Acctg 642: Case 10-1, Solvgen Inc.

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Memorandum
To:John J. Morris, Department of Accounting
From: Group #1 (Anthony Smith, Jessica Kolb, Jeffrey Brownlee, Caleb Dykes) Date: 4/11/13
Subject:ACCTG 642: Case 10-1, SolvGen Inc.

Statement of Relevant Facts
Direct Drugs Inc. (Direct) has created a plan for the acquisition of SolvGen Inc. (SolvGen), which is a publicly owned company. Direct has engaged an audit team to review agreement and procedures dealing with two separate material agreements. The first agreement is a research and development agreement and the second is a licensing and distribution agreement. The contract states that SolvGen entered into a five year research and development agreement with Careway Pharma Inc. on January 1, 2010. The agreement states that SolvGen will use its best efforts to develop a proprietary instrument system. They are expected to be ready for launch in the near future. SolvGen and Careway also entered in an agreement for a five year license and distribution. This agreement was entered in on January 1, 2010 as well. The terms of the research and development agreement state that SolvGen holds all intellectual rights that correspond with the research and development of the contract. Also with this agreement SolvGen is entitled to nonrefundable milestone payments from Careway and they are as follows: * Exclusive negation payments were paid on December 1, 2009 in the amount of $1 Million. * A contract signing payment was paid on January 1, 2010 in the amount of $2 Million. * $5 Million was paid for the commercial launch of instrument system Version 1 on March 31, 2010. * $5 Million was paid for the commercial launch of instrument system Version 2, which has not been paid yet. * $5 Million was paid for the commercial launch of instrument system Version 3, which has not been paid yet.

Identification of Issues and Alternatives
One of the key issues in this case is what are considered deliverables in the arrangement made between SolvGen...
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