Solvgen

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Case 10-1 SolvGen Inc. Direct Drugs Inc. (Direct) is planning to acquire SolvGen Inc. (SolvGen or the
Company), a publicly owned company, during the fourth quarter of fiscal year ending
December 31, 2006. Direct has engaged our audit engagement team to perform due diligence procedures, with an emphasis on the review of two separate material agreements: (1) a research and development agreement and (2) a license and distribution agreement, both executed by SolvGen during the first quarter of fiscal year 2006. Direct’s management provided the engagement team with the following memo describing the
Company’s revenue recognition policy: MEMO To: Audit Engagement Team
From: CFO, SolvGen Inc.
Subject: Revenue Recognition for Research and Development and License and
Distribution Agreements
Date: November 30, 2006 SolvGen Inc. (the Company), an SEC registrant, is a pharmaceutical development company. SolvGen entered into a five-year research and development agreement with
Careway Pharma Inc. (Careway) on January 1, 2006. The research and development agreement calls for SolvGen to use its best efforts to further develop proprietary instrument systems that have been under development for nearly 18 months and are expected to be ready for commercial launch in the near future. In connection with executing the research and development arrangement, SolvGen and Careway also entered into a five-year license and distribution agreement dated January 1, 2006. Under the terms of the research and development agreement, SolvGen retains all intellectual rights to the results of the research and development agreement (even in the event of default by the Company). In connection with this agreement, SolvGen is entitled to the following nonrefundable milestone payments from Careway: 1. Exclusive…...

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