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 20% at June 30, 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 $45.0 million at June 30, 2017 and $20.2 million at December 31, 2016. Unrealized gains of $21.5 million and $0.3 million were recognized in the second quarter of 2017 and 2016, respectively. Unrealized gains of $24.8 million and $1.1 million were recognized in the first six months of 2017 and 2016, respectively. 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.

The change in the estimated fair value of the Company’s holding in kaléo in the second quarter of 2017 primarily related to recent favorable operating results and projections. Kaléo’s stock is not publicly traded. In addition, kaléo has not completed a full year of operations since the re-launch of its Auvi-Q^® product during the first quarter of 2017, including the key third quarter back-to-school season. The valuation estimate in this situation is more of an art than a science, and while performed in good faith, is based on projection assumptions or Level 3 inputs that have a wide range of possible outcomes. Consequently, the present value of kaléo’s projected future cash flows is determined at a discount rate of 45% for their high degree of risk. Ultimately, the true value of the Company’s ownership interest in kaléo will be determined if and when a liquidity event occurs, and the ultimate value could be materially different from the $45.0 million estimated fair value reflected in the Company’s financial statements at June 30, 2017.

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. The weighted average cost of capital used in the fair market valuation of Tredegar’s interest in kaléo was 45% at both June 30, 2017 and December 31, 2016. At June 30, 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 $9 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 $8 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 June 30, 2017 and December 31, 2016 and condensed statements of operations for the three and six months ended June 30, 2017 and 2016, as reported to the Company by kaléo, are provided below:



(In Thousands)	June 30, 2017		December 31, 2016			June 30, 2017			December 31, 2016
Assets:					Liabilities & Equity:
Cash & short-term investments	$	108,740	$	102,329
Restricted cash	30		31		Current liabilities	$	97,258		$	50,134
Other current assets	51,125		15,391		Long term debt, net	143,692			143,380
Property & equipment	11,157		13,011		Other noncurrent liabilities	828			822
Other long-term assets	510		472		Equity	(70,216		)	(63,102		)
Total assets	$	171,562	$	131,234	Total liabilities & equity	$	171,562		$	131,234



	Three Months Ended June 30,						Six Months Ended June 30,
(In Thousands)	2017			2016			2017			2016
Revenues	$	67,451		$	15,020		$	89,939		$	11,970
Cost of goods sold, R&D and SG&A expenses before depreciation & amortization	(52,071		)	(15,903		)	(85,339		)	(31,394		)
Depreciation & amortization	(1,241		)	(1,437		)	(2,478		)	(2,199		)
Operating income (loss)	14,139			(2,320		)	2,122			(21,623		)
Gain on contract termination	—			58			—			18,075
Net interest expense and other net	(4,815		)	(4,844		)	(9,641		)	(9,688		)
Income tax benefit (expense)	(490		)	—			(490		)	(9		)
Net income (loss)	$	8,834		$	(7,106	)	$	(8,009	)	$	(13,245	)

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 June 30, 2017 and December 31, 2016. The carrying value at June 30, 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 six months of 2016 or 2017. The timing and amount of future installments of withdrawal proceeds, which commenced in August 2010, were not known as of June 30, 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.