Back to GetFilings.com

Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)

For the quarterly period ended June 30, 2004

OR

Commission File Number 0-27264

Corautus Genetics Inc.

(Exact name of registrant as specified in its charter)

75 Fifth Street NW, Suite 313, Atlanta, Georgia 30308

(Address of principal executive offices, including zip code)

(404) 526-6200

Registrant’s telephone number, including area code:

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x    No ¨

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Yes ¨    No x

The number of shares of the registrant’s common stock outstanding as of July 31, 2004, was 13,515,967.

-1-

Table of Contents

TABLE OF CONTENTS

-2-

Table of Contents

PART I. FINANCIAL INFORMATION

CORAUTUS GENETICS INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED BALANCE SHEETS

See accompanying notes.

-1-

Table of Contents

CORAUTUS GENETICS INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes.

-2-

Table of Contents

CORAUTUS GENETICS INC.

(A DEVELOPMENT STAGE ENTERPRISE)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes.

-3-

Table of Contents

Corautus Genetics Inc.

(A development stage enterprise)

Notes to Unaudited Consolidated Financial Statements

June 30, 2004

The accompanying unaudited consolidated financial statements reflect all adjustments (consisting solely of normal recurring adjustments) which management considers necessary for a fair presentation of the financial position, results of operations and cash flows of Corautus Genetics Inc. (“Corautus”) for the interim periods presented. Certain footnote disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, which would substantially duplicate the disclosures contained in Form 10-K for the year ended December 31, 2003 filed on March 30, 2004 by Corautus have been condensed or omitted from the interim financial statements as permitted by the rules and regulations of the Securities and Exchange Commission. Interim results are not necessarily indicative of results for the full year. Certain prior year balances have been reclassified to conform to the current presentation.

The interim results should be read in conjunction with the consolidated financial statements and notes thereto included in Corautus’ Annual Report on Form 10-K for the year ended December 31, 2003. Shareholders are encouraged to review the Form 10-K for a broader discussion of Corautus’ opportunities and risks inherent in the business.

On February 7, 2003, the Board of Directors approved a one-for-seven reverse stock split of the Corautus common stock that was effective on March 10, 2003. All share and per share amounts in these financial statements have been adjusted to reflect the reverse stock split.

On February 5, 2003, GenStar Therapeutics Corporation completed a merger with Vascular Genetics Inc. and concurrently changed its name to Corautus Genetics Inc. The focus of the combined entity is the clinical development of gene therapy products using a vascular growth factor gene, Vascular Endothelial Growth Factor 2 (VEGF-2), for the treatment of severe cardiovascular and vascular disease.

A total of 5,320,166 shares of Corautus common stock were issued to Vascular Genetics stockholders in connection with the merger. Additionally, Corautus assumed options to purchase 229,648 shares of common stock and warrants to purchase 19,164 shares of common stock. Corautus has also reserved 556,904 shares of common stock for potential indemnity obligations to former Vascular Genetics stockholders.

The acquisition has been accounted for as a purchase of assets by Corautus for financial reporting purposes, in accordance with U.S. generally accepted accounting principles. After February 5, 2003, the results of Vascular Genetics have been included in the consolidated financial statements of Corautus. The purchase price exceeded the net tangible assets acquired by $17.4 million and the final purchase price allocation is as follows:

-4-

Table of Contents

The initial recording of the in-process research and development charge was estimated at $17,699,863 and was subsequently adjusted in 2003 based on actual assets acquired and liabilities assumed. Pursuant to the Emerging Issues Task Force’s Issue No. 98-3, Determining Whether a Nonmonetary Transaction Involves the Receipt of Productive Assets or of a Business, Vascular Genetics did not meet the criteria necessary to qualify as a business. Therefore, Corautus’s acquisition of Vascular Genetics did not qualify as a business combination under Statement of Financial Accounting Standards No. 141, Business Combinations, and no goodwill resulted from the recording of the transaction. The value of the in-process research and development was charged to operations upon the close of the merger. The value allocated to acquired workforce is being amortized over two years.

Corautus grants stock options for a fixed number of shares to employees in accordance with Accounting Principles Board (“APB”) Opinion No. 25, Accounting for Stock Issued to Employees, and, accordingly, recognizes no compensation expense for stock option grants to employees provided that the option exercise price is not less than the fair market value of the underlying stock on the date of the grant. The value of options or stock awards issued to non-employees have been determined in accordance with SFAS No. 123, Accounting for Stock Based Compensation, and Emerging Issues Task Force (“EITF”) Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and are periodically remeasured as the options vest.

As required under SFAS No. 123, as amended by SFAS No. 148, Accounting for Stock-Based Compensation-Transition and Disclosure, the pro forma effects of stock-based compensation on net loss and net loss per common share are estimated at the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions:

-5-

Table of Contents

For purposes of pro forma disclosures, the estimated fair value of the options is amortized to expense over the options’ vesting period. Corautus’ pro forma information follows:

In accordance with the Financial Accounting Standards Board’s SFAS No. 128, Earnings Per Share, net loss per share is based on the weighted-average number of shares of common stock outstanding during the three-month and six-month periods ended June 30, 2004 and 2003. Equivalent shares arising from convertible preferred stock, convertible debt, warrants for common stock and outstanding stock options have not been included in the computation of net loss per share as their effect would be antidilutive.

On December 19, 2003, Corautus and three investors entered into the Common Stock and Warrant Purchase Agreement, whereunder the investors agreed to purchase in two tranches an aggregate of 793,640 shares of Corautus common stock and warrants exercisable for 158,728 shares of Corautus common stock. The common stock was issued at a price equal to 90% of the closing market price of Corautus common stock on the day immediately preceding the agreement execution date (i.e., $3.967 per share). The warrants are exercisable at a price equal to 125% of the closing market price of Corautus common stock on the day immediately preceding the date each transaction closed (i.e., $5.4375 per share for tranche one (108,338 shares) and $6.7625 per share for tranche two (50,390 shares)). Additionally, the warrants are exercisable by the holder for up to five years immediately following issuance. The transaction closed on December 31, 2003 with respect to 541,690 shares and January 27, 2004 with respect to the remaining shares. In connection with this offering, Corautus issued warrants to purchase an aggregate of 32,331 shares of its common stock at an exercise price of $1.00 per share as a finder’s fee for the offering. The proceeds of the offering (totaling $3,149,957 with no underwriting discounts or commissions) will be used for working capital and other general corporate purposes.

On January 8, 2004, Corautus and a group of investors entered into the Common Stock and Warrant Purchase Agreement, whereunder the investors agreed to purchase an aggregate of 1,200,000 shares of Corautus common stock and warrants exercisable for 240,000 shares of Corautus common stock. The

-6-

Table of Contents

common stock was issued at a price equal to 90% of the closing market price of Corautus common stock on the day immediately preceding the agreement execution date (i.e., $4.3819 per share). The warrants are exercisable at a price equal to 120% of the closing market price of Corautus common stock on the day immediately preceding the date the transaction closed (i.e., $6.72 per share). Additionally, the warrants are exercisable by the holder for up to five years immediately following issuance. The transaction closed on January 16, 2004. The proceeds of the offering (totaling $5,260,680 less $289,337 in finder’s fees) will be used for working capital and other general corporate purposes.

In March 2004, Corautus and two separate investors entered into Common Stock and Warrant Purchase Agreements, whereunder the investors agreed to purchase an aggregate of 376,000 shares of Corautus common stock and warrants exercisable for 18,800 shares of Corautus common stock. The common stock was issued at a price equal to 88% of the closing market price of Corautus common stock on the day immediately preceding the agreement execution date (i.e., $5.9835 per share). The warrants are exercisable at a price equal to 125% of the closing market price of Corautus common stock on the day immediately preceding the date the transaction closed (i.e., $8.375 per share). Additionally, the warrants are exercisable by the holder for up to five years immediately following issuance. The transaction closed on March 18, 2004. The proceeds of the offering (totaling $2,249,984) will be used in funding Corautus’ Phase IIb clinical trial.

On May 10, 2004, thirteen current or former directors, advisors and officers of Corautus or its subsidiaries purchased an aggregate of 97,909 shares of unregistered common stock from the company at $5.50 per share for aggregate net cash proceeds to Corautus of $538,500. The subscription agreements were entered into effective May 7, 2004 and the price per share was the closing price of the publicly traded stock of the company on that date.

In May 2003, Corautus entered into an agreement to terminate the lease for its manufacturing facility (Barnes Canyon) and to surrender possession of such facility without prejudice to any remedies of the landlord for the recovery of rent. As of the date of such termination, future payments due under this operating lease for the remaining eight year term were approximately $16.5 million. Corautus entered into a settlement and release agreement with the landlord, dated as of November 7, 2003, for the settlement of the remaining payments that would have been due for the original term of such lease. The net present value of this settlement amount of $3.4 million was charged to expense in 2003. In the quarter ended June 30, 2004, Corautus made payments totaling $510,325 and issued 53,180 shares of common stock valued at $300,000 to the landlord pursuant to the settlement agreement. As of June 30, 2004, the recorded liability for this obligation totaled $1,929,254. Of the total remaining liability, $680,901 is secured by a letter of credit, $406,465 is to be paid in cash, and $841,888 is to be settled by issuance of common stock.

On July 7, 2004, Corautus and thirteen investors entered into the Common Stock and Warrant Purchase Agreement, whereunder the investors agreed to purchase an aggregate of 1,886,952 shares of Corautus common stock and warrants exercisable for an aggregate of 471,738 shares of Corautus common stock for net cash proceeds to Corautus of $9,348,144. The transaction will occur in two tranches. The first tranche in the amount of $4,666,572 closed on July 7, 2004. The commitment for the second tranche in the amount of $4,681,572 has been placed into escrow and will be paid to Corautus upon the treatment of the first patient in the upcoming Phase IIb clinical trial. The common stock was issued at a price of $5.22 per share, which equals 90% of the average closing price during the thirteen trading days prior to execution of the definitive agreement. The warrants for each tranche are exercisable at a price equal to

-7-

Table of Contents

120% of the closing price on the day prior to the closing of that tranche (e.g. $8.064 for the warrants issued in the first tranche).

On July 22, 2004, Corautus executed a senior convertible promissory note and received proceeds of $5,000,000 from Boston Scientific Corporation. The note is convertible into 655,469 shares of common stock, subject to adjustment, and is only convertible in the event of a change of control, as defined. The note bears interest at 6% and if it remains unconverted, shall be repaid in three equal, annual payments of principal and interest beginning on the fifth anniversary of issuance.

This report may contain forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Such statements are subject to certain factors, risks and uncertainties that may cause actual results, events and performances to differ materially from those referred to in such statements. These risks include statements that address operating performance, events or developments that we expect or anticipate will occur in the future, such as projections about our future results of operations or our financial condition, benefits from the alliance with Boston Scientific, synergies from the merger between GenStar and Vascular Genetics, research, development and commercialization of our product candidates, anticipated trends in our business, manufacture of sufficient and acceptable quantities of our proposed products, approval of our product candidates, meeting additional capital requirements, and other risks that could cause actual results to differ materially. These risks are discussed in the Corautus Genetics Inc.’s Securities and Exchange Commission filings, including, but not limited to, the risks discussed in Corautus’ Annual Report on Form 10-K for the year ended December 31, 2003 (File No. 001-15833) filed March 30, 2004, all of which are incorporated by reference into this report. All forward-looking statements included in this document are based on information available to Corautus on the date hereof, and Corautus assumes no obligation to update any such forward-looking statements.

OVERVIEW

Corautus is a biopharmaceutical company dedicated to the development of innovative gene therapy products for the treatment of cardiac and vascular disease. Corautus, formerly known as GenStar Therapeutics Corporation and Urogen Corp., was formed as a Delaware corporation on June 30, 1995. Under the name UroGen Corp., UroGen operated as a division of Medstone International, Inc. between July 1, 1991 (Inception) and June 30, 1995. UroGen changed its name to GenStar Therapeutics Corporation in March 2000. Gene therapy is technology that uses genetic materials as therapeutic agents to treat disease. Gene therapy seeks to restore, augment or correct gene functions either by the addition of normal genes or by neutralizing the activity of defective genes.

On February 5, 2003, GenStar Therapeutics Corporation completed a merger with Vascular Genetics Inc. and concurrently changed its name to Corautus Genetics Inc. The focus of the combined entity is the clinical development of gene therapy products using a vascular growth factor gene, Vascular Endothelial Growth Factor 2 (VEGF-2), for the treatment of severe cardiovascular disease.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Our discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related

-8-

Table of Contents

disclosure of contingent assets and liabilities. On an ongoing basis, we evaluate our estimates, including those related to revenue recognition and stock-based compensation. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies affect the significant judgments and estimates used in the preparation of our consolidated financial statements.

Revenue Recognition

Grant revenue is recognized as the research expenses related to the grants are incurred. Contract revenue arising from collaborative research agreements is recognized either (i) ratably over the term of the agreement, which approximates the performance of services, for contracts specifying payment for services over a given period, or (ii) as services are performed under the agreement, for contracts specifying payment on a per full-time employee basis. All amounts received under collaborative research agreements or research grants are not refundable, regardless of the success of the underlying research.

Stock Based Compensation

We grant stock options for a fixed number of shares to employees in accordance with Accounting Principles Board Opinion No. 25 (“APB 25”), Accounting for Stock Issued to Employees, and accordingly, recognize no compensation expense for the stock option grants to employees provided that the option exercise price is not less than the fair market value of the underlying stock on the date of the grant. The value of options, warrants, or stock awards issued to non-employees have been determined in accordance with SFAS No. 123, Accounting for Stock Based Compensation, and Emerging Issues Task Force Issue No. 96-18, Accounting for Equity Instruments that are Issued to Other than Employees for Acquiring, or in Conjunction with Selling Goods and Services, and are periodically remeasured as the options vest, if required. Warrants for common stock are valued at the date of issuance and are recorded to the expense category related to the services provided.

RESULTS OF OPERATIONS

Revenues

Corautus has generated revenues to date of $2,618,737 from contract research agreements and grants. Total revenues for the six months ended June 30, 2004 and 2003 were $41,667 and $0, respectively, and for the three months ended June 30, 2004 and 2003 were $20,833 and $0, respectively. Revenues in 2004 were from the sublicense of certain patents to Boston Scientific Corporation concurrent with Boston Scientific’s investment in Corautus in July 2003. We do not anticipate revenues from the sale of products for at least four to six years, if at all. Product revenues are contingent on the success of our clinical trials.

Research and development and acquired in-process technology

Research and development expense during the six months ended June 30, 2004 and 2003 was $2,792,661 and $2,298,371, respectively, and for the three months ended June 30, 2004 and 2003 was $1,380,057 and $980,727, respectively. Research and development expense increased $494,290, or 22%, in the six months ended June 30, 2004 compared to the six months ended June 30, 2003 and $399,330, or 41%, in the three months ended June 30, 2004 compared to the three months ended June 30, 2003.

-9-

Table of Contents

In 2003, research and development costs consisted primarily of the cost to manufacture the VEGF-2 materials for clinical use and the costs to prepare for the VEGF-2 clinical trials. In 2004, research and development costs consist primarily of personnel, consultants and other costs associated with preparing for our planned clinical trials and costs associated with manufacturing our clinical material for planned Phase III clinical trials and commercial use, which caused the increase in research and development costs in 2004 over 2003.

The charge for the write-off of acquired in-process technology in 2003 related to the merger with Vascular Genetics as it did not otherwise qualify for capitalization as there were significant required regulatory approvals remaining.

We estimate that it will take at least four to six years to complete clinical testing of any of our products and obtain regulatory approvals, if we are able to obtain approvals. We anticipate increasing research and development expenditures in the future as we conduct clinical testing necessary to bring our products to market. We currently anticipate commencement of our Phase II(b) clinical trial for our VEGF-2 product candidate for the treatment of severe coronary artery disease in the third quarter of 2004. To this end, we are currently working to finalize agreements with potential clinical sites for clinical testing.

General and administrative expense

General and administrative expense during the six months ended June 30, 2004 and 2003 was $2,013,727 and $2,365,801, respectively, and for the three months ended June 30, 2004 and 2003 was $865,777 and $1,353,017, respectively. General and administrative expense decreased $352,074, or 15%, for the six months ended June 30, 2004 compared to 2003 and $487,240, or 36%, for the three months ended June 30, 2004 compared to 2003, primarily due to reduced salary costs related to fewer personnel, legal and facility lease costs and reduced depreciation expense. General and administrative expense includes the costs of our administrative personnel and consultants, office lease expenses and other overhead costs, including legal and accounting costs. We expect the number of financial and administrative employees and overall general and administrative expenses to remain relatively constant for the rest of 2004.

Write-off of property and equipment

The write-off of property and equipment of $1,932,414 in 2003 related to the decision to abandon our manufacturing facility and outsource future manufacturing operations. The charge relates to tenant improvement costs and certain equipment related to the manufacturing operations.

Interest income and expense

Interest income during the six months ended June 30, 2004 and 2003 of $65,447 and $33,002, respectively, and for the three months ended June 30, 2004 and 2003 of $35,419 and $9,052, respectively, is a result of investment of excess cash in money market accounts, corporate and government notes and certificates of deposit. The increase is due to an increase in the balances in those investments.

Interest expense for the six months ended June 30, 2004 and 2003 was $154,365 and $117,640, respectively and for the three months ended June 30, 2004 and 2003 was $70,424 and $30,015, respectively. Interest expense in 2004 relates to equipment financing, the long-term note payable to Boston Scientific, and the lease settlement obligation. Interest expense in 2003 relates to equipment financing, amortization of deferred loan fees and the interest accrued on the deferred compensation liability. The increase in 2004 is due to the interest on the note payable and lease settlement obligation, somewhat offset by the decrease in principal balances of our capital lease obligations, absence of deferred financing costs and deferred compensation liabilities in 2004.

-10-

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

From inception through June 30, 2004, we have primarily financed our operations through private placements of equity and convertible debt securities, our strategic alliance with Boston Scientific Corporation and through our relationship with Baxter Healthcare. We have raised approximately $3.9 million in convertible debt offerings (including $2.5 million from Boston Scientific Corporation), $36.1 million in private equity financings, $8.1 million in net proceeds from the Boston Scientific Corporation investment and received equity funding of $14.9 million related to our relationship with Baxter Healthcare. Additionally we have financed equipment purchases under capital leases and secured notes payable totaling $1.9 million.

Net cash used in operating activities during the six months ended June 30, 2004 was $5,069,547. Net cash used in operating activities consists of expenditures for research and development and general and administrative expenses. Net cash provided by investing activities during the six months ended June 30, 2004 was $32,547, which consists of the purchase and sales of property and equipment. Net cash provided by financing activities for the six months ended June 30, 2004 was $8,546,421, which consists primarily of proceeds from the private sales of common stock and warrants, offset by repayments of capital leases.

As of June 30, 2004, we had cash and cash equivalents totaling $12,421,415. Our operations to date have consumed substantial amounts of cash and have generated insignificant revenues. The negative cash flow from operations is expected to continue and to accelerate for at least the next five years. The development of our products will require a commitment of substantial funds to conduct the costly and time-consuming research, preclinical and clinical testing necessary to bring our products to market and to establish manufacturing and marketing capabilities. Our future capital requirements will depend on many factors including the progress of our research and development programs; the progress, scope and results of our preclinical and clinical testing; the time and cost involved in obtaining regulatory approvals; the cost of manufacturing for our proposed products; the cost of filing, prosecuting, defending and enforcing patent claims and other intellectual property rights; competing technological and market developments; and our ability to establish and maintain collaborative and other arrangements with third parties, such as licensing and manufacturing agreements, and the cost of such arrangements.

We expect that our existing capital resources will enable us to maintain our currently planned operations through December 2005. Any material changes in our currently planned Phase IIb clinical trial for the treatment of severe cardiovascular disease, and/or the implementation of plans to file a protocol and conduct a Phase II clinical trial for the treatment of peripheral artery disease could increase our expenditures and reduce the length of time we could operate without additional capital.

We will need to raise substantial additional capital in the future to fund our operations. We intend to seek this additional funding either through collaborative arrangements or through public or private equity or debt financings. We cannot be certain that additional financing will be available on acceptable terms, or at all. Except for the Boston Scientific loan agreement and the second tranche of the common stock and warrant purchase agreement entered into in July 2004, which are triggered by milestones, we do not have commitments or arrangements assuring us of any additional funds in the future, and there is no assurance that we will be able to obtain additional capital on acceptable terms, or at all. Failure to successfully address ongoing liquidity requirements will have a material adverse effect upon our business. In the event that we are unable to obtain additional capital, we will be required to take actions that may harm our business and our ability to achieve cash flow in the future. To the extent we raise additional cash by issuing equity securities, our existing stockholders will be diluted. If additional funds are raised through the issuance of debt securities, these securities are likely to have rights, preferences and privileges senior to our common stock and preferred stock.

-11-

Table of Contents

The primary objective of our investment activities is to preserve principal while at the same time maximizing the income we receive from our investments without significantly increasing risk. Some of the securities in which we invest may have market risk. This means that a change in prevailing interest rates may cause the principal amount of the investment to fluctuate. For example, if we hold a security that was issued with a fixed interest rate at the then-prevailing rate and the prevailing interest rate later rises, the market value of our investment will probably decline. To minimize this risk in the future, we intend to maintain our portfolio of cash equivalents and short-term investments in a variety of securities, including commercial paper, money market funds, government and non-government debt securities and certificates of deposit. The average duration of the majority of our investments is less than one year. Due to the short-term nature of these investments, we believe that we have no material exposure to interest rates arising from our investments. Therefore, no quantitative tabular disclosure is included in this report.

We are subject to a certain amount of short-term foreign exchange risk related to the potential manufacture in Europe of our VEGF-2 plasmid material for our planned Phase III clinical trial and commercial use. The payments made for the VEGF-2 will be denominated in Euros and are expected to be made over the next two to three years. We are unable to predict currency exchange risk at this time.

(a) Evaluation of disclosure controls and procedures. Our chief executive officer and chief financial officer are responsible for establishing and maintaining “disclosure controls and procedures” (as defined in the Securities and Exchange Act of 1934 Rules 13a-15(e) and 15d-15(e)) for the company. Our chief executive officer and chief financial officer, after evaluating the effectiveness of our disclosure controls and procedures as of the end of the period covered by this quarterly report, have concluded that our disclosure controls and procedures were effective in timely alerting them to material information relating to us (including our consolidated subsidiaries) required to be included in our periodic SEC filings.

(b) Changes in internal controls over financial reporting. There were no significant changes in our internal controls over financial reporting or in other factors that would significantly affect those controls that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II. OTHER INFORMATION

None.

On May 10, 2004, thirteen current or former directors, advisors and officers of Corautus and its subsidiaries purchased an aggregate of 97,909 shares of unregistered common stock from the company at $5.50 per share for aggregate net cash proceeds to Corautus of $538,500. The subscription agreements were entered into effective May 7, 2004, and the price per share was the closing price of the publicly traded stock of the company on that date. The purchasers included Richard E. Otto, Director, President and Chief Executive Officer; Robert T. Atwood, Director, Executive Vice President, Chief Financial Officer and Secretary; James C. Gilstrap, Director and Chairman of the Board; Dr. Ivor Royston, Director; John R. Larson, Director; Eric N. Falkenberg, Director; Ronald Merriman, Director;

-12-

Table of Contents

Victor W. Schmitt, Director; Dr. F. Richard Nichol, Director; former directors Daniel Pharand and Dr. Richard A. Schatz; Jack W. Callicutt, Vice President of Finance and Administration and Chief Accounting Officer; and Robert E. Tritt, advisor. The common stock was issued pursuant to a private offering, with no general solicitation, and was therefore eligible for an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933.

On July 7, 2004, Corautus and thirteen investors (Iroquois Capital, L.P.; Highline Capital Partners, LP; Highline Capital Partners, QP LP; Highline Capital International, Ltd.; Bonanza Master Fund Ltd.; DKR SoundShore Oasis Holding Fund Ltd.; DKR SoundShore Strategic Holding Fund Ltd.; Bluegrass Growth Fund, LP; Bluegrass Growth Fund, Ltd.; BayStar Capital II, L.P.; Smithfield Fiduciary LLC; Omicron Master Trust; The Walters Group) entered into a Common Stock and Warrant Purchase Agreement, whereunder the investors agreed to purchase an aggregate of 1,886,952 shares of Corautus common stock and warrants exercisable for an aggregate of 471,738 shares of Corautus common stock for net cash proceeds to Corautus of $9,348,144. The transaction will occur in two tranches. The first tranche in the amount of $4,666,572 closed on July 7, 2004. The commitment for the second tranche in the amount of $4,681,572 has been placed into escrow and will be paid to Corautus upon the treatment of the first patient in the upcoming Phase IIb clinical trial. The common stock was issued at a price of $5.22 per share, which equals 90% of the average closing price during the thirteen trading days prior to execution of the definitive agreement. The warrants for each tranche are exercisable at a price equal to 120% of the closing price on the day prior to the closing of that tranche (e.g., $8.064 for the warrants issued in the first tranche). Additionally, the warrants are exercisable by the holder for up to five years immediately following issuance. The common Stock and warrants were issued pursuant to a private offering, with no general solicitation, and were therefore eligible for an exemption from registration pursuant to Section 4(2) of the Securities Act of 1933.

None.

Our annual meeting of shareholders was held in Atlanta, Georgia on May 7, 2004. At the annual meeting, the shareholders were presented with four proposals as set forth in our proxy statement, all of which were approved.

Out of 13,802,778 shares of stock entitled to vote at such meeting based upon the record date of March 26, 2004, there were present in person or by proxy an aggregate of 10,669,648 shares, constituting a quorum. The following sets forth detailed information regarding the results of the voting at the meeting for each proposal:

Proposal 1. The shareholders elected the following directors to serve for the ensuing year.

-13-

Table of Contents

Proposal 2. The shareholders approved the amended and restated 2002 Stock Plan.

Proposal 3. The shareholders approved the sale and issuance, in one or more private placements, to certain investors of up to 5,000,000 shares of our common stock and warrants for up to 2,500,000 shares of our common stock.

Proposal 4. The shareholders ratified the appointment by the Audit Committee of the Board of Directors of Ernst & Young LLP as our independent auditors for 2004.

In July 2004, the U.S. Food and Drug Administration (“FDA”) approved our protocol for a Phase IIb clinical trial for the treatment of severe cardiovascular disease and gave us permission to start that trial. We plan to commence this trial during the third quarter of 2004. Some of the medical centers that we have finalized or expect to finalize agreements with as clinical sites are as follows: Caritas St. Elizabeth’s Medical Center, Scripps Clinic, Minneapolis Heart Institute, Medstar Research Institute - Washington Heart, Rush University Medical Center, Arizona Heart Institute, St. Luke’s Episcopal Hospital - Texas Heart Institute, Fuqua Heart Center of Piedmont Hospital, Duke University Medical Center, Mayo Clinic Hospital - Scottsdale, Mayo Clinic Hospital - Rochester, Southwest Florida Heart Group, Baptist Hospital of East Tennessee, Swedish Medical Center and Riverside Regional Medical Center. We are currently working with our intended clinical sites so that the trial may commence, which efforts include, among other activities, having the Institutional Review Boards at the sites approve the final FDA approved protocol, physician training and then recruitment of patients.

As the trial commences, our clinical and regulatory activities are changing and expanding, and we intend to provide the needed clinical and regulatory functions through a combination of internal staffing and by outsourcing certain activities to clinical research organizations. In June 2004, we entered into a Letter Agreement with Nina Vincent Sewell, our Senior Vice President-Clinical/Regulatory, which reduced her hours and working relationship with us to allow her to pursue an academic opportunity in medical journalism. On July 13, 2004, Corautus accepted the resignation of Ms. Vincent Sewell to pursue that academic opportunity on a full-time basis. Her duties have been assumed by senior officers and others of our clinical/regulatory staff. We have commenced a search for a Senior Vice President-Clinical/Regulatory utilizing an executive search firm and are actively interviewing candidates.

-14-

Table of Contents

(a) Exhibits

(b) Reports on Form 8-K.

None

-15-

Table of Contents

SIGNATURE

In accordance with the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized on August 16, 2004.

-16-