INVESTMENTS

In August 2007 and December 2008, the Company 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. Tredegar owns Series A-3 Preferred Stock and Series B Preferred Stock in kaléo that, taken together, represents on a fully-diluted basis an approximate 20% interest in kaléo. Tredegar accounts for its investment in kaléo under the fair value method. At the time of the initial investment, the Company elected the fair value option of accounting since its investment objectives were similar to those of venture capitalists, which typically do not have controlling financial interests. Kaléo’s stock is not publicly traded.

The estimated fair value of the Company’s investment was $84.6 million as of December 31, 2018 and $54.0 million as of December 31, 2017. The Company recognized unrealized gains on its investment in kaléo of $30.6 million ($23.9 million after taxes) and $33.8 million ($24.0 million after taxes) in 2018 and 2017, respectively. Unrealized gains or losses associated with the Company’s investment in kaléo 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.

Kaléo has transitioned from a company with net losses in 2017 to a company with net income in 2018. Tredegar’s assessment of kaléo’s risk profile has improved during this transition resulting in a lower discount rate versus a year ago that is applied to kaléo’s projected unlevered after-tax cash flows to estimate kaléo’s enterprise value (“EV”) (the “DCF Method”) and the Company’s underlying share of kaléo’s equity value. Moreover, with net income as well as earnings before interest, taxes, depreciation and amortization (“EBITDA”), the EV of kaléo can also be estimated by applying the EV-to-adjusted EBITDA multiple of guideline public companies to kaléo’s most recent trailing 12-month adjusted EBITDA (the “EBITDA Multiple Method”).

The Company estimates the fair value of its investment in kaléo by: (i) computing the weighted average estimated EV utilizing both the DCF Method and EBITDA Multiple Method (including adjustments for any surplus or deficient working capital and estimates of contingent liabilities), (ii) adding cash and cash equivalents, (iii) subtracting interest-bearing debt, (iv) subtracting a private company liquidity discount estimated at 15% of the net result of (i) through (iii) and (v) applying liquidation preferences and fully diluted ownership percentages to the estimated equity value computed in (i) through (iv).

The Company’s estimate of kaléo’s EV as of December 31, 2018 was determined by weighting the EBITDA Multiple Method by 80% and the DCF Method by 20%. The heavier weighting towards the EBITDA Multiple Method was due to its heuristic nature and kaléo’s transition and actual performance in 2018, versus the hypothetical nature of the projections used in the DCF Method. The DCF Method projections rely on numerous assumptions and Level 3 inputs, including estimating market growth, market share, pricing, net margins (after allowances for temporary discounts, prompt pay discounts, product returns, wholesaler fees, chargebacks, rebates and copays), selling expenses, R&D expenses, general and administrative expenses, income taxes on unlevered pretax income, working capital, capital expenditures and the risk-adjusted discount rate. In addition, there are various regulatory and legal enforcement efforts, including an ongoing Department of Justice investigation related to kaléo’s Evzio business, which could have a material adverse effect on kaléo’s business that require assessment in any valuation method applied.

The table below provides a sensitivity analysis of the estimated fair value of the Company’s investment in kaléo for changes in the EBITDA multiple used in applying the EBITDA Multiple Method and the changes in the weighting of the DCF Method.



($ Millions)			EV-to-Adjusted EBITDA Multiple
			7.6x		8.6x		9.6x		10.6x		11.6x
Weighting to DCF Method	50	%	$	76.3	$	81.2	$	86.1	$	91.0	$	95.9
	40	%	$	73.8	$	79.7	$	85.6	$	91.5	$	97.3
	30	%	$	71.4	$	78.3	$	85.1	$	92.0	$	98.8
	20	%	$	69.0	$	76.8	$	84.6	$	92.5	$	100.3
	10	%	$	66.5	$	75.4	$	84.2	$	93.0	$	101.8
	—	%	$	64.1	$	73.9	$	83.7	$	93.5	$	103.3

The ultimate value of the Company’s ownership interest in kaléo will be determined and realized only if and when a liquidity event occurs, and the ultimate value could be materially different from the $84.6 million estimated fair value reflected in the Company’s financial statements at December 31, 2018.

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. The December 31, 2018 and 2017 carrying values in the consolidated balance sheets (included in “Other assets and deferred charges”) were $1.3 million and $1.7 million, respectively. The carrying value at December 31, 2018 reflected Tredegar’s cost basis in its investment in Harbinger, net of total withdrawal proceeds received and losses. Based on an observable price change, the Company recorded a loss of $0.5 million in 2018 (none in 2017 or 2016). No withdrawal proceeds were received in 2018, 2017 or 2016. The timing and amount of future installments of withdrawal proceeds, which commenced in August 2010, was not known as of December 31, 2018. The Company has determined that there is no readily determinable fair value for the Harbinger Fund and has elected to record its investment in the Harbinger Fund at cost, less impairment, adjusted for observable price changes. Gains on the Company’s investment in the Harbinger Fund will be recognized when there are positive observable price changes, including 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 through observable methods that it is probable that future withdrawal proceeds will not exceed the remaining carrying value.

In 2018, Tredegar sold all its remaining interest in investment property it had held in Alleghany and Bath counties, Virginia. The total loss recorded on this investment property in 2018 was $0.2 million ($0.2 million after taxes). 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 the investment that was not expected to be temporary. 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, 2017.