**Table of Contents**

** **

 

** **

**UNITEDSTATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,DC 20549**

** **

**FORM 10-Q**

 

**(Mark One)**

 

**x****     ****QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THESECURITIES EXCHANGE ACT OF 1934**

 

**For quarterly period ended March 31, 2010**

 

**o****        ****TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THEEXCHANGE ACT**

 

**For the transition periodfrom       to       **

 

**Commission filenumber:  000-28882**

 

**WORLD HEART CORPORATION**

(Exact name of registrant as specified in itscharter)

 

| **Delaware**                                                    | ** ** | **52-2247240**                     |
|-----------------------------------------------------------------|------------|------------------------------------|
| (State  or other jurisdiction of incorporation or organization) |       | (IRS  Employer Identification No.) |

 

**4750 WileyPost Way, Suite 120, Salt Lake City, UT 84116 USA**

(Addressof principal executive offices)

 

**(801)355-6255**

(Registrant’stelephone number)

 

 

(Former name, former address and former fiscal year, if changed sincelast report)

 

Indicate by check mark whether the registrant (1) has filed allreports required to be filed by Section 13 or 15(d) of the SecuritiesExchange Act of 1934 during the preceding 12 months (or for such shorter periodthat the registrant was required to file such reports), and (2) has beensubject to such filing requirements for the past 90 days.  Yes  x  No  o

 

Indicate by a checkmark whether the registrant has submittedelectronically and posted on its corporate Website, if any, every InteractiveData File required to be submitted and posted pursuant to Rule 405 ofRegulation S-T during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).  Yes  o  No  o

 

Indicate by check mark whether the Registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reporting company.  See the definitions of “large acceleratedfiler” “accelerated filer” and “smaller reporting company” in Rule 12b-2of the Exchange Act.

 

| Large accelerated  filer o               |   | Accelerated filer o         |
|-----------------------------------------------|--------|----------------------------------|
|                                          |   |                             |
| Non-accelerated filer o                  |   | Smaller reporting company x |
| (Do not check if a smaller reporting company) |   |                             |

 

Indicate by check markwhether the Registrant is a shell company (as defined in Rule 12b-2 of theExchange Act).Yes o  No x

 

Indicate the number ofstock outstanding of each of the issuer’s classes of common stock, as of thelatest practicable date:

 

The number of commonshares outstanding as of May 14, 2010 was 14,730,991.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **                                                     | **Page**                                                                                                 |
|----------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| **Part I.  Financial Information (to review and update)** | ** **                                                                                               |
| ** **                                                     | ** **                                                                                               | ** ** |
| Item 1.                                                        | Financial Statements                                                                                     |   |
|                                                           | Condensed Consolidated Balance Sheets as of  March 31, 2010 and December 31, 2009              | 3 |
|                                                           | Condensed Consolidated Statements of Operations for  the three months ended March 31, 2010 and 2009 | 4 |
|                                                           | Condensed Consolidated Statements of Cash Flows for  the three months ended March 31, 2010 and 2009 | 5 |
|                                                           | Notes to Condensed Consolidated Financial Statements                                                     | 6 |
| Item 2.                                                        | Management’s Discussion and  Analysis of Financial Condition and Results of Operations              | 15 |
| Item  3.                                                       | Quantitative  and Qualitative Disclosures About Market Risk                                              | 19 |
| Item 4.                                                        | Controls  and Procedures                                                                                 | 19 |
|                                                           |                                                                                                     |   |
| **Part II.  Other Information**                           |                                                                                                     |
|                                                           |                                                                                                     |   |
| Item 1.                                                        | Legal  Proceedings                                                                                       | 20 |
| Item 1A.                                                       | Risk Factors                                                                                             | 20 |
| Item  2.                                                       | Unregistered  Sales of Equity Securities and Use of Proceeds                                             | 21 |
| Item  3.                                                       | Defaults  Upon Senior Securities                                                                         | 21 |
| Item 4.                                                        | (Removed and  Reserved)                                                                                  | 21 |
| Item 5.                                                        | Other  Information                                                                                       | 21 |
| Item 6.                                                        | Exhibits                                                                                                 | 22 |
|                                                           | Signatures                                                                                               |   |

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**WORLD HEART CORPORATION**

## **Condensed Consolidated Balance Sheets**

(United States Dollars) (Unaudited)

 
| ** **                                                                                                                                                                                                                             | ** ** | **March 31, 2010** | ** **     | **December 31, 2009 (1)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|----------------|--------------------------------|------------|
| **ASSETS**                                                                                                                                                                                                                             | ** ** | ** **              | ** **     | ** **                     | ** ** |
| **Current  assets**                                                                                                                                                                                                                    | ** ** | ** **              | ** **     | ** **                     | ** ** |
| Cash and cash  equivalents                                                                                                                                                                                                             |       | $                       | 7,343,821      |                           | $          | 5,562,670 |   |
| Marketable investment  securities                                                                                                                                                                                                      |       | 2,530,104               |           | 499,417                        |       |
| Trade and other  receivables, net of allowance for doubtful accounts of $0 and $238,854 at  March 31, 2010 and December 31, 2009, respectively                                                                               |       | 167,277                 |           | 18,907                         |       |
| Inventory, net of  allowance for excess and obsolete of $65,000 and $0 at March 31, 2010  and December 31, 2009, respectively                                                                                                |       | 543,942                 |           | 341,614                        |       |
| Prepaid expenses and  other current assets                                                                                                                                                                                             |       | 376,098                 |           | 271,966                        |       |
|                                                                                                                                                                                                                                   |       | 10,961,242              |           | 6,694,574                      |       |
| **Long-term  assets**                                                                                                                                                                                                                  | * *   | * *                | * *       | * *                       | * *   |
| Property and equipment,  net                                                                                                                                                                                                           |       | 907,344                 |           | 879,833                        |       |
| Other long-term assets                                                                                                                                                                                                                 |       | 14,756                  |           | 36,360                         |       |
|                                                                                                                                                                                                                                   |       | 922,100                 |           | 916,193                        |       |
| **Total  assets**                                                                                                                                                                                                                      | ** ** | **$**                   | **11,883,342** | ** **                     | **$**      | **7,610,767** | ** ** |
|                                                                                                                                                                                                                                   | ** ** | ** **              | * *       | * *                       | * *   |
| **LIABILITIES  AND SHAREHOLDERS’ EQUITY**                                                                                                                                                                                         | * *   | * *                | ** **     | ** **                     | ** ** |
| ** **                                                                                                                                                                                                                             | * *   | * *                | ** **     | ** **                     | ** ** |
| **Current  liabilities**                                                                                                                                                                                                               | ** ** | ** **              | ** **     | ** **                     | ** ** |
| Accounts payable and  accrued liabilities                                                                                                                                                                                              |       | $                       | 1,491,511      |                           | $          | 1,541,166 |   |
| Accrued compensation                                                                                                                                                                                                                   |       | 881,242                 |           | 645,306                        |       |
| Note payable - short  term, net                                                                                                                                                                                                        |       | 135,253                 |           | 110,971                        |       |
| ** **                                                                                                                                                                                                                             |       | 2,508,006               |           | 2,297,443                      |       |
| **Long-term  liabilities**                                                                                                                                                                                                             |       |                    |           |                           |       |
| Note payable - long  term, net                                                                                                                                                                                                         |       | 580,123                 |           | 580,123                        |       |
| Other long term  liabilities                                                                                                                                                                                                           |       | 73,821                  |           | 74,215                         |       |
|                                                                                                                                                                                                                                   |       |                    |           |                           |       |
| **Total  liabilities**                                                                                                                                                                                                                 |       | 3,161,950               |           | 2,951,781                      |       |
|                                                                                                                                                                                                                                   | ** ** | ** **              | ** **     | ** **                     | ** ** |
| **Commitments  and Contingencies**                                                                                                                                                                                                     | ** ** | ** **              | ** **     | ** **                     | ** ** |
|                                                                                                                                                                                                                                   | ** ** | ** **              | ** **     | ** **                     | ** ** |
| **Shareholders’  equity (deficit)**                                                                                                                                                                                               | ** ** | ** **              | ** **     | ** **                     | ** ** |
| Preferred stock $.01  par value; 1,000,000 shares authorized; no shares issued or outstanding                                                                                                                                          |       | **—**              |           | **—**                     |       |
| Common stock $.001 par  value; 50,000,000 shares authorized; 14,730,991 issued and outstanding at  March 31, 2010 and no par value; unlimited shares authorized; 13,312,265  issued and and outstanding at December 31, 2009 | ** ** | 14,731                  | ** **     | 325,279,751                    | ** ** |
| Additional  paid-in-capital                                                                                                                                                                                                            |       | 351,138,768             |           | 18,389,635                     |       |
| Cumulative other  comprehensive loss                                                                                                                                                                                                   |       | (2,535                  | )              | (6,285,577                     | )          |
| Accumulated deficit                                                                                                                                                                                                                    |       | (342,429,572            | )              | (332,724,823                   | )          |
| Total shareholders’  equity                                                                                                                                                                                                       |       | 8,721,392               |           | 4,658,986                      |       |
| **Total  liabilities and shareholders’ equity**                                                                                                                                                                                   | ** ** | **$**                   | **11,883,342** | ** **                     | **$**      | **7,610,767** | ** ** |

 

(See accompanying notesto the condensed consolidated financial statements)

 

(1)  Derived from the Company’s auditedconsolidated financial statements as of December 31, 2009.

 

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**WORLD HEART CORPORATION**

## **Condensed Consolidated Statements of Operations**

(United States Dollars)

(Unaudited)

 
| ** **                                                                  | ** ** | **Three Months Ended March 31,** | ** **     |
|-----------------------------------------------------------------------------|------------|----------------------------------|----------------|
| ** **                                                                  | ** ** | **2010**                         | ** **     | **2009** | ** ** |
| **Revenue**                                                                 |       | $                                | 555,651        |   | $ | 4,765 |   |
| **Cost of goods sold**                                                      |       | (417,084                         | )              | (28,238 | ) |
| ** **                                                                  |       |                             |           |   |   |
| **Gross  profit (loss)**                                                    |       | 138,567                          |           | (23,473 | ) |
|                                                                        |       |                             |           |   |   |
| **Operating  expenses**                                                     |       |                             |           |   |   |
| Selling, general and  administrative                                        |       | 1,192,704                        |           | 1,442,885 |   |
| Research and  development                                                   |       | 2,321,796                        |           | 2,103,931 |   |
| Restructuring costs                                                         |       | —                           |           | 52,718 |   |
| Amortization of  intangibles                                                |       | —                           |           | 47,856 |   |
| **Total  operating expenses**                                               |       | 3,514,500                        |           | 3,647,390 |   |
|                                                                        |       |                             |           |   |   |
| **Operating  loss**                                                         |       | (3,375,933                       | )              | (3,670,863 | ) |
|                                                                        |       |                             |           |   |   |
| **Other  income (expenses)**                                                |       |                             |           |   |   |
| Foreign exchange (loss)  gain                                               |       | (12,569                          | )              | 11,509 |   |
| Investment and other  income                                                |       | 4,390                            |           | 8,330 |   |
| Loss on liquidation of  foreign entity                                      |       | (6,285,574                       | )              | — |   |
| Interest expense                                                            |       | (35,063                          | )              | (400 | ) |
| **Net  loss**                                                               | ** ** | **$**                            | **(9,704,749** | **)** | **$** | **(3,651,424** | **)** |
|                                                                        |       |                             |           |   |   |
| **Weighted  average number of common stock outstanding: basic and diluted** |       | 14,336,901                       |           | 13,253,964 |   |
|                                                                        |       |                             |           |   |   |
| **Basic  and diluted loss per common share**                                |       | $                                | (0.68          | ) | $ | (0.28 | ) |

 

(See accompanying notesto the condensed consolidated financial statements)

 

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**WORLD HEART CORPORATION**

**Condensed Consolidated Statements of Cash Flow**

(United StatesDollars)

(Unaudited)

 
| ** **                                                           | ** ** | **Three Months Ended March 31,** | ** **    |
|----------------------------------------------------------------------|------------|---------------------------------------|---------------|
| ** **                                                           | ** ** | **2010**                              | ** **    | **2009** | ** ** |
| ** **                                                           |       |                                  |          |   |   |
| Net loss for the period                                              |       | $                                     | (9,704,749    | ) | $ | (3,651,424 | ) |
| Adjustments to  reconcile net loss to net cash used in operations:   |       |                                  |          |   |   |
| Amortization and  depreciation                                       |       | 58,933                                |          | 88,670 |   |
| Non-cash stock-based  compensation expense                           |       | 467,936                               |          | 103,829 |   |
| Non-cash expense on  loss on liquidation of foreign entity           |       | 6,285,574                             |          | — |   |
| Imputed interest on  debt                                            |       | 24,285                                |          | — |   |
| Unrealized foreign  exchange loss                                    |       | —                                |          | (9,261 | ) |
| **Change  in operating components of working capital:**              |       |                                  |          |   |   |
| Trade receivables                                                    |       | (148,370                              | )             | 262,425 |   |
| Prepaid expenses and  other current assets                           |       | (82,528                               | )             | (236,623 | ) |
| Inventory                                                            |       | (202,328                              | )             | — |   |
| Accounts payable and  accrued liabilities                            |       | (49,655                               | )             | 62,773 |   |
| Accrued compensation                                                 |       | 235,936                               |          | 133,461 |   |
| **Cash  used in operating activities**                               | ** ** | **(3,114,966**                        | **)**         | **(3,246,150** | **)** |
|                                                                 |       |                                  |          |   |   |
| **Investing  activities**                                            |       |                                  |          |   |   |
| Purchase of marketable  investment securities                        |       | (2,033,219                            | )             | — |   |
| Purchase of property  and equipment                                  |       | (86,447                               | )             | (64,149 | ) |
| **Cash  used in investing activities**                               | ** ** | **(2,119,666**                        | **)**         | **(64,149** | **)** |
|                                                                 |       |                                  |          |   |   |
| **Financing  activities**                                            |       |                                  |          |   |   |
| Issuance of common  shares through private placement, net            |       | 7,016,177                             |          | — |   |
| Capital lease  repayments                                            |       | (394                                  | )             | (1,271 | ) |
| **Cash  provided by (used in) financing activities**                 | ** ** | **7,015,783**                         | ** **    | **(1,271** | **)** |
| **Effect  of exchange rates on cash and cash equivalents**           | ** ** | **—**                            | ** **    | **1,517** | ** ** |
| **Increase  (decrease) in cash and cash equivalents for the period** | ** ** | **1,781,151**                         | ** **    | **(3,310,053** | **)** |
| **Cash  and cash equivalents, beginning of the period**              | ** ** | **5,562,670**                         | ** **    | **20,703,724** | ** ** |
| **Cash  and cash equivalents, end of the period**                    | ** ** | **$**                                 | **7,343,821** | ** ** | **$** | **17,393,671** | ** ** |
| ** **                                                           | ** ** | ** **                            |          |   |   |
| **Supplementary  cash flow information:**                            |       |                                  |          |   |   |
| Interest paid on capital  lease                                      |       | $                                     | 396           |   | $ | 399 |   |

 

(See accompanyingnotes to the condensed consolidated financial statements)

 

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**WORLDHEART CORPORATION**

#### **Notes toUnaudited Condensed Consolidated Financial Statements**

 

**1.****                                     ****Nature of Operations of the Company**

 

WorldHeart Corporation,together with its subsidiaries (collectively referred to as WorldHeart or theCompany), is focused on developing and commercializing implantable ventricularassist devices (VADs), which are mechanical pumps that allow for therestoration of normal blood circulation to patients suffering from advancedheart failure. WorldHeart has facilities in Salt Lake City, Utah, and Oakland,California. The Company is currently focusing on the development of itsnext-generation LevacorTM Rotary VAD (or Levacor VAD). In August 2009, theCompany received a conditional Investigational Device Exception (IDE) from theU.S. Food and Drug Administration (FDA) for the Levacor VAD.  In January 2010, the Company receivedunconditional IDE from the FDA for the Levacor VAD in a Bridge-to-Transplant(BTT) clinical study and enrolled the first patient in January 2010. TheCompany expects to realize cost recoveries from the use of the Levacor VAD inthe U.S. clinical trials. Such recoveries are expected to be an important partof the Company’s overall operating cash flows. The Company is also developing asmall, magnetically levitated minimally invasive VAD (MiVAD) aimed at providingpartial circulatory support to patients in an earlier stage of heart failure.

 

**2.****                                     ****Summary of Significant Accounting Policies**

 

**(a)****         ****Basis of Presentation and Principlesof Consolidation**

 

The condensedconsolidated financial statements have been prepared by management inaccordance with accounting principles generally accepted in the United States(U.S. GAAP), and include all assets, liabilities, revenues, and expenses of theCompany and its wholly owned subsidiaries; World Heart, Incorporated (WHI) andWorld Heart B.V. (WHBV). All material intercompany transactions and balanceshave been eliminated. These interim unaudited condensed consolidated financialstatements and notes thereto should be read in conjunction with Management’sDiscussion and Analysis of Financial Condition and Results of Operations andthe audited financial statements and notes thereto included in the Company’sAnnual Report on Form 10-K for the year ended December 31, 2009.Certain information required by U.S. GAAP has been condensed or omitted inaccordance with the rules and regulations of the SEC. The results for theperiod ended March 31, 2010 are not necessarily indicative of the resultsto be expected for the entire fiscal year ended December 31, 2010 or forany future period.

 

**(b)****         ****Use of Estimates**

 

The preparation of thecondensed consolidated financial statements in accordance with U.S. GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities and disclosure of contingent assets and liabilitiesat the dates of the financial statements and the reported amounts of revenueand expenses during the reporting periods. Such management estimates includeallowance for doubtful accounts, sales and other allowances, inventoryreserves, income taxes, realizability of deferred tax assets, stock-basedcompensation, deferred revenue, warranty, restructuring, legal and clinicalreserves. The Company bases their estimates on historical experience and onvarious other assumptions that the Company believes to be reasonable under thecircumstances. Actual results could differ from these estimates.

 

**(c)****         ****Cash Equivalents**

 

Cash equivalents includemoney market funds, debt instruments of commercial enterprises, financialinstitutions and government entities. The Company has established guidelinesrelative to credit ratings, diversification and maturities that are intended tomitigate risk and provide liquidity. Cash equivalents include highly liquid andhighly rated investments with maturity periods of three months or less whenpurchased. The composition and maturities are regularly monitored bymanagement.

 

**(d)****         ****Marketable Investment Securities,Financial Instruments and Fair Value**

 

The Company classifiesits marketable investment securities as available for sale. Available for salesecurities are recorded at fair value. Unrealized holding gains and losses, netof the related tax effect, are excluded from earnings and are reported as aseparate component of stockholder’s equity until realized. A decline in themarket value below cost that is deemed other than temporary is charged to otherincome (expense) results of operations resulting in the establishment of a newcost basis for the security. Premiums and discounts are amortized or accretedinto the cost basis over the life of the related security as adjustments toyield using the effective-interest method. Interest income is recognized whenearned. Realized gains and losses from the sale of marketable investmentsecurities are based on the specific identification method and are included inresults of operations and are determined on the specific identification basis.

 

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**WORLDHEART CORPORATION**

#### **Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

The Company’s financialinstruments are cash and cash equivalents, marketable investment securities,accounts receivable, accounts payable, accrued liabilities and notespayable.  The recorded values of cash andcash equivalents, accounts receivable, and accounts payable approximate thefair values based on their short-term nature. The fair value of marketable  investment securities is estimated based uponquoted market prices. The recorded values of notes payable, net of thediscount, approximate the fair value as the interest approximates market rates.

 

The Company measurescertain financial assets (cash and cash equivalents and marketable investmentsecurities) at fair value on a recurring basis. The Company’s investments incash and cash equivalents and marketable investment securities are classifiedwithin Level 1 of the fair value hierarchy because they are valued basedon quoted market prices in active markets.

 

**(e)****         ****Concentration of Credit Risk**

 

Financial instrumentsthat potentially subject the Company to significant concentrations of creditrisk consist primarily of cash investments, marketable investment securitiesand accounts receivable. Substantially, all of the Company’s liquid cashequivalents are invested primarily in money market funds. Additionally, theCompany has limited investments in marketable investment securities, primarilycomprised of certificates of deposit. The Company had $167,277 and $0 in tradeaccounts receivable as of March 31, 2010 and December 31, 2009,respectively. Beginning in 2010, with the commencement of the BTT clinicaltrial, the Company’s trade accounts receivable is derived from three customersall located in the United States. The Company performs ongoing creditevaluations of its customers and generally will not require collateral. TheCompany maintains reserves for potential credit losses. Write-offs during theperiods presented have been insignificant.

 

**(f) Inventory**

 

Inventoriesare stated at the lower cost or market. Cost is determined on a first-in, firstout (FIFO) method. The Company utilizes a standard costing system, whichrequires significant management judgment and estimates in determining andapplying standard labor and overhead rates.Labor and overhead rates are estimated based on theCompany’s best estimate of annual production volumes and labor rates and hoursper manufacturing process. These estimates are based on historical experienceand budgeted expenses and production volume. Estimates are set at the beginningof the year and updated periodically. While the Company believes standard costsare reliable, actual production costs and volume change may impact inventory,costs of sales and the absorption of production overhead expenses.

 

The Company reviewsinventory for excess or obsolete inventory and writes down obsolete orotherwise unmarketable inventory to its estimated net realizable value.

 

The Company included ininventory materials and finished goods that can be held for sale or used innon-revenue clinical trials. Products consumed in non-revenue clinical trialsare expensed as part of research and development when consumed.

 

Prior to August 23,2009, all costs associated with manufacturing the Levacor VAD and relatedsurgical and peripheral products were expensed as research and developmentcosts. Therefore, cost of goods sold of the Levacor VAD will be lower untilzero cost inventories are fully consumed.

 

**(g) Propertyand Equipment**

 

Capital assets arerecorded at cost. Depreciation and amortization are calculated over estimateduseful lives ranging from 1 to 15 years using the following rates andbases:

 
| Furniture and fixtures                     |   | 20% declining balance                                               |
|--------------------------------------------|--------|---------------------------------------------------------------------|
| Computer  equipment and software      |   | 30% declining balance                                               |
| Manufacturing  and research equipment |   | 30% declining balance                                               |
| Leasehold improvements                     |   | Straight-line over the  shorter of the lease term or estimated life |

 

The carrying value ofproperty and equipment is assessed when factors indicating a possibleimpairment are present. The Company records an impairment loss in the periodwhen it is determined that the carrying amounts may not be recoverable. Theimpairment loss would be calculated as the amount by which the carrying amountexceeds the undiscounted future cash flows from the asset.

 

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**WORLD HEART CORPORATION**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

**(h) IncomeTaxes**

 

Income taxes are providedfor using the asset and liability method whereby deferred tax assets andliabilities are recognized using current tax rates on the difference betweenthe financial statement carrying amounts and the respective tax basis of theassets and liabilities. The Company provides a valuation allowance on deferredtax assets when it is more likely than not that such assets will not berealized.

 

The Company adopted theprovisions of Financial Accounting Standards Codification (ASC) 740, IncomeTaxes, on January 1, 2007. As required by ASC 740, the Company recognizesthe financial statement benefit of a tax position only after determining thatthe relevant tax authority would more likely than not sustain the positionfollowing an audit. For tax positions meeting this standard, the amountrecognized in the financial statements is the largest benefit that has agreater than 50 percent likelihood of being realized upon ultimatesettlement with the relevant tax authority. At the adoption date, the Companyapplied ASC 740 to all tax positions for which the statute of limitationsremained open.

 

**(i) RevenueRecognition, Trade Receivables and Deferred Revenue**

 

The Company recognizesrevenue from product sales in accordance with ASC 605, Revenue Recognition.Pursuant to purchase agreements or orders, the Company ships product tocustomers based on existing agreements or orders. Revenue from product sales isonly recognized when substantially all the risks and rewards of ownership havetransferred to the customer, the selling price is fixed and collection isreasonably assured. Beginning in 2010, a majority of the Company’s productsales are made on a consignment basis and as such, pursuant to the terms of theconsignment arrangements, revenue is generally recognized on the date theconsigned product is implanted or otherwise consumed. Revenue from productsales not sold on a consignment basis is generally recognized upon customerreceipt and acceptance of the product. Beginning in 2010, revenue recognized isfrom sales of the Levacor VAD in connection with our BTT clinical trial.

 

The significant elementsof the Company’s multiple-element offerings are implant kits, peripherals,training and one-time post-implant support for new centers. For arrangementswith multiple elements, the Company recognizes revenue using the residualmethod as described in ASC 985-605, Revenue Recognition-Software  or ASC 605-25, Revenue Recognition ofMultiple Element Arrangements. Under the residual method, revenue is allocated anddeferred for the undelivered elements based on relative fair value. Thedetermination of fair value of the undelivered elements in multiple elementsarrangements is based on the price charged when such elements are soldseparately, which is commonly referred to as vendor-specific objective-evidence(VSOE). Each element’s revenue is recognized when all of the revenuerecognition criteria are met for each of the elements.

 

Trade receivables arerecorded for product sales and do not bear interest. The Company regularlyevaluates the collectability of trade receivables. An allowance for doubtfulaccounts is maintained for estimated credit losses. When estimating creditlosses, the Company considers a number of factors including the aging of acustomer’s account, credit worthiness of specific customers, historical trendsand other information. The Company reviews its allowance for doubtful accountsmonthly. At March 31, 2010 and December 31, 2009, the allowance fordoubtful accounts was $0 and $238,854 respectively.

 

**(j) Warranty**

 

The Company warrants itsproducts for various periods against defects in material or installationworkmanship. Warranty costs are based on historical experience and estimatedand recorded when the related sales are recognized. Any additional costs arerecorded when incurred or when they can reasonably be estimated.

 

The Company provides fora six month warranty related to the sale of its Levacor VAD system peripherals.The warranty reserve, which is included in accounts payable and accruedliabilities, totaled $10,000 and $44,000 at March 31, 2010 and December 31,2009, respectively.

 

**(k) Researchand Development Costs**

 

Research and development(R&D) costs, including research performed under contract by third parties,are expensed as incurred. For the purchase of research and developmenttechnology under an assignment or license agreement, the Company recordsR&D expense in accordance with ASC 730, Research and Development .

 

**(l) Stock-BasedCompensation**

 

The Company accounts forstock based compensation in accordance with ASC 718, Stock Compensation, whichrequires the recognition of the fair value of stock compensation as an expensein the calculation of net income (loss). The Company recognizes stockcompensation expense in the period in which the employee is required to provideservice, which is generally over the vesting period of the individual equityinstruments. Stock options issued in lieu of cash to non-employees for servicesperformed are recorded at the fair value of the options at the time they areissued and are expensed as service is provided.

 

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**WORLD HEART CORPORATION**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

**(m) Shippingand Handling Costs**

 

In accordance with ASC605-45-20, Revenue Recognition: Principal Agent Considerations, the Companyrecords freight billed to its customers as sales of product and services andthe related freight costs as a cost of sales, product and services. The Company’sshipping and handling costs are not significant.

 

**(n) ****Restructuring Expense**

 

The Company records costs and liabilitiesassociated with exit and disposal activities, as defined in ASC 420, Exit orDisposal Cost Obligations, based on estimates of fair value in the period theliabilities are incurred. In periods subsequent to initial measurement, changesto the liability are measured using the credit-adjusted risk-free discount rateapplied in the initial period.

 

The liability isevaluated and adjusted as appropriate for changes in circumstances. During thethree months ended March 31, 2010 and 2009, the Company recordedrestructuring expense of $0 and $52,718, respectively, primarily attributableto one-time termination costs relating to workforce reduction, severance,retention and relocation. As of March 31, 2010, the accrued liabilityrelating to restructuring charges totaled $12,000.

 

**(o) ForeignCurrency Translation and Functional Currency**

 

Since January 1,2004, the functional currency of the Company has been the U.S. dollar. Theaccumulated other comprehensive loss on the balance sheet at December 31,2009 represents the impact of converting to U.S. dollars from Canadian dollarsprior to January 1, 2004. Effective January 1, 2010, World Heart Corpchanged its jurisdiction of incorporation from the federal jurisdiction ofCanada to the state of Delaware in the United States through a plannedarrangement and substantially terminated a majority of operations outside theUnited States. As a result the Company recorded a loss on liquidation offoreign entity of $6.3 million during the three months ended March 31,2010 which represented the other comprehensive loss on the balance sheet at December 31,2009. Exchange gains and losses are included in the net loss for the year.

 

**(p) Reclassification**

 

The accompanying consolidated financial statementscontain certain reclassifications to conform to the presentation used in thecurrent period. The reclassifications had no impact on shareholders’ equity,working capital, gross profit or net income.

 

**(q) Earningsper Share**

 

Basicearnings per share are computed by dividing net income (loss) by the weighted averagenumber of common shares outstanding during the period presented. Dilutedearnings per share are computed using the weighted average number of commonshares outstanding during the periods plus the effect of dilutive securitiesoutstanding during the periods. For the three months ended March 31, 2010and March 31, 2009, basic earnings per share are the same as dilutedearnings per share as a result of the Company’s common stock equivalents beinganti-dilutive.

 

The followingreconciliation shows the anti-dilutive shares excluded from the calculation ofbasic and diluted earnings (loss) per common share attributable to the Companyfor the three months ended March 31, 2010:

 
| ** **                        | ** ** | **March 31,** | ** ** | **March 31,** | ** ** |
|-----------------------------------|------------|--------------------|------------|--------------------|------------|
| ** **                        | ** ** | **2010**           | ** ** | **2009**           | ** ** |
|                              |       |               |       |               |       |
| Gross number of shares  excluded: |       |               |       |               |       |
| Warrants                          |       | 25,416             |       | 84,395             |       |
| Stock options                     |       | 1,647,617          |       | 1,059,693          |       |
|                              |       | 1,673,033          |       | 1,144,088          |       |

 

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**WORLD HEART CORPORATION**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

**3.****                                     ****Marketable Investment Securities**

 

The Company’s short terminvestments consist primarily of investments in certificates of deposit.  All investments are classified as availablefor sale. Marketable investment securities available for sale as of March 31,2010 are summarized as follows:

 
| ** **                              | ** ** | **Amortized Cost** | ** ** | **Gross unrealized  holding gains** | ** ** | **Gross unrealized  holding losses** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|--------------------|------------|-------------------------------------|------------|--------------------------------------|------------|----------------|------------|
|                                    |       |                    |       |                                |       |                                 |       |           |       |
| Certificates  of deposit                |       | $                  | 2,532,639  |                                | —     |                                 | (2,535     | )              | $          | 2,530,104 |   |
| Total  marketable investment securities |       | $                  | 2,532,639  |                                | $          | —                               |       | $              | (2,535     | ) | $ | 2,530,104 |   |
|                                         |            |                    |            |                                     |            |                                      |            |                |            |  |  |  |  |

 

Maturities of marketableinvestment securities as of March 31, 2010 are as follows:

 
| ** **                              | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|-----------------------------------------|------------|--------------------|------------|----------------|------------|
| Due within one year                     |       | $                  | 2,512,639  |           | $          | 2,510,104 |   |
| Due after one year  through five years  |       | 20,000             |       | 20,000         |       |
| Total marketable  investment securities |       | 2,532,639          |       | 2,530,104      |       |
|                                         |            |                    |            |                |            |  |  |

 

**4.****                                     ****Property and Equipment**

 

As of March 31, 2010and December 31, 2009, property and equipment consisted of the following:

 
| ** **                                   | ** ** | **March 31, 2010** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|
| ** **                                   | ** ** | **Cost**                | ** ** | **Accumulated  Depreciation/  Amortization** | ** ** | **Net Book Value** | ** ** |
| Furniture &  fixtures               |       | $                       | 168,401    |   | $ | (120,846 | ) | $ | 47,555 |   |
| Computer  equipment & software      |       | 646,285                 |       | (531,395 | ) | 114,890 |   |
| Manufacturing &  research equipment |       | 2,636,167               |       | (2,040,855 | ) | 595,312 |   |
| Leasehold improvements                       |       | 570,217                 |       | (420,630 | ) | 149,587 |   |
|                                         |       | $                       | 4,021,070  |   | $ | (3,113,726 | ) | $ | 907,344 |   |

 
| ** **                                   | ** ** | **December 31, 2009** | ** ** |
|----------------------------------------------|------------|----------------------------|------------|
| ** **                                   | ** ** | **Cost**                   | ** ** | **Accumulated  Depreciation/  Amortization** | ** ** | **Net Book Value** | ** ** |
| Furniture &  fixtures               |       | $                          | 168,402    |   | $ | (117,552 | ) | $ | 50,850 |   |
| Computer  equipment & software      |       | 630,822                    |       | (522,963 | ) | 107,860 |   |
| Manufacturing &  research equipment |       | 2,566,844                  |       | (2,009,146 | ) | 557,698 |   |
| Leasehold improvements                       |       | 568,792                    |       | (405,366 | ) | 163,426 |   |
|                                         |       | $                          | 3,934,860  |   | $ | (3,055,027 | ) | $ | 879,833 |   |

 

Depreciation expense forthe three months ended March 31, 2010 and March 31, 2009 was $58,933and $40,814, respectively.

 

**5.****                                     ****Inventory**

 

Inventories are stated atthe lower of cost or market, with cost determined on a first-in, first-outbasis. During the quarter ended March 31, 2010, inventory balances wereas follows:

 
| ** **       | ** ** | **March 31, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------|------------|-------------------------|------------|----------------------------|------------|
| Raw materials    |       | 6,612                   |       | 131,614                    |       |
| Work in progress |       | 103,388                 |       | 210,000                    |       |
| Finished goods   |       | 433,942                 |       | —                     |       |
| Total inventory  |       | $                       | 543,942    |                       | $          | 341,614 |   |
|                  |            |                         |            |                            |            |  |  |

 

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**WORLD HEART CORPORATION**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

Finished goods inventoryon consignment at customer sites was $200,000 at March 31, 2010 and $0 at December 31,2009.

 

**6.****                                     ****Current Liabilities**

 

*Accounts Payable and Accrued Liabilities*

 

Accounts payable and accrued liabilitiesconsist of the following:

 
| ** **                                          | ** ** | **March 31, 2010** | ** **    | **December 31, 2009** | ** ** |
|-----------------------------------------------------|------------|-------------------------|---------------|----------------------------|------------|
| Accounts payable                                    |       | $                       | 166,009       |                       | $          | 368,219 |   |
| Accrued liabilities                                 |       | 1,315,502               |          | 1,128,947                  |       |
| Accrued warranty                                    |       | 10,000                  |          | 44,000                     |       |
| **Total  accounts payable and accrued liabilities** | ** ** | **$**                   | **1,491,511** | ** **                 | **$**      | **1,541,166** | ** ** |

 

*Accrued Compensation*

 

Accruedcompensation includes accruals for employee wages, Board of Director fees,severance, relocation benefits, vacation, and performance bonus. The componentsof accrued compensation, inclusive of payroll taxes, are as follows:

 
| ** **                      | ** ** | **March 31, 2010** | ** **  | **December 31, 2009** | ** ** |
|---------------------------------|------------|-------------------------|-------------|----------------------------|------------|
| Wages                           |       | $                       | 115,054     |                       | $          | 50,090 |   |
| Severance                       |       | 12,087                  |        | 77,524                     |       |
| Vacation                        |       | 400,872                 |        | 326,526                    |       |
| Bonuses                         |       | 353,229                 |        | 191,166                    |       |
| **Total  accrued compensation** | ** ** | **$**                   | **881,242** | ** **                 | **$**      | **645,306** | ** ** |

 

*Performance Bonus*

 

Annually, the Compensation Committee of theBoard of Directors, in conjunction with the entire Board of Directors, approvesthe corporate goals and objectives for the year with corresponding weightingand payout. Subsequent to each year end, typically before the end of the firstquarter of the year following, the Compensation Committee reviews accomplishmentof corporate goals and recommends bonus payout, including executive officerspayouts. The Board of Directors reviews the Compensation Committeerecommendation, modifies as appropriate, and approves the performance bonuspayouts. As of March 31, 2010, accrued bonuses for the 2009 and 2010Performance Bonus Plan were $191,166 and $162,063, respectively. As of April 23,2010, majority of accrued bonuses for the 2009 Performance Bonus Plan had beenpaid. The accrued bonus as of December 31, 2009 relates to the 2009Performance Bonus Plan.

 

**7.****                                     ****Shareholders’ Equity**

 

EffectiveJanuary 1, 2010, World Heart Corporation changed its jurisdiction ofincorporation from the federal jurisdiction of Canada to the state of Delawarein the United States through a planned arrangement. The certificate ofincorporation in Delaware authorizes the issuance of a total of51.0 million shares, consisting of 50.0 million shares of commonstock and 1.0 million shares of preferred stock. Each share of commonstock will have a par value of $0.001 and each share of preferred stock willhave a par value of $0.01. As a result of this, the Company reclassifiedapproximately $325.3 million out of common stock and into additional-paid-incapital.

 

Prior to thereincorporation of the Company from Canada to Delaware, the Company hadrecorded $6.3 million cumulative translation adjustment related to theconversion of foreign subsidiaries into the reporting currency.   Asa result of the reincorporation from Canada to Delaware and subsequentliquidation of the Company’s entity in Canada, the Company applied ASC 830,Foreign Currency Matters, and recorded a $6.3 million non-cash loss on theliquidation of foreign subsidiary in the three months ended March 31, 2010a $6.3 million non-cash loss on the liquidation of foreign subsidiary, andwrote off the balance of cumulative translation adjustment.

 

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**WORLD HEART CORPORATION**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

On January 26,2010, the Company completed a private placement of common stock and warrants topurchase common stock. Gross proceeds from the offering were approximately$7.3 million. The Company issued an aggregate of 1,418,726 newly issuedshares of common stock at an issue price of $5.15 per share. Additionally, theCompany issued warrants to purchase up to 2,837,452 additional shares of commonstock at an exercise price of $4.90 per share. The placement agent for thetransaction received a placement fee of approximately $60,000 and the Companyincurred other related professional fees of approximately $230,000. Inconnection with the private placement, the Company filed a registrationstatement under the Securities Act on Form S-3 covering the registrationof the common stock and warrants in March 2010 which was declaredeffective in April 2010.

 

**Other Comprehensive Income (Loss)**

 

For the three monthsended March 31, 2010, the Company’s other comprehensive loss was $2,535higher than the net loss resulting from unrealized losses from the Company’sinvestments on available for sale securities. For the three months ended March 31,2009, no such losses were recorded and there were no differences between theCompany’s other comprehensive loss and its net loss.

 

**Common Stock**

 

Authorized common shares of the Company consist of50.0 million shares of common stock with a par value of $.001 per share.

 

**Preferred Stock**

 

Authorized preferred shares of the Company consist of1.0 million shares of preferred stock with a par value of $.01 per share.

 

**EmployeeStock Option Plan**

 

The Company has anemployee stock option plan, the 2006 Equity Incentive Plan (Incentive Plan).The exercise price for all equity awards issued under the Incentive Plan isbased on the fair market value of the common share price which is the closingprice quoted on the NASDAQ Stock Exchange on the last trading day before thedate of grant. The stock options generally vest over a four-year or three-yearperiod, first year cliff vesting with monthly vesting thereafter on thefour-year awards and annually in equal portions on the three-year awards, andhave a ten year life.

 

The Incentive Plan allows for the issuance ofrestricted stock awards, restricted stock unit awards, stock appreciation rights,performance shares and other stock-based awards, in addition to stock options.An aggregate of 2,166,667 shares are authorized for future issuance under theIncentive Plan. As of March 31, 2010, there are 519,042 shares reservedfor future grants under the Incentive Plan.

 

**Stock-based Compensation**

 

The Company accounts forstock based compensation in accordance with ASC 718, *Stock BasedCompensation*, which requires the recognition of the fair value ofstock compensation as an expense in the calculation of net income. ASC 718requires that stock-based compensation expense be based on awards that areultimately expected to vest. Stock-based compensation for the three monthsended March 31, 2010 and 2009 have been reduced for estimated forfeitures.When estimating forfeitures, voluntary termination behaviors, as well as trendsof actual option forfeitures are considered. To the extent actual forfeituresdiffer from the Company’s current estimates, cumulative adjustments to stock-based compensation expense are recorded.

 

Exceptfor transactions with employees and directors that are within the scope of ASC718, all transactions in which goods or services are the consideration receivedfor the issuance of equity instruments are accounted for based on the fairvalue of the consideration received or the fair value of the equity instrumentsissued, whichever is more reliably measurable.

 

TheCompany uses the Black-Scholes valuation model for estimating the fair value ofstock compensation. The stock-based compensation expense for the three monthsended March 31, 2010 and 2009, respectively were as follows:

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|
| ** **                           | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| Selling, general and  administrative |       | $                                     | 239,811    |   | $ | 74,518 |   |
| Research and  development            |       | 228,125                               |       | 29,311 |   |
| Total                                |       | $                                     | 467,936    |   | $ | 103,829 |   |

 

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**WORLD HEART CORPORATION**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

As ofApril 1, 2010, $3,732,746 of total unrecognized compensation cost relatedto stock options is expected to be recognized over a period of approximately 16quarters.

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of all outstanding options and the quoted price of the Company’s commonstock that were in the money at March 31, 2010. At March 31, 2010,the aggregate intrinsic value of all outstanding options was $3,152,159 with aweighted average remaining contractual term of approximately 9.1 years. Ofthe 1,647,614 outstanding options, 327,617 options were vested and exercisable,with a weighted average remaining contractual life of 8.7 years and1,319,998 options were unvested, with a weighted average remaining contractuallife of 9.2 years. No options were exercised under the Company’s IncentivePlan during the three months ended March 31, 2010 and 2009.

 

A summary of thestatus and changes the Company’s non-vested options, subject to ASC 718 calculationfor the three months ended March 31, 2010 and 2009 are presented below:

 
| ** **                        | ** ** | **Shares**    | ** ** | **Weighted Average  Grant-Date Fair Value** | ** ** |
|-----------------------------------|------------|---------------|------------|---------------------------------------------|------------|
| Nonvested at January 1, 2010 |       | 1,468,948     |       | $                                           | 3.62       |   |
| Granted                           |       | 136,273       |       | 5.41                                        |       |
| Vested                            |       | (284,373      | )          | 3.26                                        |       |
| Forfeited                         |       | (850          | )          | 4.19                                        |       |
| Nonvested at  March 31, 2010 | ** ** | **1,319,998** | ** ** | **$**                                       | **3.88**   | ** ** |

 

Thefollowing table summarizes stock option and warrant activity for the threemonths ended March 31, 2010:

 
| ** **                             | ** ** | **Employees** | ** ** | **Non-Employees**  | ** ** | ** **   | ** ** | ** **   | ** ** | ** **   | ** ** |
|----------------------------------------|------------|---------------|------------|--------------------|------------|--------------|------------|--------------|------------|--------------|------------|
| ** **                             | ** ** | ** **    | ** ** | ** **         | ** ** | **Weighted** | ** ** | ** **   | ** ** | ** **   | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **    | ** ** | **Weighted**       | ** ** | ** **   | ** ** | **average**  | ** ** | ** **   | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | ** **    | ** ** | **average**        | ** ** | ** **   | ** ** | **exercise** | ** ** | ** **   | ** ** | **average** | ** ** | ** ** | ** ** |
| ** **                             | ** ** | **Options**   | ** ** | **exercise price** | ** ** | **Options**  | ** ** | **price**    | ** ** | **Warrants** | ** ** | **exercise price** | ** ** | **Total** | ** ** |
| Outstanding  at December 31, 2009 |       | 1,384,687     |       | $                  | 6.91       |         | 127,801    |         | $          | 10.85        |       | 25,416 |   | $ | 4.91 |   | 1,537,904 |   |
| Granted                                |       | 136,273       |       | 6.01               |       | —       |       | —       |       | —       |       | — |   | 136,273 |   |
| Expired                                |       | (297          | )          | 117.51             |       | —       |       | —       |       | —       |       | — |   | (297 | ) |
| Forfeited                              |       | (850          | )          | 4.46               |       | —       |       | —       |       | —       |       | — |   | (850 | ) |
| Outstanding  at March 31,2010     |       | 1,519,813     |       | $                  | 6.81       |         | 127,801    |         | $          | 10.85        |       | 25,416 |   | $ | 4.91 |   | 1,673,030 |   |

 

*ValuationAssumptions*

 

TheCompany calculates the fair value of each equity award on the date of grantusing the Black-Scholes option pricing model. During the three months ended March 31,2010 and 2009, 136.273 and 1,027,169 stock options were granted, respectively.The weighted average fair value of the options granted during the three monthsended March 31, 2010 and 2009 was $5.41 and $2.42, respectively. For threemonths ended March 31, 2010 and 2009, the following weighted averageassumptions were utilized:

 
| ** **                       | ** ** | **Three  Months Ended March 31,** | ** ** |
|----------------------------------|------------|----------------------------------------|------------|
| ** **                       | ** ** | **2010**                               | ** ** | **2009** | ** ** |
| Average risk free  interest rate |       | 2.92                                   | %          | 2.11 | % |
| Expected life (in  years)        |       | 6.25                                   |       | 5.5 |   |
| Expected volatility              |       | 128                                    | %          | 155 | % |
| Dividend yield                   |       | 0                                      | %          | 0 | % |

 

The dividend yield of zerois based on the fact that the Company has never paid cash dividends and has nopresent intention to pay cash dividends. Expected volatility is based on thehistorical volatility of the Company’s common shares over the periodcommensurate with the expected life of the options. Expected life in years isbased on the “simplified” method as permitted by ASC 718. The Company believesthat all 

 

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**WORLD HEART CORPORATION**

**Notes to Unaudited CondensedConsolidated Financial Statements (Continued)**

 

stock options issued under its stock optionplans meet the criteria of “plain vanilla” stock options. The Company used aterm of 6.25 years for all its stock options granted during the three monthsended March 31, 2010.  The risk freeinterest rate is based on average rates for five and seven-year treasury notesas published by the Federal Reserve.

 

**8.**                                      **Note Payable**

 

On December 2, 2009 (Issuance Date) the Companyissued to LaunchPoint a note (LaunchPoint Note) in the principal amount of$1.0 million, with interest at 4.5% per annum, maturing five years fromthe Issuance Date. Twenty percent of the principal amount of the LaunchPointNote, together with accrued interest, will be converted into restricted sharesof the Company’s common stock, on each anniversary of the Issuance Date for5 years. LaunchPoint’s right of resale for each annual issuance ofrestricted shares will be limited to no more than one-twelfth of such shares ineach of the next 12 months with the restrictions lifted after12 months. The stock price used for determining the conversion rate willbe the publicly traded weighted average closing price of the Company’s commonstock for the three month period preceding the relevant anniversary date. TheCompany will have the right to repurchase, at any time prior to November 9,2011, any outstanding balance of the LaunchPoint Note at a 15% discount. Theeffective interest rate on the LaunchPoint Note is 20%. As of March 31,2010, the current and long term portions of the note are approximately $135,000and $580,000, respectively, net of a total discount of $285,000.

 

**9.**                     **Recent Accounting Pronouncements**

 

With the exception ofthose discussed below, there have been no recent accounting pronouncements orchanges in accounting pronouncements during the three months ended March 31,2010, as compared to the recent accounting pronouncements described in theCompany’s Annual Report on Form 10-K for the year ended December 31,2009, that the Company believes are of significance, or potential significanceto the Company based upon current operations.

 

In October 2009, theFASB issued ASU No. 2009-13, “Multiple-Deliverable RevenueArrangements a Consensus of the FASB Emerging Issues Task Force” an updateto Accounting Standards Codification (ASC) Topic 605, “RevenueRecognition.”  This update requires the allocation ofconsideration among separately identified deliverables contained within anarrangement, based on their related selling prices.  Thisupdate will be effective for annual reporting periods beginning January 1,2011.  The Company is currently evaluating the impact of thisupdate on its financial position, results of operations, cash flows, anddisclosures.

 

In January 2010, the FASB issued ASU No. 2010-06,“Improving Disclosures about Fair Value Measurements” an update to ASC Topic820, “Fair Value Measurements and Disclosures.” This update requires an entityto: (i) disclose separately the amounts of significant transfers in andout of Level 1 and Level 2 fair value measurements and describe the reasons forthe transfers and (ii) present separate information for Level 3 activitypertaining to gross purchases, sales, issuances, and settlements.  Thisupdate became effective for us in the quarter ended March 31, 2010, exceptthat the disclosure on the roll forward activities for Level 3 fair valuemeasurements will become effective for us with the reporting period beginning January 1,2011. Other than requiring additional disclosures, adoption of this newguidance did not have a material impact on the Company’s financial statements.

 

**10.**              **SubsequentEvents**

 

We have evaluated eventsand transactions that occurred subsequent to March 31, 2010 through thedate the financial statements were issued, for potential recognition ordisclosure in the accompanying condensed consolidated financial statements.

 

On May 17, 2010, asdisclosed on a current report on Form 8-K, WorldHeart initiated a voluntary field corrective action due to twovendor-related issues associated with the Levacor VAD external in-lineconnector. The action taken resulted in the repair or replacement of in-lineconnectors in inventory, including those held on consignment at customer sites,and units previously distributed through clinical trials or sold to customers.The total cost of the repairs and replacements was not material due to thelimited number of replacements for five patients and connectors on the shelf atcustomers. The warranty reserve at March 31, 2010 was adequate to coverthis voluntary field corrective action.

 

Other than thedisclosures above, we did not identify any events or transactions that shouldbe recognized or disclosed in the accompanying condensed consolidated financialstatements.

 

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**ITEM 2.**          **MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**INTRODUCTION**

 

World Heart Corporationand its subsidiaries are collectively referred to as “WorldHeart or the “Company.”The following Management Discussion and Analysis of Financial Condition andResults of Operations (MD&A) discusses material changes in our financialcondition and results of operations and cash flows for the three months ended March 31,2010 and March 31, 2009. Such discussion and comments on the liquidity andcapital resources should be read in conjunction with the information containedin our audited consolidated financial statements for the year ended December 31,2009, prepared in accordance with U.S. GAAP, included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2009.

 

*Thediscussion and comments contained hereunder include both historical informationand forward-looking information. The forward-looking information, whichgenerally is information stated to be anticipated, expected, or projected bymanagement, involves known and unknown risks, uncertainties and other factorsthat may cause the actual results and performance to be materially differentfrom any future results and performance expressed or implied by suchforward-looking information. Potential risks and uncertainties include, withoutlimitation: our need for additional significant financing in the future;potential product manufacturing issues related to our Levacor VAD, includingrecent corrective actions taken to replace in-line connectors used in ourproduct; inability to recover costs and generate revenue from our Levacor VADBTT clinical trial, our ability to manufacture, sell and market our products;decisions, and the timing of decisions made by health regulatory agenciesregarding approval of our products; limitations on third-party reimbursements;  costs and delays associated with research anddevelopment, pre-clinical testing and clinical trials for our next-generationproduct candidates,   competition fromother products and therapies for heart failure; continued slower thananticipated destination therapy adoption rate for VADs; our ability to obtainand enforce in a timely manner patent and other intellectual propertyprotection for our technology and products; our ability to avoid, either byproduct design, licensing arrangement or otherwise, infringement of thirdparties’ intellectual property; our ability to enter into corporate alliancesor other strategic relationships relating to the development andcommercialization of our technology and products; loss of commercial marketshare to competitors due to our financial condition; our ability to remainlisted on the NASDAQ Capital Market; as well as other risks and uncertaintiesset forth under the heading “Risk Factors” in our Annual Report on Form 10-K,for the fiscal year ended December 31, 2009.*

 

**OVERVIEW**

** **

Ourbusiness is focused on the development and sale of ventricular assist devices(VADs), particularly our Levacor Rotary VAD (the Levacor VAD or the Levacor).VADs are mechanical assist devices that supplement the circulatory function ofthe heart by re-routing blood flow through a mechanical pump allowing for therestoration of normal blood circulation. In August 2009, we received aconditional Investigational Device Exception (IDE) from the U.S. Food and DrugAdministration (FDA) for the Levacor to begin a Bridge-to-Transplant (BTT)clinical study and in January 2010 we received unconditional IDE from theFDA.  BTT clinical study enrollment willinvolve approximately 160 subjects at ten U.S. centers initially.  The follow-up period for subjects in BTTclinical trial is six months with the end points of the BTT study being hearttransplant, six month survival on device or device removal for recovery andsurvival to 60 days after device removal. We expect to submit an application toinitiate a CE Mark clinical trial in Europe with the Levacor VAD by the firsthalf of 2011 and plan to file an IDE application to initiate a destinationtherapy clinical study in the U.S. with the Levacor VAD by the first half of2011, both contingent on our ability to obtain future financing and our abilityto satisfactorily complete all regulatory requirements. To date we haveenrolled five subjects in the BTT clinical study across three centers.

 

Inaddition, we, in conjunction with a consortium consisting of the University ofPittsburgh, Children’s Hospital of Pittsburgh, Carnegie Mellon University andLaunchPoint Technologies, Inc. (LaunchPoint) have been developing a small,magnetically levitated, axial rotary pediatric VAD (PediaFlowTM). The PediaFlowis intended for use in newborns and infants and has been primarily funded bythe National Institutes of Health (NIH). The technology embodied in thePediaFlow is also intended to form the basis for a small, minimally invasiveVAD (MiVAD). The MiVAD is aimed at providing partial circulatory support in anearly-stage heart failure patient. We expect to be in a clinical trial with theMiVAD by the first half of 2014.

 

On February 4,2010, we announced that we were part of a consortium awarded a $5.6 million,4-year contract by the NIH to further develop the PediaFlowTM VAD to clinicaltrial readiness. The PediaFlow, a miniaturized implantable fully magneticallylevitated blood pump, is intended for neonates and infants. It has evolvedsignificantly through design and development with funding from a previous NIHcontract, and supplemental funding and technology contributions fromWorldHeart. This device is now approximately the size of a AA battery and wassuccessfully evaluated in a multi-month animal experiment in 2009.

 

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On January 26,2010, we announced that we completed a private placement of common stock andwarrants to purchase common stock. Net proceeds from the offering wereapproximately $7.0 million. We issued an aggregate of 1,418,726newly-issued shares of common stock and warrants to purchase up to 2,837,452additional shares of common stock.

 

On January 4,2010, we announced that effective January 1, 2010, World Heart Corporationchanged its jurisdiction of incorporation from the federal jurisdiction ofCanada to the state of Delaware in the United States through a plannedarrangement.

 

**RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31,2010 COMPARED WITH THE THREE MONTHS ENDED MARCH 31, 2009**

**(United States Dollars and shares in thousands except per shareamounts)**

 
| ** **                                                                       | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------------------------------------------------------------|------------|---------------------------------------|------------|
| **(Unaudited)**                                                                  | ** ** | **2010**                              | ** ** | **2009** | ** ** |
| **Revenue**                                                                      |       | $                                     | 556        |   | $ | 5 |   |
| **Cost  of goods sold**                                                          |       | 417                                   |       | 28 |   |
|                                                                             |       |                                  |       |   |   |
| **Gross  profit (loss)**                                                         |       | 139                                   |       | (23 | ) |
|                                                                             |       |                                  |       |   |   |
| **Operating  expenses**                                                          |       |                                  |       |   |   |
| Selling, general and  administrative                                             |       | 1,193                                 |       | 1,443 |   |
| Research and  development                                                        |       | 2,322                                 |       | 2,104 |   |
| Restructuring costs                                                              |       | —                                |       | 53 |   |
| Amortization of  intangibles                                                     |       | —                                |       | 48 |   |
|                                                                             |       |                                  |       |   |   |
| **Total  operating expenses**                                                    |       | 3,515                                 |       | 3,648 |   |
|                                                                             |       |                                  |       |   |   |
| **Operating  loss**                                                              |       | (3,376                                | )          | (3,671 | ) |
|                                                                             |       |                                  |       |   |   |
| **Other  income (expense)**                                                      |       |                                  |       |   |   |
| Unrealized foreign  exchange (loss) gain                                         |       | (13                                   | )          | 12 |   |
| Investment and other  income                                                     |       | 4                                     |       | 8 |   |
| Loss on liquidation of  foreign entity                                           |       | (6,285                                | )          | — |   |
| Interest expense                                                                 |       | (35                                   | )          | — |   |
|                                                                             |       |                                  |       |   |   |
| **Net  loss applicable to common shareholders**                                  |       | $                                     | (9,705     | ) | $ | (3,651 | ) |
|                                                                             |       |                                  |       |   |   |
| **Weighted  average number of common****shares  outstanding: basic and diluted** |       | 14,337                                |       | 13,254 |   |
|                                                                             |       |                                  |       |   |   |
| **Basic  and diluted loss per common share**                                     |       | $                                     | (0.68      | ) | $ | (0.28 | ) |

 

***Revenue****: *Salesof Levacor implant kits, capital equipment and related peripheral equipment andservices accounted for the majority of our revenue during the three months ended March 31, 2010.

 

The composition of revenue in thousands ($000’s)is as follows except for units:

 
| ** **                 | ** ** | **Quarter Ended March 31,** | ** ** |
|----------------------------|------------|----------------------------------|------------|
| ** **                 | ** ** | **2010**                         | ** ** | **2009** | ** ** |
| ** **                 | ** ** | **Amount**                       | ** ** | **% of Total** | ** ** | **Units** | ** ** | **Amount** | ** ** | **% of Total** | ** ** | **Units** | ** ** |
| Levacor product  revenues: | ** ** | ** **                       | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Implant kits               |       | $                                | 415,000    |   | 75 | % | 5 |   | $ | — |   | — |   | — |   |
| Peripherals and other      |       | 141,000                          |       | 25 | % |   |   | 5 |   | 100 | % |   |   |
| Total revenue              |       | $                                | 556,000    |   | 100 | % |   |   | $ | 5 |   | 100 | % |   |   |

 

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Total revenue for thethree months ended March 31, 2010 was $556,000 reflecting an increase of$551,000 compared with the three months ended March 31, 2009. Revenue fromLevacor VAD implant kits sold during the three months ended March 31, 2010was $415,000, an increase of 100% compared with the quarter ended March 31,2009. Levacor VAD peripherals and other revenue was $141,000 and $5,000 for thethree months ended March 31, 2010 and March 31, 2009, respectively.The overall revenue increase is attributable to our successful development andsale of our Levacor VAD during the first quarter of 2010 as a result ofreceiving from the FDA an unconditional IDE in January 2010.  We sold five Levacor VADs during the threemonths ended March 31, 2010.

 

***Cost of goods sold:***For the threemonths ended March 31, 2010, cost of goods sold was $417,000 consisting ofraw materials, labor, minimum annual royalties payable to several of ourcollaborative partners and other costs related to the manufacture of ourLevacor VAD.  Forthe three months ended March 31, 2009, cost of goods sold of $28,000consisted entirely of royalties payable under minimum annual royalty agreements. Cost of goods sold isexpected to remain at the same level in the near future as we realizemanufacturing efficiencies and consume our pre-IDE zero cost inventory.

 

***Selling******, general andadministrative:***Selling, general and administrative expenses consist primarily ofpayroll and related expenses for executives, sales, marketing, accounting andadministrative personnel. Selling expenses primarily relate to enrollment andtraining of personnel at the new centers in the Levacor BTT clinical trial,field support of Levacor patients and marketing/trade show costs. Ouradministrative expenses include professional fees, communication expenses, insurancepremiums, public reporting costs and general corporate expenses.

 

The composition of selling, general andadministrative expenses in thousands ($000’s) is as follows:

 
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|---------------------------------------|------------|
| **(Unaudited)**             | ** ** | **2010**                              | ** ** | **2009** | ** ** |
|                        |       |                                  |       |   |   |
| Selling                     |       | $                                     | 189,000    |   | $ | 149,000 |   |
| General and  administrative |       | 1,004,000                             |       | 1,294,000 |   |
| Total                       |       | $                                     | 1,193,000  |   | $ | 1,443,000 |   |

 

Selling expenses for thethree months ended March 31, 2010 increased by $40,000, or 28%, comparedwith the three months ended March 31, 2009. The increase is a result of arise in marketing and other support efforts for our Levacor VAD. For the threemonths ended March 31, 2010 and March 31, 2009, we recorded $33,000and $6,000, respectively, in stock-based compensation expense. Selling expensesare expected to increase as the demand for our Levacor VAD increases.

 

General andadministrative expenses for the three months ended March 31, 2010decreased by $290,000, or 22%, compared with the three months ended March 31,2009. The decrease is primarily attributable to decrease in legal feesassociated with the preparation and timing of our annual meeting, proxy andannual and special meetings and reincorporation related costs ($260,000),decrease in consulting fees as the company relocated its corporate offices toSalt Lake City in 2009 ($72,000), a decrease in recruiting fees related to thehiring of a CEO in 2009 ($60,000), a decrease in general office and insuranceexpenses ($36,000), offset by an increase in stock based compensation expense($138,000). For the three months ended March 31, 2010 and March 31,2009, we recorded $207,000 and $69,000, respectively, in stock-basedcompensation expense. General and administrative expenses are expected toincrease as we add additional employees and activities to support the Levacor VADclinical trials.

 

***Research and development:***Research and development expenses consistprincipally of salaries and related expenses for research personnel,consulting, prototype manufacturing, testing, clinical trials, materialpurchases and regulatory affairs incurred at our Salt Lake City and Oaklandfacilities.

 

Research and developmentexpenses for the three months ended March 31, 2010 increased $218,000, or10%, compared with the three months ended March 31, 2009. The increase isprimarily attributable to an increase in stock based compensation ($199,000),and increase in salaries and benefits associated with the Levacor VAD clinicaltrials ($158,000), and an increase in research payments made to collaborativepartners and consulting expenses ($87,000) offset by a decrease in suppliespurchases resulting from the commencement of the Levacor VAD clinical trials($187,000) and a reduction in patent and other professional fees ($77,000). Forthe three months ended March 31, 2010 and March 31, 2009, we recorded$228,000 and $29,000, respectively, in stock-based compensation expenseassociated with research and development employees. For the three months endedMarch 31, 2010, the  increase instock-based compensation expense is a result of a full quarter’s worth ofcompensation expense related to a broad based employee award on March 25, 2009, compared to less than one month’s compensation expense during the threemonths ended March 31, 2009. Research and development expenses areexpected to increase during the remainder of 2010 as we continue to develop ourLevacor VAD and continue activities on pre-clinical testing and other productdevelopment.

 

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***Restructuring costs:*** Restructuring costs for the three months ended March 31,2010 and March 31, 2009 were zero and $53,000, respectively. Restructuringcosts in 2009 consisted primarily of termination benefits of several employeesand relocation benefits of our new CEO.

 

***Amortization of intangibles:***Amortization of acquired workforce forthe three months ended March 31, 2010 and March 31, 2009 was zero and$48,000 respectively. The intangible asset was being amortized on astraight-line basis over four years and became fully amortized in August 2009.

 

***Foreign Exchange:***Foreign exchange transactions resulted in losses of$13,000 for the three months ended March 31, 2010 and a gain of $12,000for the three months ended March 31, 2009. Gains and losses relateprimarily to fluctuations in the relative value of the U.S. dollar comparedwith the Euro and Canadian dollar.

 

***Investment and other income:*** Investment and other income for thethree months ended March 31, 2010 was $4,000 compared to $8,000during the three months ended March 31,2009.  Although average daily balances ofinvested cash were greater in 2010, earnings were lower due to the continueddecline in interest rates in 2010. We anticipate our investment income willdecrease over the remainder of 2010 resulting from consumption of cash to fundoperations.

 

***Interest expense***: During the three months ended March 31, 2010and March 31, 2009, we recorded interest expense of $35,000 relating tothe $1.0 million LaunchPoint Note issued by us in December 2010,consisting of $24,000 in imputed interest expense and $11,000 in statedinterest expense on the LaunchPoint Note. During the three months ended March 31,2009, we recorded $400 in interest expense.

 

***Losson liquidation of foreign entity:*** We recorded a $6.3 million loss on liquidation offoreign entity during the three months ended March 31, 2010 related toWorld Heart Corporation changing its jurisdiction of incorporation from thefederal jurisdiction of Canada to the state of Delaware and terminating amajority of operations in Canada.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Historically, we havefunded losses from operations through the sale of equity and issuance of debtinstruments. Combined with revenue and investment income, these funds haveprovided us with the resources to operate our business, sell and support ourproducts, attract and retain key personnel, fund our research and developmentprograms and clinical trials, and apply for and obtain the necessary regulatoryapprovals.

 

At March 31, 2010,we had cash and cash equivalents of $7.4 million and $2.5 million in availablefor sale investment securities totaling $9.9 million, an increase of $3.8million from December 31, 2009 total of $6.1 million.  For the three months ended March 31,2010, cash used in operating activities was $3.1 million, consisting primarilyof the net loss for the period of $9.7 million, offset by $6.3 million fornon-cash loss on liquidation of foreign entity, $468,000 for non-cash stock compensation expense and $59,000 fordepreciation expense.  Additionally,working capital changes consisted of cash decreases related to a $148,000increase in trade accounts receivable and other receivables, $83,000 increasein prepaid expenses and other current assets, a $202,000 increase in inventoryand a $50,000 decrease in accounts payable and accrued liabilities, and cashincreases related to a $236,000 increase in accrued compensation.  For the three months ended March 31,2010, cash used in investing activities was $2.1 million related primarily tothe purchase of marketable investment securities and cash provided by financingactivities was $7.0 million related to net proceeds from the issuance of commonstock in a private placement.

 

For the three monthsended March 31, 2009, cash used in operating activities was $3.2 million,consisting primarily of the net loss for the period of $3.7 million, offset by$104,000 for non-cash stock compensation expense and $89,000 for amortization anddepreciation expense.  Additionally,working capital changes consisted of cash decreases related to a $237,000increase in prepaid expenses and other current assets and cash increasesrelated to a $262,000 decrease in trade accounts receivable and otherreceivables, a $63,000 increase in accounts payable and accrued liabilities anda $133,000 increase in accrued compensation. For the three months ended March 31, 2009, cash used in investingactivities was $64,000 related to the purchase of property and equipment andcash used in financing activities was $1,000 related to capital lease payments.

 

We expect that ourexisting capital resources will be sufficient to allow us to maintain ourcurrent and planned operations through at least 2010. However, our actual needswill depend on numerous factors, primarily the progress and scope of ourinternally funded research and development activities and our success inmanufacturing Levacor VAD on a timely basis sufficient to meet the needs of ourclinical trials. Our Levacor VAD clinical trial may be modified or terminatedfor many reasons including the risk that our device demonstrates safety issues;the risk that regulatory authorities may not approve our device for furtherdevelopment or may require additional or expanded clinical trials to beperformed; and the risk that we or our suppliers may not be able to supplysufficient quantities of our device, parts, or materials to support clinicaltrial, which could lead to a disruption or

 

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cessation of the clinicaltrials. If any of the events occur, our actual capital needs may substantiallyexceed our anticipated capital needs and we may have to substantially modify orterminate current and planned clinical trials or postpone conducting futureclinical trials. As a result, our business may be materially harmed, our stockprice may be adversely affected, and our ability to raise additional capitalmay be impaired.

 

We will need to raisesubstantial additional funds to support our long-term research, productdevelopment and commercialization programs. We regularly consider various fundraising alternatives, including, for example, debt or equity financing andmerger and acquisition alternatives. We may also seek additional fundingthrough strategic alliances, collaborations, or license agreements and otherfinancing mechanisms. There can be no assurance that additional financing willbe available on acceptable terms, if at all. If adequate funds are notavailable, we may be required to delay, reduce the scope of, or eliminate oneor more of our research and development programs, or to obtain funds througharrangements with licensees or other that may require us to relinquish rightsto certain of our technologies that we by otherwise seek to develop orcommercialize on our own.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

For a discussion of our critical accounting polices,see “Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations” in our 2009 Form 10-K.

 

**NEW ACCOUNTING STANDARDS**

 

Refer to Note 9, in “Notes to Unaudited CondensedConsolidated Financial Statements” for a discussion of new accountingstandards.

 

**OFF- BALANCE SHEET ARRANGEMENTS**

 

None.

 

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

NotApplicable.

 

**ITEM 4T.  CONTROLS AND PROCEDURES**

 

*Evaluation of disclosure controlsand procedures.*    Based on their evaluation ofour disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of March 31, 2010, our Presidentand Chief Executive Officer (principal executive officer) and our ChiefFinancial Officer (principal accounting and financial officer) have concludedthat our disclosure controls and procedures are effective at the reasonableassurance level.

 

*Change inInternal Control over Financial Reporting. *No change in ourinternal control over financial reporting occurred during our most recent thequarter ended March 31, 2010 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting.

 

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**PART II—OTHER INFORMATION**

 

**ITEM1. LEGAL PROCEEDINGS**

 

In the normal course ofbusiness, we may be a party to legal proceedings. We are not currently a partyto any material legal proceedings, except as described in our Annual report on Form 10-Kfor the year ended December 31, 2009.

 

**ITEM1A. RISK FACTORS**

 

In addition to theinformation set forth in this report you should carefully consider the riskfactors discussed in Item 1A — Risk Factors in our Annual Report on Form 10-K.

 

The following risk factorhave been updated to update the risks related to our product manufacturing and reflectsa material change to the Risk Factors set forth in our 2009 Annual Report on Form 10-K.

 

***We may be unable to obtain regulatory approvals, which willprevent us from selling our products and generating revenue.***

 

Most countries, includingthe United States, Canada and countries in Europe, require regulatory approvalprior to the commercial distribution of medical devices. In particular,implanted medical devices generally are subject to rigorous clinical testing asa condition of approval by the FDA and by similar authorities in Canada, Europeand other countries. The approval process is expensive and time consuming.Non-compliance with applicable regulatory requirements can result in, amongother things, fines, injunctions, civil penalties, recall or seizure ofproducts, total or partial suspension of production, government refusal togrant marketing approval for devices, withdrawal of marketing approvals andcriminal prosecution. The inability to obtain the appropriate regulatoryapprovals for our products in the United States and the rest of the world willprevent us from selling our products, which would have a material adverseeffect on our business, financial condition and results of operations.

 

We are currentlyconducting a clinical trial under an IDE. During the clinical trial, we may experience unanticipated device issuesor clinical outcomes, either of which may cause us to delay or stop ourclinical trial.  If we were to experiencedevice issues or unanticipated clinical outcomes, the FDA might imposeadditional conditions or restrictions which could also delay or stop our clinicaltrial.  Any such delays or additionalrestrictions could impact our ability to get our product approved or couldcause material delay in the time period to get approval, which in turn wouldhave a material adverse impact on our business.

 

The FDA or any otherregulatory authority may not act favorably or quickly in its review of ourapplications, if and when made, and we may face significant difficulties andcosts obtaining such approvals that could delay or preclude us from selling ourproducts in the United States, Europe, Canada and elsewhere. Failure toreceive, or delays in receiving, such approvals, including the need forextended clinical trials or additional data as a prerequisite to approval,limitations on the intended use of our products, the restriction, suspension orrevocation of any approvals obtained or any failure to comply with approvalsobtained could have a material adverse effect on our business, financialcondition and results of operations.

 

***Our clinical trials may be subject to costly delays.***

 

In order to conductclinical studies, we must generally receive an IDE for each device from theFDA. We are currently conducting a BTT clinical trial for Levacor VAD productunder an IDE. During this clinical trial we may experience unanticipated deviceissues or clinical outcomes, either of which may cause us to delay or stop ourclinical trial. The completion of any of our clinical trial may be delayed orhalted for numerous reasons, including:

 

·                  subjects may not enroll in clinical trials at the ratewe expect and/or subjects may not be followed-up on at the rate we expect;

·                  subjects may experience adverse side effects or eventsrelated or unrelated to our products;

·                  third-party clinical investigators may not perform ourclinical trials on our anticipated schedule or consistent with the clinicaltrial protocol and good clinical practices, or other third-party organizationsmay not perform data collection and analysis in a timely or accurate manner;

·                  defects in our products, product recalls, safetyalerts or advisory notices;

·                  the interim results of any of our clinical trials maybe inconclusive or negative; and

·                  regulatory inspections of our clinical trials ormanufacturing facilities may require us to undertake corrective action or suspendor terminate our clinical trials if investigators find us not to be incompliance with regulatory requirements;

 

For example in May 2010,we initiated a voluntary field corrective action associated with the externalin-line connector used in our Levacor VAD pump kits. We had discovered twovendor-related issues with the in-line connector.  While these issues were unlikely to representserious safety concerns and no adverse patient consequences were reported, they,nonetheless, did not provide

 

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the intended optimumdesign.  Therefore, we undertook thefield actions to correct the problem to replace the percutaneous cables andpump cable extensions for five patients and Levacor VAD pump kits on the shelf.

 

If we were to experience other device issues orunanticipated clinical outcomes, the FDA might impose additional conditions orrestrictions which could also delay or stop our clinical trial. Any such delaysor additional restrictions could impact our ability to get our productsapproved or could cause material delay in the time period to get approval,which in turn would have a material adverse impact on our business.

 

***We face risks associated with our manufacturing operations,risks resulting from dependence on third-party manufacturers, and risks relatedto dependence on sole suppliers.***

 

The manufacture of ourproducts is a complex operation involving a number of separate processes andcomponents. Material costs are high and certain of the manufacturing processesinvolved are labor-intensive. The conduct of manufacturing operations issubject to numerous risks, including reliance on third-party manufacturers,unanticipated technological problems and delays. From time to time, we haveexperienced manufacturing challenges and delays, and we may experience manufacturingchallenges and delays in the future. Any such challenges or delays, ifsignificant, could negatively affect our ability to develop and deliver ourproducts in a timely manner, which could have a material adverse effect on ourbusiness, financial condition and results of operations. In addition, we, orany entity manufacturing products or components on our behalf, may not be ableto comply with applicable governmental regulations or satisfy regulatoryinspections in connection with the manufacture of our products, which wouldhave a material or adverse effect on our business, financial condition and resultsof operation. Furthermore, any of our own manufacturing problems or those ofthe third-party manufacturers we rely on could result in potential defects inour products, exposing us to product liability, claims and product recalls,safety alerts or advisory notices.

 

We often depend onsingle-source third-party manufacturers for several of the components used inour products. We do not have agreements with many of such single-sourcemanufacturers and purchase these components pursuant to purchase orders placedfrom time to time in the ordinary course of business. We are substantiallydependent on the ability of these manufacturers to provide adequate inventoriesof these components on a timely basis and on favorable terms. Thesemanufacturers also produce components for certain of our competitors, as wellas other large customers, and there can be no assurance that such manufacturerswill have sufficient production capacity to satisfy our inventory or schedulingrequirements during any period of sustained demand, or that we will not besubject to the risk of price fluctuations and periodic delays. Although webelieve that our relationships with our manufacturers are satisfactory and thatalternative sources for the components we currently purchase from single-sourcesuppliers are currently available, the loss of the services of suchmanufacturers or substantial price increases imposed by such manufacturers, inthe absence of readily available alternative sources of supply, would have amaterial adverse effect on us. Failure or delay by such manufacturers insupplying components to us on favorable terms could also adversely affect ouroperating margins and our ability to develop and deliver our products on atimely and competitive basis, which could have a material adverse effect on ourbusiness, financial condition and results of operations.

 

**ITEM2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM4. (REMOVED AND RESERVED)**

 

**ITEM5. OTHER INFORMATION**

 

None.

 

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**ITEM6.  EXHIBITS**

 
| Exhibit 4.5  |   | Form of Five-Year  Warrant (incorporated by reference to Exhibit 4.5 to the Corporation’s  Form 8-K filed on January 22, 2010 (Commission File  No. 000-28882)).                                                                                                                                    |
|-------------------|--------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                                                                                                                                                                              |
| Exhibit 4.6  |   | Form of 15-Month  Warrant (incorporated by reference to Exhibit 4.6 to the Corporation’s  Form 8-K filed on January 22, 2010 (Commission File  No. 000-28882)).                                                                                                                                     |
|              |   |                                                                                                                                                                                                                                                                                                                              |
| Exhibit 10.1 |   | 2010 Performance Bonus  Program for Executive Officers and Other Employees (incorporated by reference  to Exhibit 99.1 to the Corporation’s Form 8-K dated March 9,  2010 (Commission File No. 000-28882)).                                                                                              |
|              |   |                                                                                                                                                                                                                                                                                                                              |
| Exhibit 10.2 |   | Securities Purchase  Agreement, dated January 26, 2010, by and among World Heart Corporation.  and the purchasers listed on the signature pages thereto (incorporated  by reference to Exhibit 10.1 to the Corporation’s Form 8-K filed on  January 22, 2010 (Commission File No. 000-28882)). |
|              |   |                                                                                                                                                                                                                                                                                                                              |
| Exhibit 10.3 |   | Registration Rights  Agreement, dated January 26, 2010, by and among World Heart Corporation  and the purchasers listed on the signature pages thereto (incorporated  by reference to Exhibit 10.2 to the Corporation’s Form 8-K filed on  January 22, 2010 (Commission File No. 000-28882)).  |
|              |   |                                                                                                                                                                                                                                                                                                                              |
| Exhibit 31.1 |   | Certification of  Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                    |
|              |   |                                                                                                                                                                                                                                                                                                                              |
| Exhibit 31.2 |   | Certification of  Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                                                                                    |
|              |   |                                                                                                                                                                                                                                                                                                                              |
| Exhibit 32.1 |   | Certification of  Principal Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.                                                                                                                                                                                                    |
|              |   |                                                                                                                                                                                                                                                                                                                              |
| Exhibit 32.2 |   | Certification of  Principal Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.                                                                                                                                                                                                    |

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|                             | World Heart  Corporation                                               |
|----------------------------------|------------------------------------------------------------------------|
|                             | (Registrant)                                                           |
|                             |                                                                   |
|                             |                                                                   |
| Dated:    May 17, 2010 | /s/ J. Alex  Martin                                                    |
|                             | J. Alex Martin,  President and Chief Executive Officer                 |
|                             | (Principal  Executive Officer)                                         |
|                             |                                                                   |
|                             |                                                                   |
| Dated:   May 17, 2010  | /s/ Morgan R.  Brown                                                   |
|                             | Morgan R. Brown,  Executive Vice President and Chief Financial Officer |
|                             | (Principal  Financial and Accounting Officer)                          |

 

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