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. Tredegar’s ownership interest on a fully diluted basis was approximately 19% at March 31, 2017, 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 $23.5 million at March 31, 2017 and $20.2 million at December 31, 2016. Unrealized gains of $3.3 million and $0.8 million were recognized in the first quarter of 2017 and 2016, respectively. The change in the estimated fair value of the Company’s holding in kaléo in the first quarter of 2017 and 2016 primarily related to favorable adjustments in the fair value for the passage of time associated with achieving product development and commercialization milestones that are discounted at 45% for their high degree of risk.

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 10. 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 March 31, 2017 and December 31, 2016. At March 31, 2017, 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 $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 March 31, 2017 and December 31, 2016 and condensed statements of operations for the three months ended March 31, 2017 and 2016, as reported to the Company by kaléo, are provided below:



(In Thousands)	March 31, 2017		December 31, 2016			March 31, 2017			December 31, 2016
Assets:					Liabilities & Equity:
Cash & short-term investments	$	103,274	$	102,329
Restricted cash	30		31		Current liabilities	$	100,299		$	50,134
Other current assets	49,319		15,391		Long term debt, net	143,536			143,380
Property & equipment	12,055		13,011		Other noncurrent liabilities	826			822
Other long-term assets	377		472		Equity	(79,606		)	(63,102		)
Total assets	$	165,055	$	131,234	Total liabilities & equity	$	165,055		$	131,234



	Three Months Ended March 31,
	2017			2016
Revenues & Expenses:
Revenues, net (a)	$	22,488		$	(3,050	)
Cost of goods sold	(5,924		)	(3,622		)
Expenses and other, net (b)	(33,408		)	541
Income tax benefit (expense)	—			(8		)
Net loss	$	(16,844	)	$	(6,139	)
(a) Negative revenues during the first quarter of 2016 relate to the impact of product sales allowances on channel inventory following a product price reset during the quarter. (b) “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, “Expenses and other, net” would have been a net deduction of $17.5 million in the first quarter of 2016.

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 March 31, 2017 and December 31, 2016. The carrying value at March 31, 2017 reflected Tredegar’s cost basis in its investment in the Harbinger Fund, net of total withdrawal proceeds received and unrealized losses. No withdrawal proceeds were received in the first three months of 2016 and 2017). The timing and amount of future installments of withdrawal proceeds, which commenced in August 2010, were not known as of March 31, 2017. 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.