a reassessment of the amount and timing of estimated cash flows associated with kaléo’s commercialized products.

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 segment operating profit table in Note 5 of the Notes to Financial Statements. 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 the reintroduction of the Auvi-Q product, meeting product development and commercialization milestones, cash flow projections (projections of development and commercialization milestone payments, 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 Tredegar’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 the Company’s interest in kaléo was 45% at both December 31, 2016 and 2015. At December 31, 2016, the effect of a 500 basis point decrease in the weighted average cost of capital assumption would have further increased the fair value of Tredegar’s interest in kaléo by approximately $6 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 $5 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 December 31, 2016 and 2015 and related condensed statements of operations for the last three years ended December 31, 2016, as reported to the Company by kaléo, are provided below:



	December 31,					December 31,
(In Thousands)	2016		2015			2016			2015
Assets:					Liabilities & Equity:
Cash & cash equivalents	$	102,329	$	91,844
Restricted cash	31		8,182		Current liabilities	$	50,134		$	10,261
Other current assets	15,391		9,070		Long-term debt, net	143,380			142,696
Property & equipment	13,011		8,453		Other noncurrent liabilities	822			552
Other long-term assets	472		2,903		Equity	(63,102		)	(33,057		)
Total assets	$	131,234	$	120,452	Total liabilities & equity	$	131,234		$	120,452



	2016			2015			2014
Revenues & Expenses:
Revenues	$	56,188		$	35,731		$	21,156
Cost of goods sold	(15,428		)	(14,147		)	(3,801		)
Expenses and other, net (a)	(71,548		)	(63,042		)	(48,447		)
Income tax (expense) benefit	(35		)	(481		)	8,100
Net income (loss)	$	(30,823	)	$	(41,939	)	$	(22,992	)
(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 $89.6 million in 2016.

The audited financial statements and accompanying footnotes of kaléo as of December 31, 2016 and 2015 and for the years ended December 31, 2016, 2015 and 2014 have been included as an exhibit to the Company’s Annual Report on Form 10-K for the year ended December 31, 2016 filed with the Securities and Exchange Commission.

On April 2, 2007, Tredegar invested $10.0 million in Harbinger Capital Partners Special Situations Fund, L.P. (the “Harbinger Fund”), a private investment fund that is subject to limitations on withdrawal. There is no secondary market for interests in the fund. The Company’s investment in the Harbinger Fund, which represents less than 1% of its total partnership capital, is accounted for under the cost method. Unrealized losses on the Company’s investment in the Harbinger Fund (included in “Other income (expense), net” in the consolidated statements of income) were $0.8 million ($0.4 million after taxes) in 2014 (none in 2015 and 2016), as a result of a reduction in the estimated fair value of the investment that is not expected to be temporary. The December 31, 2016 and 2015 carrying values in the consolidated balance sheets (included in “Other assets and deferred charges”) were $1.7 million and $1.7 million, respectively. The carrying value at December 31, 2016 reflected Tredegar’s cost basis in its investment in Harbinger, net of total withdrawal proceeds received and unrealized losses. Withdrawal proceeds were $0.1 million in 2015 and $0.2 million in 2014 (none in 2016). The timing and amount of future installments of withdrawal proceeds was not known as of December 31, 2016. There were no realized gains or losses associated with the investment in the Harbinger Fund in 2016, 2015 and 2014. Gains on the Company’s investment in the Harbinger Fund, if any, will be recognized when the amounts expected to be collected from 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 if management believes it is probable that future withdrawal proceeds will not exceed the remaining carrying value.

Tredegar has investment property in Alleghany and Bath County, Virginia. In 2016, the Company recorded an unrealized loss on this investment property of $1.0 million ($0.7 million after taxes) as a reduction in the estimated fair value of our investment that is not expected to be temporary. The Company realized a gain (included in “Other income (expense), net” in the consolidated statements of income) of $1.2 million ($0.8 million after taxes) on a sale of a portion of this investment property in 2014. The Company’s carrying value in this investment property (included in “Other assets and deferred charges” on the consolidated balance sheets) was $1.6 million at December 31, 2016 and $2.6 million at December 31, 2015.