**Table of Contents**

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**UNITED STATESSECURITIES AND EXCHANGECOMMISSION**

** **

**WASHINGTON,DC 20549**

** **

**FORM 10-Q**

** **
| **(Mark One)** |
|----------------|
|           |   |
| **x**          | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|           |   |
|           | **For quarterly period  ended September 30****, 2008** |
|           |   |
| **o**          | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |

 

**For the transition periodfrom       to       **

**Commission filenumber:  000-28882**

 

**WORLDHEART CORPORATION**

(Exact name of registrant as specified in itscharter)

 

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

 

**7799 PardeeLane, Oakland, California, USA, 94621**

(Addressof principal executive offices)

 

**(510)563-5000**

(Registrant’stelephone number)

 

 (Former name, former address andformer fiscal year, if changed since last report) **N/A**

 

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

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer” “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 mark whether the Registrant isa shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o    No x

 

Indicate the number of shares outstanding ofeach of the issuer’s classes of common stock, as of the latest practicable date:

The number of common shares outstanding as of November 4,2008 was 13,253,964.

 

 

 

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Tableof Contents

 

**TABLE OF CONTENTS**

** **
| ** **   | **Item** | ** **                                                                                  | ** ** |
|--------------|----------|---------------------------------------------------------------------------------------------|------------|
|         |     |                                                                                        |       |
| Part I  | 1        | Financial Statements                                                                        |       |
|         |     |                                                                                        |       |
|         | 2        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |       |
|         |     |                                                                                        |       |
|         | 3        | Quantitative  and Qualitative Disclosures About Market Risk                                 |       |
|         |     |                                                                                        |       |
|         | 4        | Controls and  Procedures                                                                    |       |
|         |     |                                                                                        |       |
| Part II | 1        | Legal Proceedings                                                                           |       |
|         |     |                                                                                        |       |
|         | 2        | Unregistered  Sales of Equity Securities and Use of Proceeds                                |       |
|         |     |                                                                                        |       |
|         | 3        | Defaults  Upon Senior Securities                                                            |       |
|         |     |                                                                                        |       |
|         | 4        | Submission  of Matters to a Vote of Security Holders                                        |       |
|         |     |                                                                                        |       |
|         | 5        | Other  Information                                                                          |       |
|         |     |                                                                                        |       |
|         | 6        | Exhibits                                                                                    |       |
|         |     |                                                                                        |       |
|         |     | Signatures                                                                                  |       |

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**WORLD HEARTCORPORATION**

## **Condensed Consolidated Balance Sheets**

(United States Dollars)(Unaudited)

 
| ** **                                                                                                                                                  | ** ** | **September 30, 2008** | ** **     | **December 31, 2007 (1)** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|----------------|------------------------------------------|------------|
| **ASSETS**                                                                                                                                                  | ** ** | ** **                       | ** **     | ** **                               | ** ** |
| **Current assets**                                                                                                                                          | ** ** | ** **                       | ** **     | ** **                               | ** ** |
| Cash and cash equivalents                                                                                                                                   |       | $                                | 23,876,240     |                                     | $          | 664,504 |   |
| Trade and other receivables, net of  allowance for doubtful accounts of $239,178 at September 30, 2008 and  $265,845 at December 31, 2007                   |       | 223,255                          |           | 175,170                                  |       |
| Inventory, net of allowance for excess and  obsolete of $2,692,018 at September 30, 2008 and $2,336,733 at December 31,  2007                               |       | 51,349                           |           | 864,314                                  |       |
| Prepaid expenses                                                                                                                                            |       | 302,649                          |           | 191,464                                  |       |
|                                                                                                                                                        |       | 24,453,493                       |           | 1,895,452                                |       |
| **Long-term assets**                                                                                                                                        | * *   | * *                         | * *       | * *                                 | * *   |
| Property and equipment, net of accumulated  depreciation of $2,935,887 at September 30, 2008 and $2,720,087 at December  31, 2007                           |       | 638,042                          |           | 808,383                                  |       |
| Intangible assets, net of accumulated  amortization of $609,897 at September 30, 2008 and $466,329 at December 31,  2007                                    |       | 155,772                          |           | 299,340                                  |       |
| Other long-term assets                                                                                                                                      |       | 156,889                          |           | 244,420                                  |       |
|                                                                                                                                                        |       | 950,703                          |           | 1,352,143                                |       |
| **Total assets**                                                                                                                                            | ** ** | **$**                            | **25,404,196** | ** **                               | **$**      | **3,247,595** | ** ** |
| * *                                                                                                                                                    | * *   | * *                         | * *       | * *                                 | * *   |
| **LIABILITIES AND SHAREHOLDERS' EQUITY**                                                                                                                    | ** ** | ** **                       | ** **     | ** **                               | ** ** |
| **Current liabilities**                                                                                                                                     | ** ** | ** **                       | ** **     | ** **                               | ** ** |
| Accounts payable and accrued liabilities                                                                                                                    |       | $                                | 1,151,508      |                                     | $          | 1,938,531 |   |
| Accrued site restoration                                                                                                                                    |       | 5,395                            |           | 31,000                                   |       |
| Accrued compensation                                                                                                                                        |       | 520,811                          |           | 1,318,091                                |       |
| Deferred revenue                                                                                                                                            |       | 1,582                            |           | 50,618                                   |       |
|                                                                                                                                                        |       | 1,679,296                        |           | 3,338,240                                |       |
| **Non-current liabilities**                                                                                                                                 |       |                             |           |                                     |       |
| Convertible debenture                                                                                                                                       |       | —                           |           | 1,000,000                                |       |
|                                                                                                                                                        |       |                             |           |                                     |       |
| **Total liabilities**                                                                                                                                       | ** ** | **$**                            | **1,679,296**  | ** **                               | **$**      | **4,338,240** | ** ** |
| ** **                                                                                                                                                  | ** ** | ** **                       | ** **     | ** **                               | ** ** |
| **Commitments and Contingencies (Note 10)**                                                                                                                 | ** ** | ** **                       | ** **     | ** **                               | ** ** |
| ** **                                                                                                                                                  | ** ** | ** **                       | ** **     | ** **                               | ** ** |
| **Shareholders' equity (deficit)**                                                                                                                          | ** ** | ** **                       | ** **     | ** **                               | ** ** |
| Common stock, no par value, 13,253,964  shares issued and outstanding at September 30, 2008 and 383,576 shares issued  and outstanding at December 31, 2007 |       | 325,184,192                      |           | 290,750,131                              |       |
| Additional paid-in-capital                                                                                                                                  |       | 17,213,097                       |           | 5,142,339                                |       |
| Accumulated other comprehensive income                                                                                                                      |       | (6,285,577                       | )              | (6,285,577                               | )          |
| Accumulated deficit                                                                                                                                         |       | (312,386,812                     | )              | (290,697,538                             | )          |
| Total shareholders' equity (deficit)                                                                                                                        |       | 23,724,900                       |           | (1,090,645                               | )          |
| **Total liabilities and shareholders' equity  (deficit)**                                                                                                   | ** ** | **$**                            | **25,404,196** | ** **                               | **$**      | **3,247,595** | ** ** |

 

(The accompanying notes are an integralpart of these condensed consolidated financial statements.)

 

(1) Derived from the Corporation's audited consolidated financial statementsas of December 31, 2007.

 

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## **WORLD HEART CORPORATION**

## **Condensed Consolidated Statements ofOperations**

(United States Dollars)

(Unaudited)

 
| ** **                                                                  | ** ** | **Three Months Ended September 30,** | ** **     | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|----------------|---------------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                                 | ** **     | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                        |       |                                                     |           |                                                    |       |   |   |   |   |
| **Revenue**                                                                 |       | $                                                        | 191,705        |                                                    | $          | 531,575 |   | $ | 1,363,235 |   | $ | 2,227,884 |   |
| **Cost of goods sold**                                                      |       | (203,289                                                 | )              | (381,875                                                | )          | (889,720 | ) | (2,273,707 | ) |
|                                                                        |       |                                                     |           |                                                    |       |   |   |   |   |
| **Gross profit**                                                            |       | (11,584                                                  | )              | 149,700                                                 |       | 473,515 |   | (45,823 | ) |
|                                                                        |       |                                                     |           |                                                    |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                                     |           |                                                    |       |   |   |   |   |
| Selling, general and administrative                                         |       | 1,036,002                                                |           | 1,456,527                                               |       | 3,441,193 |   | 4,459,171 |   |
| Research and development                                                    |       | 2,226,423                                                |           | 2,164,249                                               |       | 6,651,608 |   | 7,169,141 |   |
| Clinical and marketing support- non-cash                                    |       | —                                                   |           | —                                                  |       | 6,478,619 |   | — |   |
| Amortization of intangibles                                                 |       | 47,856                                                   |           | 47,856                                                  |       | 143,568 |   | 143,568 |   |
| **Total operating expenses**                                                |       | 3,310,281                                                |           | 3,668,632                                               |       | 16,714,988 |   | 11,771,880 |   |
|                                                                        |       |                                                     |           |                                                    |       |   |   |   |   |
| **Operating loss**                                                          |       | (3,321,865                                               | )              | (3,518,932                                              | )          | (16,241,473 | ) | (11,817,703 | ) |
|                                                                        |       |                                                     |           |                                                    |       |   |   |   |   |
| **Other income (expenses)**                                                 |       |                                                     |           |                                                    |       |   |   |   |   |
| Debt inducement expense                                                     |       | (3,914,357                                               | )              | —                                                  |       | (3,914,357 | ) | — |   |
| Unrealized foreign exchange gain (loss)                                     |       | 15,110                                                   |           | (160,115                                                | )          | 4,594 |   | (29,184 | ) |
| Investment and other income (loss)                                          |       | 102,834                                                  |           | 665,498                                                 |       | 120,665 |   | 923,696 |   |
| Loss on disposal of property and equipment                                  |       | —                                                   |           | (4,632                                                  | )          | — |   | (1,659 | ) |
| Interest expense                                                            |       | (43,625                                                  | )              | —                                                  |       | (1,658,703 | ) | — |   |
| **Net loss**                                                                | ** ** | **$**                                                    | **(7,161,903** | **)**                                                   | **$**      | **(3,018,181** | **)** | **$** | **(21,689,274** | **)** | **$** | **(10,924,850** | **)** |
|                                                                        |       |                                                     |           |                                                    |       |   |   |   |   |
| **Weighted average number of common shares  outstanding basic and diluted** |       | 8,962,943                                                |           | 383,576                                                 |       | 3,295,793 |   | 383,576 |   |
|                                                                        |       |                                                     |           |                                                    |       |   |   |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                                        | (0.80          | )                                                       | $          | (7.87 | ) | $ | (6.58 | ) | $ | (28.48 | ) |

 

(The accompanying notes are an integral partof these condensed consolidated financial statements.)

 

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**WORLD HEARTCORPORATION**

## **Condensed Consolidated Statements of Cash Flow**

(United States Dollars)

(Unaudited)

 
| ** **                                                           | ** ** | **Nine Months Ended September 30,** | ** **     |
|----------------------------------------------------------------------|------------|---------------------------------------------------------|----------------|
| **CASH FLOWS FROM (USED IN)**                    | ** ** | **2008**                                                | ** **     | **2007** | ** ** |
| **Operating activities**                                             |       |                                                    |           |   |   |
| Net loss for the period                                              |       | $                                                       | (21,689,274    | ) | $ | (10,924,850 | ) |
| Adjustments to reconcile net loss to net  cash used in operations:   |       |                                                    |           |   |   |
| Amortization and depreciation                                        |       | 359,369                                                 |           | 522,710 |   |
| (Gain) loss on disposal of property and  equipment                   |       | —                                                  |           | 1,659 |   |
| Write down of property and equipment                                 |       | —                                                  |           | 197,819 |   |
| Write down of inventory                                              |       | 355,285                                                 |           | 425,000 |   |
| Non-cash expense on stock options                                    |       | 211,638                                                 |           | 353,728 |   |
| Non-cash interest on debt                                            |       | 1,466,143                                               |           | — |   |
| Non-cash expense for fair value of warrants                          |       | 6,478,619                                               |           | — |   |
| Non-cash debt inducement expense                                     |       | 3,914,357                                               |           | — |   |
| Unrealized foreign exchange gain (loss)                              |       | (34,471                                                 | )              | (183,440 | ) |
| Change in operating components of working  capital                   |       | (538,549                                                | )              | 591,063 |   |
| **Cash used in operating activities**                                | ** ** | **(9,476,883**                                          | **)**          | **(9,016,311** | **)** |
|                                                                 |       |                                                    |           |   |   |
| **Investing activities**                                             |       |                                                    |           |   |   |
| Purchase of property and equipment                                   |       | (45,460                                                 | )              | (209,573 | ) |
| Cash pledged as collateral for site  restoration                     |       | —                                                  |           | (568,468 | ) |
| **Cash used in investing activities**                                | ** ** | **(45,460**                                             | **)**          | **(778,041** | **)** |
|                                                                 |       |                                                    |           |   |   |
| **Financing activities**                                             |       |                                                    |           |   |   |
| Convertible bridge loan proceeds                                     |       | 1,400,000                                               |           | — |   |
| Convertible debenture proceeds                                       |       | 4,000,000                                               |           | — |   |
| Common shares issued through private  placement                      |       | 28,600,000                                              |           | — |   |
| Expenses related to private placement and  convertible debenture     |       | (1,262,291                                              | )              | — |   |
| **Cash provided by financing activities**                            | ** ** | **32,737,709**                                          | ** **     | **—** | ** ** |
| **Effect of exchange rates on cash and cash equivalents**            | ** ** | **(3,630**                                              | **)**          | **(8,508** | **)** |
| **Increase (decrease) in cash and cash  equivalents for the period** | ** ** | **23,211,736**                                          | ** **     | **(9,802,860** | **)** |
| ** **                                                           | ** ** | ** **                                              | ** **     | ** ** | ** ** |
| **Cash and cash equivalents, beginning of the  period**              | ** ** | **664,504**                                             | ** **     | **12,216,671** | ** ** |
| **Cash and cash equivalents, end of the  period**                    | ** ** | **$**                                                   | **23,876,240** | ** ** | **$** | **2,413,811** | ** ** |
| ** **                                                           | ** ** | ** **                                              | ** **     | ** ** | ** ** |
| **Supplementary cash flow information**                              | ** ** | ** **                                              | ** **     | ** ** | ** ** |
| Bridge loans converted to common stock                               |       | $                                                       | 1,400,000      |   | — |   |
| Note payable and accrued interest converted  to common stock         |       | $                                                       | 5,238,444      |   | — |   |
| Accrued bonus paid by issuance of stock                              |       | $                                                       | 457,908        |   | — |   |

 

(The accompanying notes are an integral part of thesecondensed consolidated financial statements.)

 

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**WORLD HEARTCORPORATION**

## **Condensed Consolidated Statement of Equity**

(United States Dollars)

(Unaudited)

 

**Nine Months Ended September 30, 2008**

 
| ** **                                                       | ** ** | ** **            | ** ** | ** **                  | ** **  | **Accumulated  Other** | ** ** | ** **      | ** ** | ** **                         | ** ** |
|------------------------------------------------------------------|------------|-----------------------|------------|-----------------------------|-------------|------------------------|------------|-----------------|------------|------------------------------------|------------|
| ** **                                                       | ** ** | **Common Stock** | ** ** | **Additional Paid-in** | ** **  | **Comprehensive**      | ** ** | **Accumulated** | ** ** | **Shareholders’ Equity** | ** ** |
| ** **                                                       | ** ** | **Number**            | ** ** | **Amount**                  | ** **  | **Capital**            | ** ** | **Income**      | ** ** | **Deficit**                        | ** ** | **(Deficiency)** | ** ** |
| Balance as at  January 1, 2008                                   |       | 383,576               |       | $                           | 290,750,131 |                   | $          | 5,142,339       |       | $                                  | (6,285,577 | ) | $ | (290,697,537 | ) | $ | (1,090,644 | ) |
| Non-cash stock  compensation                                     |       |                  |       |                        |        | 211,638                |       |            |       |                               |       | 211,638 |   |
| Fair value of  beneficial conversion                             |       |                  |       |                        |        | 1,466,144              |       |            |       |                               |       | 1,466,144 |   |
| feature for  convertible debenture                               |       |                  |       |                        |        |                   |       |            |       |                               |       | — |   |
| Warrants issued  in connection with                              |       |                  |       |                        |        | 6,478,619              |       |            |       |                               |       | 6,478,619 |   |
| support services  agreement                                      |       |                  |       |                        |        |                   |       |            |       |                               |       | — |   |
| Stock issued for  accrued bonus                                  |       | 3,722                 |       | 457,908                     |        |                   |       |            |       |                               |       | 457,908 |   |
| Proceeds from  sale of stock, net                                |       | 10,000,000            |       | 28,737,709                  | (1)    |                   |       |            |       |                               |       | 28,737,709 |   |
| Debt inducement  expense                                         |       |                  |       |                        |        | 3,914,357              |       |            |       |                               |       | 3,914,357 |   |
| Conversion of  note payable and accrued interest to common stock |       | 2,866,667             |       | 5,238,444                   |        |                   |       |            |       |                               |       | 5,238,444 |   |
| Net loss for the  nine months ended September 30, 2008           |       |                  |       |                        |        |                   |       |            |       | (21,689,274                        | )          | (21,689,274 | ) |
| **Balance  at September 30, 2008**                               |       | 13,253,964            |       | $                           | 325,184,192 |                   | $          | 17,213,097      |       | $                                  | (6,285,577 | ) | $ | (312,386,812 | ) | $ | 23,724,900 |   |

 

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(1) Includes conversion of $1.4 millionbridge notes payable

 

(The accompanying notes are an integral partof these condensed consolidated financial statements.)

 

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**WORLD HEART CORPORATION**

**Notes to Unaudited Condensed Consolidated Financial Statements**

 

**1.****                                     Natureof Operations of the Corporation**

 

World Heart Corporation (“WorldHeart” or the “Corporation”) isdeveloping and commercializing implantable ventricular assist devices (VADs),which are mechanical pumps that allow for the restoration of normal bloodcirculation to patients suffering from advanced heart failure. WorldHeart hasfacilities in Oakland, California, Salt Lake City, Utah and Herkenbosch,Netherlands. WorldHeart currently derives its revenue from its Novacor LVAS(left ventricular assist system) and related peripheral equipment which itsells directly to medical clinics and hospitals in the United States, Europeand Canada and through distributors in other countries.  As previously announced, after more thantwenty years in clinical use, the Corporation is phasing out its first-generationNovacor LVAS as it approaches the natural end of its life cycle. TheCorporation is focusing on the development of its next-generation LevacorTMRotary VAD (the “Levacor”) and on activities leading to the start of a U.S.clinical trial with the Levacor in 2009. The Corporation expects to realizecost recoveries from the use of the Levacor in a U.S. clinical trial. Suchrecoveries are expected to be an important part of the Corporation’s overalloperating cash flows in the future.

 

On July 31, 2008, WorldHeart completed a $30.0million private placement transaction and recapitalization under the terms ofthe Recapitalization Agreement dated June 20, 2008 and amended on July 31,2008 (See Note 9 of the Notes to Unaudited Condensed Consolidated FinancialStatements).  With the completion of the privateplacement and recapitalization, the Corporation believes it has sufficient cashto fund operations for at least twelve months and that it will be able torealize its assets and discharge its liabilities in the normal course ofbusiness. The Corporation also believes that it cansustain compliance with NASDAQ Marketplace Rules 4310(c)(3), the “MinimumEquity Rule” and 4310(c)(4), the “Minimum Bid Price Rule” with the issuance of12.86 million common shares as part of the private placement transaction andrecapitalization and with its recently completed 30-to-1 reverse stock split(See Note 2 of the Notes to Unaudited Condensed Consolidated FinancialStatements).

 

**2.****                                     SubsequentEvents**

 

Reverse Stock Split

 

On October 28, 2008, the Corporation effected areverse stock split of 30-to-1 of its capital stock. The reverse stock splitwas previously approved by the Corporation’s Board of Directors and by theCorporation’s shareholders during the October 9, 2008 Special Meeting ofShareholders.

 

Pursuant to the reverse stock split, each holder ofthe Corporation’s common shares, options or warrants on October 28, 2008,the date of effectiveness of the reverse stock split, became entitled toreceive one new common share, option or warrant in exchange for every thirtyold common shares, options or warrants held by such shareholder.

 

The effect of the reverse stock split has beenretroactively applied throughout the financial statements contained herein. Allnumbers of common shares set forth herein are shown on a post-consolidatedbasis, unless otherwise noted.

 

NASDAQ Notice on Non-Compliance

 

On October 29, 2008, the Corporation received a NASDAQ StaffDeficiency Letter indicating that WorldHeart does not comply with Marketplace Rule 4310(c)(7) whichrequires the Corporation to maintain a minimum of 500,000 publicly held sharesfor continued listing on the NASDAQ Capital Market. For purposes of thisrequirement, the number of publicly held shares excludes shares held byaffiliates, including officers, directors, or ten percent shareholders. TheNASDAQ staff is reviewing the Corporation’s eligibility for continued listingon the NASDAQ Capital Market and had asked the Corporation to provide, on orbefore November 21, 2008, the Corporation’s specific plan to achieve andsustain compliance with all the NASDAQ Capital Market listing requirements,including the time frame for completion of the plan. The Corporation filed aregistration statement to register certain shares held by affiliates and othersthat were issued or are issuable in connection with the previously announcedUS$30.0 million private placement transaction and recapitalization. Theregistration statement has been declared effective and the Corporation expectsthat sales in the open market will result in an increase in the number ofpublicly held shares. WorldHeart also intends to submit a specific plan toachieve and sustain compliance with Marketplace Rule 4310(C)(7) by November 21,2008.

 

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**WORLD HEART CORPORATION**

Notes to Unaudited CondensedConsolidated Financial Statements – continued

 

**3.****                                     Summaryof Significant Accounting Policies**

 

### *Basis of presentation*

### * *

Theaccompanying interim condensed unaudited consolidated financial statements havebeen prepared by management in accordance with accounting principles generallyaccepted in the United States (“GAAP”) and with the instructions to Form 10-Qand Article 10 of Regulation S-X. Accordingly, these consolidatedfinancial statements include all assets, liabilities, revenue and expenses ofthe Corporation and its wholly owned subsidiaries: World Heart Inc. and WorldHeart B.V. All material inter-company transactions and balances have beeneliminated. These interim unaudited condensed consolidated financial statementsand notes thereto should be read in conjunction with Management’s Discussionand Analysis of Financial Condition and Results of Operations and the auditedfinancial statements and notes thereto included in the Corporation’s AnnualReport on Form 10-KSB/A, for the year ended December 31, 2007. In theopinion of management, the condensed balance sheet at December 31, 2007which has been derived from audited financial statements and these interimunaudited consolidated financial statements reflect all normal and recurringadjustments considered necessary to state fairly the results for the periodspresented. The results for the period ended September 30, 2008 are notnecessarily indicative of the results to be expected for the entire fiscal yearended December 31, 2008 or for any future period.

 

### *Use of estimates*

### * *

The preparation of these consolidated financialstatements in accordance with accounting principles generally accepted in theUnited States of America, requires management to make estimates and assumptionsthat affect the reported amounts of assets and liabilities and disclosure ofcontingent assets and liabilities at the dates of the financial statements andthe reported amounts of revenue and expenses during the reporting periods. Suchmanagement estimates include allowance for doubtful accounts, sales and otherallowances, inventory reserves, income taxes, realizability of deferred taxassets, stock-based compensation, deferred revenue, warranty reserves and legalreserves. Actual results could differ from these estimates.

 

##### *Revenue recognition*

##### * *

Revenuefrom product and service sales is recognized when all of the following criteriaare met:  persuasive evidence of anagreement exists; delivery has occurred or services have been rendered; priceis fixed or determinable; and collection is reasonably assured.

 

Thesignificant elements of the Corporation’s multiple-element offerings areImplant Kits, Peripherals and Other. For arrangements with multiple elements,the Corporation recognizes revenue using the residual method as described inSOP 98-9. Under the residual method, revenue is allocated and deferred for theundelivered elements based on relative fair value. The determination of fairvalue of the undelivered elements in multiple elements arrangements is based onthe price charged when such elements are sold separately, which is commonlyreferred to as vendor-specific objective-evidence, or VSOE. Each element’srevenue is recognized when all of the revenue recognition criteria are met foreach of the elements.

 

##### *Shipping and Handling Costs*

##### * *

##### *In accordance with Emerging Issues Task Force (“EITF”) 00-10, “Accountingfor Shipping and Handling Fees and Costs,” the Corporation records freightbilled to its customers as sales of product and services and the relatedfreight costs as a cost of sales, product and services. The Corporation’sshipping and handling costs are not significant.*

##### * *

**4.****                                     Stock-basedCompensation**

 

OnJanuary 1, 2006, WorldHeart adopted Statement of Financial AccountingStandards (“SFAS”) No. 123(R), “Accounting for Stock-Based Compensation (“FAS123(R)”), using the modified prospective transition method. Under this method,the provisions of FAS 123(R) apply to all stock-based awards granted afterthe effective date. The unrecognized expense of awards not yet vested as of January 1,2006 is recognized as an expense in the calculation of net income. As FAS 123(R) requiresthat stock-based compensation expense be based on awards that are ultimatelyexpected to vest, stock-based compensation for the third quarter of 2008 hasbeen reduced for estimated forfeitures. When estimating forfeitures, voluntarytermination behaviors, as well as trends of actual option forfeitures areconsidered. To the extent actual forfeitures differ from the Corporation’scurrent estimates, cumulative adjustments to stock-based compensation expenseare recorded.

 

Except for transactions with employees and directors that are withinthe scope of FAS 123(R), all transactions in which goods or services are theconsideration received for the issuance of equity instruments are accounted forbased on the fair value of the consideration received or the fair value of theequity instruments issued, whichever is more reliably measurable. Additionally, in accordance with EITF 96-18, “Accounting for EquityInstruments that are Issued to Other Than Employees for Acquiring, or inConjunction with Selling Goods or Services or Combined with Cash” (“EITF 96-18”),the Corporation has determined that the 

 

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**WORLD HEART CORPORATION**

Notes to Unaudited CondensedConsolidated Financial Statements – continued

 

dates used to value the transaction are either: (1) the date atwhich a commitment for performance by the counter party to earn the equityinstruments is established; or (2) the date at which the counter party’sperformance is complete.

 

WorldHeartuses the Black-Scholes valuation model for estimating the fair value of stockcompensation. The stock-based compensation expense for the three and nine monthperiods ended September 30, 2008 and 2007 are as follows:

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Unaudited)**                     | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Selling, general and administrative |       | $                                                        | 37,518     |                                                    | $          | 131,293 |   | $ | 144,645 |   | $ | 273,149 |   |
| Research and development            |       | 20,034                                                   |       | 53,258                                                  |       | 66,993 |   | 80,579 |   |
| Total                               |       | $                                                        | 57,552     |                                                    | $          | 184,551 |   | $ | 211,638 |   | $ | 353,728 |   |

 

Asof September 30, 2008, approximately $501,084 of total unrecognizedcompensation cost related to stock options is expected to be recognized over aperiod of approximately 10 quarters.

 

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of all outstanding options and the quoted price of our common shares thatwere in the money at September 30, 2008. At September 30, 2008, theaggregate intrinsic value of all outstanding options was zero with a weightedaverage remaining contractual term of approximately 5.5 years. Of the 33,533outstanding options, 26,047 options were exercisable, with a weighted averageremaining contractual life of 4.6 years and 7,486 options were unvested, with aweighted average remaining contractual life of 7.6 years. No options wereexercised or granted under the Corporation’s 2006 Equity Incentive Plan duringthe third quarter of 2008.

 

Asummary of the status and changes the Corporation’s non-vested options, subjectto FAS123(R) calculation as of the quarter ended September 30, 2008is presented below:

 
| ** **                      | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date Fair Value** | ** ** |
|---------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Nonvested at December 31, 2007  |       | 12,373     |       | $                                                          | 90.00      |   |
| Granted                         |       | 437        |       | $                                                          | 42.58      |   |
| Vested                          |       | (3,728     | )          | $                                                          | 45.60      |   |
| Forfeited                       |       | (160       | )          | $                                                          | 84.90      |   |
| Nonvested at March 31, 2008     |       | 8,922      |       | $                                                          | 106.50     |   |
| Granted                         |       | —     |       | $                                                          | 0.00       |   |
| Vested                          |       | (295       | )          | $                                                          | 79.72      |   |
| Forfeited                       |       | (211       | )          | $                                                          | 82.70      |   |
| Nonvested at June 30, 2008      |       | 8,416      |       | $                                                          | 107.85     |   |
| Granted                         |       | —     |       | $                                                          | 0.00       |   |
| Vested                          |       | (138       | )          | $                                                          | 48.26      |   |
| Forfeited                       |       | (792       | )          | $                                                          | 71.20      |   |
| Nonvested at September 30, 2008 |       | 7,486      |       | $                                                          | 110.50     |   |

 

*Valuation Assumptions*

 

WorldHeartcalculates the fair value of each option award on the date of grant using theBlack-Scholes option pricing model.  Duringthe three months ended September 30, 2008, no stock options weregranted.  For the three and nine monthperiods ended September 30, 2008, the weighted average fair value of theoptions granted was $0 and $59.10, respectively. For the three and nine monthperiods ended September 30, 2007, the weighted average fair value of theoptions granted was $42.30 and $15.60, respectively. The following weightedaverage assumptions were utilized:

 

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**WORLD HEART CORPORATION**

Notes to Unaudited CondensedConsolidated Financial Statements – continued

 
| ** **                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                      | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| Average risk free interest rate |       | —                                                   |       | 4.7                                                     | %          | 3.4 | % | 4.7 | % |
| Expected life (in years)        |       | —                                                   |       | 5.5                                                     |       | 5.5 |   | 5.5 |   |
| Expected volatility             |       | —                                                   |       | 100                                                     | %          | 133 | % | 99 | % |
| Dividend yield                  |       | —                                                   |       | 0                                                       | %          | 0.0 | % | 0 | % |

 

Thedividend yield of zero is based on the fact that WorldHeart has never paid cashdividends and has no present intention to pay cash dividends. Expectedvolatility is based on the historical volatility of the Corporation’s commonshares over the period commensurate with the expected life of the options. Expectedlife in years is based on the “simplified” method as permitted by the SEC’sStaff Accounting Bulletin No. 110 (“SAB 110”). WorldHeart believes thatall stock options issued under its stock option plans meet the criteria of “plainvanilla” stock options. The Corporation uses a term of 5.5 years for all itsstock options. The risk free interest rate is based on average rates for fiveand seven-year treasury notes as published by the Federal Reserve. Thefollowing table summarizes stock option and warrant activity for the quarterended September 30, 2008:

 
| ** **                        | ** ** | **Employees** | ** ** | **Non-Employees**                          | ** ** | ** **  | ** ** | ** **                                 | ** ** | ** **   | ** ** |
|-----------------------------------|------------|---------------|------------|--------------------------------------------|------------|-------------|------------|--------------------------------------------|------------|--------------|------------|
| ** **                        | ** ** | **Options**   | ** ** | **Weighted  average  exercise price** | ** ** | **Options** | ** ** | **Weighted  average  exercise price** | ** ** | **Warrants** | ** ** | **Weighted  average  exercise price** | ** ** | **Total** | ** ** |
| ** **                        | ** ** | **#**         | ** ** | **$**                                      | ** ** | **#**       | ** ** | **$**                                      | ** ** | **#**        | ** ** | **$** | ** ** | **#** | ** ** |
| December 31, 2007            |       | 31,451        |       | $                                          | 351.30     |        | 3,237      |                                       | $          | 317.10       |       | 63,663 |   | $ | 145.20 |   | 98,351 |   |
| Granted                           |       | 437           |       | $                                          | 47.84      |        | —     |                                       | —     |         | 90,667     |   | $ | 52.50 |   | 91,103 |   |
| Expired                           |       | (113          | )          | $                                          | 4,962.12   |        | (11        | )                                          | $          | 4,026.66     |       | (1,429 | ) | $ | 327.00 |   | (1,553 | ) |
| Forfeited                         |       | (154          | )          | $                                          | 52.20      |        | —     |                                       | $          | 0.00         |       | — |   | $ | 0.00 |   | (154 | ) |
| Outstanding at March 31, 2008     |       | 31,621        |       | $                                          | 332.10     |        | 3,226      |                                       | $          | 304.50       |       | 152,901 |   | $ | 87.00 |   | 187,748 |   |
| Granted                           |       | —        |       | $                                          | 0.00       |        | —     |                                       | —     |         | —     |   | $ | 0.00 |   | — |   |
| Expired                           |       | (297          | )          | $                                          | 667.80     |        | (1         | )                                          | $          | 1,596.00     |       | (838 | ) | $ | 342.25 |   | (1,136 | ) |
| Forfeited                         |       | (211          | )          | $                                          | 87.84      |        | —     |                                       | $          | 0.00         |       | — |   | $ | 0.00 |   | (211 | ) |
| Outstanding at June 30, 2008      |       | 31,113        |       | $                                          | 331.20     |        | 3,225      |                                       | $          | 312.30       |       | 152,063 |   | $ | 85.80 |   | 186,400 |   |
| Granted                           |       | 0             |       | $                                          | 0.00       |        | —     |                                       | —     |         | 83,333     |   | $ | 3.30 |   | 83,333 |   |
| Expired                           |       | (6            | )          | $                                          | 3,135.26   |        | (1         | )                                          | $          | 1,596.00     |       | (37,667 | ) | $ | 2,559.60 |   | (37,674 | ) |
| Cancelled                         |       | 0             |       | $                                          | 0.00       |        | —     |                                       | —     |         | (113,333   | ) | $ | 0.30 |   | (113,333 | ) |
| Forfeited                         |       | (798          | )          | $                                          | 70.50      |        | —     |                                       | —     |         | —     |   | $ | 0.00 |   | (798 | ) |
| Outstanding at September 30, 2008 |       | 30,309        |       | $                                          | 342.50     |        | 3,224      |                                       | $          | 313.00       |       | 84,396 |   | $ | 7.32 |   | 117,929 |   |

 

**5.****                                     Inventory**

 

Thecomponents of net inventory are as follows:

 
| ** **       | ** ** | **September 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------|------------|----------------------------------|------------|---------------------------------|------------|
| Raw materials    |       | $                                | 19,624     |                            | $          | 231,850 |   |
| Work in progress |       | 12,699                           |       | 280,363                         |       |
| Finished goods   |       | 19,026                           |       | 352,101                         |       |
| Total inventory  |       | $                                | 51,349     |                            | $          | 864,314 |   |

 

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**WORLD HEART CORPORATION**

Notes to Unaudited CondensedConsolidated Financial Statements – continued

 

**6.****                                     CurrentLiabilities**

 

**AccruedCompensation**

 

Accruedcompensation includes accruals for quarter-end employee wages and Board ofDirector fees, vacation, related payroll taxes and clinical and performancebonus. The components of accrued compensation, inclusive of payroll taxes, areas follows:

 
| ** **                 | ** ** | **September 30, 2008** | ** **  | **December 31, 2007** | ** ** |
|----------------------------|------------|----------------------------------|-------------|---------------------------------|------------|
| Wages                      |       | $                                | 107,021     |                            | $          | 254,216 |   |
| Vacation                   |       | 392,565                          |        | 432,006                         |       |
| Bonus                      |       | 21,225                           |        | 631,869                         |       |
| Total accrued compensation | ** ** | **$**                            | **520,811** | ** **                      | **$**      | **1,318,091** | ** ** |

 

Duringthe third quarter of this year, the Corporation made full payments on deferredwages owed to six executives and officers of the Corporation.

 

**Performance Bonus**

 

On February 15, 2008, the Compensation Committee of the Board ofDirectors approved the 2008 cash performance bonus program. All employees,including the Corporation’s executive officers, are eligible for performancebonuses, which are earned upon the achievement of certain performancemilestones relevant to the Corporation’s business. As of September 30,2008, except for a $21,225 balance, the majority of accrued bonuses pursuant tothe terms and conditions of the Corporation’s 2007 Performance Bonus Plan and2006 Equity Incentive Plan have been paid, totaling $152,639 in cash and$457,908 in stock.  No accrual for the2008 cash performance bonus program has been made as the performance milestonesthrough September 30, 2008 have not been achieved.

 

**AccountsPayable and Accrued Liabilities**

 

Accountspayable and accrued liabilities consist of the following:

 
| ** **                                      | ** ** | **September 30, 2008** | ** **    | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|----------------------------------|---------------|---------------------------------|------------|
| Accounts payable                                |       | $                                | 208,353       |                            | $          | 847,460 |   |
| Accrued liabilities                             |       | 843,573                          |          | 909,860                         |       |
| Sales taxes payable                             |       | 3,534                            |          | 45,719                          |       |
| Accrued warranty                                |       | 96,048                           |          | 131,048                         |       |
| Interest payable                                |       | —                           |          | 4,444                           |       |
| Total accounts payable and accrued  liabilities | ** ** | **$**                            | **1,151,508** | ** **                      | **$**      | **1,938,531** | ** ** |

 

**7.****                                     ComprehensiveIncome**

 

For the three and nine monthperiods ended September 30, 2008 and September 30, 2007, there wereno significant differences between the Corporation’s comprehensive loss and itsnet loss.

 

**8.****                                     ConvertibleDebentures and Warrants, Beneficial Conversion and Clinical and Marketing SupportExpenses**

 

On July 31, 2008, the Corporation closed apreviously announced $30.0 million private placement transaction and recapitalizationunder theterms of the Recapitalization Agreement (the “Recapitalization Agreement”)dated June 20, 2008 and amended on July 31, 2008, among the Corporation, its wholly owned subsidiary World Heart Inc.(“WHI”), Abiomed, Inc. (“Abiomed”), Venrock Partners V, L.P., Venrock AssociatesV, L.P. and Venrock Entrepreneurs Fund V, L.P. (collectively “Venrock”),Special Situations Fund III QP, L.P., Special Situations Cayman Fund, L.P.,Special Situations Private Equity Fund, L.P., Special Situations Life SciencesFund, L.P. and Austin W. Marxe (collectively “SSF”) and New Leaf Ventures II,L.P (“New Leaf”). Simultaneously with the closing, Abiomed entered into a Termination andRelease Letter Agreement dated July 31, 2008 with WorldHeart and WHI.Under the terms of the Termination and Release Letter Agreement, WorldHeartconverted the full amount  of principal and interest owed on the $5.0million 8% Secured Convertible Promissory Note (the “Note”) previously issuedto Abiomed by the Corporation and WHI into 2,866,666 common shares of theCorporation (the “Conversion”). Additionally,

 

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** **

**WORLDHEART CORPORATION**

Notes to Unaudited Condensed ConsolidatedFinancial Statements - continued

 

Abiomed released the security interest in allof the assets of the Corporation and WHI that secured the Note, terminated thewarrants Abiomed held to purchase 113,333 common shares of the Corporation,forgave other amounts owed by WorldHeart and terminated all the previouslyexisting agreements, arrangements and understandings with WorldHeart.

 

The induced conversion of the Note and simultaneous termination ofpreviously existing agreements, arrangements and understanding betweenWorldHeart and Abiomed, and the subsequent issuance of 2,866,666 common sharesof the Corporation, as approved by the Corporation’s shareholders during itsSpecial Meeting of Shareholders held on October 9, 2008, were accountedfor under the provisions of SFAS No. 84, “Induced Conversion ofConvertible Debt”, or SFAS No. 84. The Corporation recorded anon-recurring expense upon inducement in the amount of approximately $3.9million against additional paid-in capital.

 

Prior to the July 31,2008 termination of the Corporation’s agreements with Abiomed, on January 3,2008, the Corporation recorded a non-cash clinical and marketing supportexpense of $6.5 million based on the fair value of warrants issued to purchase90,000 of the Corporation’s common shares, upon receipt of $4.0 million infunding from Abiomed pursuant to a now cancelled clinical and marketing supportservices agreement. The Corporation applied the provisions of FAS 123R and EITF96-18 to account for the expense associated with the warrants granted toAbiomed.  The Corporation used the Black-Scholesmethod to compute the fair value of the warrants issued as consideration forthe clinical and marketing support services agreement. The measurement datesused were the dates when the Corporation received funding as defined by EITF96-18. As a result of the beneficial conversion features of the Note, theCorporation recorded a non-cash interest expense charge of approximately $1.4million in the nine-month ended period September 30, 2008.

 

**9. PrivatePlacement Transaction and Recapitalization**

 

On July 31, 2008, WorldHeart completed a$30.0 million private placement transaction and recapitalization previouslyannounced under the terms of the Recapitalization Agreement. Under the terms ofthe Recapitalization Agreement, WorldHeart issued 10 million common shares foran aggregate purchase price of $30.0 million (the “Issuance”), of which Venrockinvested $11.0 million, SSF invested $9.0 million and New Leaf invested $10.0million. The purchase price delivered by Venrock and SSF at the closing wasoffset by repayment of the principal and interest owed on the bridge loanfacility of $1.4 million (the “Bridge Facility”) that Venrock and SSF hadpreviously provided to WorldHeart. Simultaneously with the closing of theIssuance, Abiomed entered into a Termination and Release Letter Agreement datedJuly 31, 2008 with WorldHeart and WHI (See Note 8 of the Notes toUnaudited Condensed Consolidated Financial Statements). In connection with theIssuance, the parties to the Recapitalization Agreement entered into aRegistration Rights Agreement dated July 31, 2008, as amended October 31,2008, to register the common shares issued in connection with the Issuance andthe Conversion.

 

WorldHeart paid an aggregate cash commission of$750,000 and issued warrants to purchase an aggregate of 83,333 common sharesto its advisors, Pacific Growth Equities, LLC and Stifel, Nicolaus and Company.The warrants, with an exercise price of $3.30 per share, were subject toshareholder approval and were approved by the Corporation’s shareholders duringthe Special Meeting of Shareholders held on October 9, 2008. We calculatedthe fair value of the warrants using the Black-Scholes Option Valuation Model.Accordingly, the amount of $283,000 was attributed to the issuance of warrantsas advisor fees for services related to the financing and recapitalization. Theissuance of the warrants had no impact on total equity and did not impactoperating results for the quarter or nine months ended September 30, 2008.

 

In accordance with terms pursuant to the Recapitalization Agreement,the following terms were satisfied and, where required, carried by majorityvotes by the Corporation’s shareholders during the Special Meeting ofShareholders held on October 9, 2008:

 

(i)                                   The approval of a reverse split ofits common shares;

 

(ii)                                The election as Directors of the Corporation of the nominees of each of Abiomed, Venrock, SSF andNew Leaf , to hold office until the next annual meetingor until their successors are elected or appointed; and

 

(iii)                             The termination of Abiomed’s current distribution rights with WorldHeart and replacementwith reduced distribution rights, under which WorldHeart is required tonegotiate in good faith with Abiomed regarding distribution arrangements forcertain of the Corporation’s products before engaging a third-party distributor;and

 

(iv)                            The establishment of an equity incentive program for the benefit ofthe Corporation’s independent directors, officers, employees and consultantscovering, together with the Corporation’s existing plans, a maximum of1,466,666 common shares of WorldHeart.

 

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**WORLDHEART CORPORATION**

Notes to Unaudited Condensed ConsolidatedFinancial Statements - continued

 

**10.          Commitmentand Contingencies**

 

On September 15, 2008, WorldHeart andLaunchPoint Technologies LLC (“LaunchPoint”) entered into an AssignmentAgreement (the “Agreement”) wherein all of LaunchPoint’s right, title andinterest in and to the assigned technology and intellectual property relatingto physiological control of rotary blood pumps were assigned, sold,transferred granted and delivered to WorldHeart for $230,000. In addition, theAgreement confirmed a 0.5% royalty on net future sales through 2020 of productsusing such technology. The purchase price of $230,000 will be paid in equalinstallments of $10,000 over 23 months beginning in October 2008.

 

Under the Agreement, LaunchPointagreed to provide exclusive research and development (“R&D”) services toWorldHeart, for approximately two years, for the design, production,distribution or sale of rotary blood pumps that provide assisted circulation.In return, WorldHeart will engage LaunchPoint in ‘Active Projects’ with one ofthem being the Pediatric Ventricular Assist Device (PediaFLowTM) project. ThePediaFlow is a small, magnetically levitated rotary VAD intended for use innewborns and infants. WorldHeart will provide LaunchPoint with an annualfunding of $120,000 until termination on either (i) the second anniversaryof the Agreement, (ii) expiration of the period of exclusivity accordingto the terms of any Active Project or (iii) termination of R&Dservices pursuant to any Active Project.

 

The Corporation accounted for the purchase ofR&D technology under the Agreement in accordance with Financial AccountingStandards Board (“FASB”) Statement No. 2, “Accounting for Research andDevelopment Costs,” as interpreted by FASB Interpretation (FIN) No. 4, “Applicabilityof FASB Statement No. 2 to Business Combinations Accounted for by thePurchase Method.” The Corporation recorded a one time R&D expense of$230,000 during the quarter ended September 30, 2008 based on the factthat alternative future value or realizability of this technology is notdeterminable as of the date of the Agreement.

 

**11.****      ****        Recent Accounting Pronouncements**

 

Sincethe beginning of 2008 the following new standards have been issued that mayimpact the Corporation:

 

InJune 2008, the FASB issued FASB Staff Position (“FSP”) EITF 03-6-1, “DeterminingWhether Instruments Granted in Share-Based Payment Transactions AreParticipating Securities.” This FSP provides that unvested share-based paymentawards that contain non-forfeitable rights to dividends or dividend equivalents(whether paid or unpaid) are participating securities and shall be included inthe computation of earnings per share pursuant to the two-class method. The FSPis effective for financial statements issued for fiscal years beginning after December 15,2008, and interim periods within those years. This FSP is not applicable toWorldHeart since the Corporation does not issue dividends and has no intentionto do so.

 

InApril 2008, the FASB issued FSP FAS 142-3, “Determination of theUseful Life of Intangible Assets” (“FSP FAS 142-3”). FSP FAS 142-3amends the factors that should be considered in developing renewal or extensionassumptions used to determine the useful life of a recognized intangible assetunder FASB Statement No.142, Goodwill and Other Intangible Assets. FSPFAS 142-3 also requires expanded disclosure related to the determinationof intangible asset useful lives. FSP FAS 142-3 is effective for financialstatements issued for fiscal years beginning after December 15, 2008, andinterim periods within those fiscal years. The Corporation is currentlyevaluating the impact this adoption may have on its results of operations andfinancial condition, but does not expect it will have a material impact, ifany.

 

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS 157”). SFAS 157 defines fair value, establishesa framework and gives guidance regarding the methods used for measuring fairvalue, and expands disclosures about fair value measurements. In February 2008,the FASB issued FASB Staff Position 157-1, “Application of FASB Statement No. 157to FASB Statement No. 13 and Other Accounting Pronouncements That AddressFair Value Measurements for Purposes of Lease Classification or Measurementunder Statement 13” (“FSP 157-1”) and FASB Staff Position 157-2, “EffectiveDate of FASB Statement No. 157” (“FSP 157-2”). FSP 157-1 amendsSFAS 157 to remove certain leasing transactions from its scope. FSP 157-2delays the effective date of SFAS 157 for all non-financial assets andnon-financial liabilities, except for items that are recognized or disclosed atfair value in the financial statements on a recurring basis (at leastannually), until fiscal years beginning after November 15, 2008.SFAS 157 is effective for financial statements issued for fiscal yearsbeginning after November 15, 2007, and interim periods within those fiscalyears. The measurement and disclosure requirements related to financial assetsand financial liabilities are effective beginning the first quarter of fiscal2009. The Corporation does not believe that the adoption of SFAS 157 forfinancial assets and financial liabilities will have a material impact on itsfinancial position or results of operations. The Corporation is currentlyassessing the impact that SFAS 157 will have on its results of operationsand financial position when it is applied to non-financial assets andnon-financial liabilities beginning in the first quarter of fiscal 2010.

 

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**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

 

**INTRODUCTION**

 

World Heart Corporation and its subsidiaries arecollectively referred to as “WorldHeart” or the “Corporation.” The followingManagement Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) discusses material changes in WorldHeart’s financialcondition and results of operations and cash flows for the three and ninemonths ended September 30, 2008 and September 30, 2007. Suchdiscussion and comments on the liquidity and capital resources should be readin conjunction with the information contained in WorldHeart’s auditedconsolidated financial statements for the year ended December 31, 2007,prepared in accordance with U.S. GAAP included in our Annual Report on Form 10—KSB/Afor the fiscal year ended December 31, 2007.

 

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; costsand delays associated with research and development, pre-clinical testing andclinical trials for our products and next-generation product candidates, suchas the Levacor Rotary VAD; our ability to manufacture, sell and market ourproducts; decisions, and the timing of decisions, made by health regulatoryagencies regarding approval of our products; competition from other productsand therapies for heart failure; continued slower than anticipated destinationtherapy adoption rate for VADs; limitations on third-party reimbursements; ourability to obtain and enforce in a timely manner patent and other intellectualproperty protection for our technology and products; our ability to avoid,either by product design, licensing arrangement or otherwise, infringement ofthird parties’ intellectual property; our ability to enter into corporatealliances or 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-KSB/A,for the fiscal year ended December 31, 2007.

 

**OVERVIEW**

** **

Weare engaged in development of mechanical circulatory support systems focused ondeveloping and commercializing implantable ventricular assist devices (“VADs”),which are mechanical pumps that allow for the restoration of normal bloodcirculation to patients suffering from advanced heart failure.

 

Todate we derive most of our revenue from our Novacor LVAS (“Novacor LVAS” or “Novacor”)and related peripheral equipment, which we sell directly to medical clinics andhospitals in the United States, Europe and Canada and through distributors incertain other countries. The Novacor LVAS is commercially approved for use as abridge-to-transplant in the United States and Canada. In Europe, the NovacorLVAS has unrestricted approval for use as an alternative to transplantation,Bridge-to-Transplantation and to support patients who may be able to recoverthe use of their natural heart. In Japan, the device is commercially approvedfor use in cardiac patients at risk of imminent death from non-reversible leftventricular failure for which there is no alternative except hearttransplantation.

 

InJuly 2005, we acquired the assets of MedQuest Products, Inc. (“MedQuest”),including a rotary VAD, now called the LevacorTM Rotary VAD. In conjunction withthe acquisition, we raisedapproximately $22.7 million in gross financing proceeds from a privateplacement with Maverick Venture Management, LLC and the exercise of certainwarrants and also converted all of its remaining convertible debentures from anearlier financing. Pre-clinical testing of the LevacorRotary VAD was accelerated after the acquisition, with successful initial humanfeasibility use in Europe in 2006.

 

InNovember 2006, we announced a restructuring plan, which included areduction of commercial operations associated with the Novacor LVAS, and arefocusing of our resources on the development of the next generation product,particularly the Levacor Rotary VAD. After more than twenty years in clinicaluse, the Novacor LVAS has reached the natural end of its life cycle and we havebeen focusing on the development of the Levacor Rotary VAD and on activitiesleading to the start of a US clinical trial with the Levacor Rotary VAD in2009.

 

InJuly 2008, we completed a $30.0 million private placement transaction andrecapitalization under the terms of the Recapitalization Agreement (the “RecapitalizationAgreement”) dated June 20, 2008 and amended on July 31, 2008, amongthe Corporation, our wholly owned subsidiary World Heart Inc. (“WHI”), Abiomed, Inc.(“Abiomed”), Venrock Partners V, L.P., Venrock Associates V, L.P. and VenrockEntrepreneurs Fund V, L.P. (collectively, “Venrock”), Special Situations FundIII QP, L.P., Special Situations Cayman Fund, L.P., Special Situations PrivateEquity Fund, L.P., Special Situations Life Sciences Fund, L.P. and Austin W.Marxe (collectively, “SSF”) and New Leaf Ventures II, L.P. (“New Leaf”).Simultaneouslywith the closing of the recapitalization, Abiomedentered into a Termination and Release Letter Agreement with us and convertedthe full amount of 

 

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principaland interest owed on the $5,000,000 8% Secured Convertible Promissory Note (the“Note”) previously issued to Abiomed by the Corporation and WHI into 2,866,667of our common shares (the “Conversion”), released the security interest in allof our assets and those of WHI that secured the Note, terminated the warrantAbiomed held to purchase 113,333 of our common shares, forgave other amounts weowed to Abiomed and terminated previously existing agreements, arrangements andunderstandings with us. The purchase price delivered by Venrock and SSF at theclosing was offset by repayment of the principal and interest owed on thebridge loan facility (the “Bridge Loan”) of $1,400,000 that Venrock and SSF hadpreviously provided to us. As part of the recapitalizationtransaction, we issued warrants to purchase an aggregate of 83,333 commonshares to our advisors, Pacific Growth Equities, LLC and Stifel, Nicolaus andCompany (See Notes 8 and 9 of the Notes to Unaudited Condensed ConsolidatedFinancial Statements).

 

InAugust 2008, we announced that we were embarking on a phased consolidationinto our current facility in Salt Lake City, Utah. This included a search for anew CEO to reside in Salt Lake City and the termination or relocation ofseveral employees from our Oakland facility by approximately mid 2009. We arestill in the process of evaluating all our alternatives and expect to completethe evaluation process by early 2009, at which time we will determine the  impact, if any, on our financial position.

 

Researchand development by our competitors is proceeding on several rotary flowdevices. Certain of these devices have received the CE mark in Europe and areadvancing through clinical trials in the United States and Europe, and onedevice has just received U.S. marketing approval. We believe that our LevacorVAD is the most advanced fourth-generation rotary device under development.

 

Althoughthe patient population for Destination Therapy, the implanting of a VAD toprovide support for a patient not currently eligible for a heart transplant,continues to be largely untreated by cardiac assist devices, and the adoptionrates have been slower than anticipated, we believe that the DestinationTherapy market will evolve more rapidly when newer devices are evaluatedclinically and as experience with next-generation VADs increases.

 

**Summaryof Quarterly Results**

In thousands(000’s) except for per share amounts

(Unaudited)

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **September 30,**           | ** ** | **June 30** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                 | ** ** | **2008**                         | ** ** | **2008** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                       |       |                             |       |   |   |   |   |   |   |
| Net revenue                                |       | $                                | 192        |   | $ | 536 |   | $ | 635 |   | $ | 348 |   |
| Net loss for the period                    |       | (7,162                           | )          | (3,049 | ) | (11,478 | ) | (7,639 | ) |
| Net loss applicable to common shareholders |       | (7,162                           | )          | (3,049 | ) | (11,478 | ) | (7,639 | ) |
| Basic and diluted loss per share           |       | $                                | (0.80      | ) | $ | (7.94 | ) | $ | (29.92 | ) | $ | (19.92 | ) |

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **September 30,**           | ** ** | **June 30,** | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
| ** **                                 | ** ** | **2007**                         | ** ** | **2007** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                       |       |                             |       |   |   |   |   |   |   |
| Net revenue                                |       | $                                | 532        |   | $ | 849 |   | $ | 848 |   | $ | 956 |   |
| Net loss for the period                    |       | (3,018                           | )          | (4,477 | ) | (3,430 | ) | (5,136 | ) |
| Net loss applicable to common shareholders |       | (3,018                           | )          | (4,477 | ) | (3,430 | ) | (5,136 | ) |
| Basic and diluted loss per share           |       | $                                | (7.87      | ) | $ | (11.67 | ) | $ | (8.94 | ) | $ | (23.21 | ) |

 

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**RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHPERIODS ENDED SEPTEMBER 30, 2008 COMPARED WITH THE THREE AND NINE MONTHPERIODS ENDED SEPTEMBER 30, 2007**

 
| **In thousands (000’s) except for per share  amounts**                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| **(Unaudited)**                                                             | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenue**                                                                 |       | $                                                        | 192        |                                                    | $          | 532 |   | 1,363 |   | $ | 2,228 |   |
| **Cost of goods sold**                                                      |       | (204                                                     | )          | (382                                                    | )          | (889 | ) | (2,274 | ) |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Gross profit**                                                            |       | (12                                                      | )          | 150                                                     |       | 474 |   | (46 | ) |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                                     |       |                                                    |       |   |   |   |   |
| Selling, general and administrative                                         |       | 1,036                                                    |       | 1,457                                                   |       | 3,441 |   | 4,459 |   |
| Research and development                                                    |       | 2,226                                                    |       | 2,164                                                   |       | 6,651 |   | 7,169 |   |
| Clinical and marketing support- non-cash                                    |       | —                                                   |       | —                                                  |       | 6,479 |   | — |   |
| Amortization of intangibles                                                 |       | 48                                                       |       | 48                                                      |       | 144 |   | 144 |   |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Total operating expenses**                                                |       | 3,310                                                    |       | 3,669                                                   |       | 16,715 |   | 11,772 |   |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Operating loss**                                                          |       | (3,322                                                   | )          | (3,519                                                  | )          | (16,241 | ) | (11,818 | ) |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Other income (expense)**                                                  |       | (3,840                                                   | )          | 501                                                     |       | (5,448 | ) | 893 |   |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Net loss applicable to common shareholders**                              |       | $                                                        | (7,162     | )                                                       | $          | (3,018 | ) | $ | (21,689 | ) | $ | (10,925 | ) |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Weighted average number of common shares  outstanding basic and diluted** |       | 8,963                                                    |       | 384                                                     |       | 3,296 |   | 384 |   |
|                                                                        |       |                                                     |       |                                                    |       |   |   |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                                        | (0.80      | )                                                       | $          | (7.87 | ) | $ | (6.58 | ) | $ | (28.48 | ) |

 

***Revenue:*******In the past,****sales ofNovacor LVAS implant kits and related peripheral equipment and servicesaccounted for the majority of our revenue. In addition, we generate revenuefrom sales of SPUS (Segmented Poly Urethane Solution) used by one other medicaldevice manufacturer, which have contributed a greater percentage of overallrevenue in recent quarters. We primarily sell our products directly, except fora few countries where we sell through distributors.

 

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

 
| ** **                   | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|------------------------------|------------|----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                                 | ** ** | **2007**                                                | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(Unaudited)**              | ** ** | **$**                                                    | ** ** | **Units**                                               | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
| **Novacor Product Revenues** |       |                                                     |       |                                                    |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Implant kits                 |       | $                                                        | —     |                                                    | —     |   | $ | 306 |   | 4 |   | $ | 318 |   | 5 |   | $ | 990 |   | 14 |   |
| Peripherals and other        |       | 102                                                      |       |                                                    |       | 136 |   |   |   | 440 |   |   |   | 938 |   |   |   |
|                         |       | 102                                                      |       |                                                    |       | 442 |   |   |   | 758 |   |   |   | 1,928 |   |   |   |
| **SPUS Revenues**            |       | 90                                                       |       |                                                    |       | 90 |   |   |   | 605 |   |   |   | 300 |   |   |   |
| **Total Revenue**            |       | $                                                        | 192        |                                                    |       |   | $ | 532 |   |   |   | $ | 1,363 |   |   |   | $ | 2,228 |   |   |   |

 

Revenue for the quarter ended September 30, 2008 was $192,000reflecting a decrease of $340,000, or 64%, compared with the quarter ended September 30,2007. There were no Novacor LVAS implant kits sold in the quarter ended September 30,2008 compared to 4 implant kits sold in the quarter ended September 30,2007. Novacor peripherals and other revenue, including Novacor LVAS hardware,peripherals, and services, were $102,000 for the quarter ended September 30,2008, a decrease of $34,000, or 25%, compared with Novacor peripherals andservices of $136,000 recorded in the quarter ended September 30, 2007.

 

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We do not expect to sell any additionalNovacor implant kits in the future as the Novacor LVAS has reached the naturalend of its life cycle and we are phasing out the product.

 

SPUS revenue was $90,000 for the quarterended September 30, 2008, or 47% of total revenue and $90,000 for thequarter ended September 30, 2007, or 17% of total revenue. SPUS revenue inrecent quarters has become a greater percentage of our total revenue as Novacorproduct revenues have declined, and we expect this trend to continue throughoutthe remainder of 2008.

 

Revenue for the first nine months of 2008 was $1,363,000, a decrease of$865,000, or 39%, compared with $2,228,000 recorded in the same period of 2007.Novacor implant kits recognized as revenue for the nine months ended September 30,2008 totaled five compared with 14 during the same period of 2007. Revenuegenerated from Novacor products was $758,000 for the first nine months of 2008compared to $1,928,000 for the same nine-month period in 2007, a decrease of$1,170,000, or 61%. We anticipate no implant kit sales and continued decliningNovacor peripheral and other revenue throughout the remainder of 2008.

 

SPUS revenue, on the other hand, increasedfrom $300,000 in the first nine months of 2007 to $605,000 in the first ninemonths of 2008, an increase of $305,000, or 102%. SPUS revenue was 44% of totalrevenue in the first nine months of 2008, compared with 13% of total revenue inthe first nine months of 2007.

 

***Cost of goodssold:***  For the threemonths ended September 30, 2008, cost of goods sold was greater thanrevenue at 106% of revenue, as an additional $99,000 of Novacor inventorywrite-downs were taken in the quarter. Cost of goods sold for the three monthsended September 30, 2007 was 72% of revenue. Cost of goods sold as apercent of revenue was 65% and 102% for the nine-month periods ended September 30,2008 and September 30, 2007, respectively. The higher cost of goods soldin the prior year’s nine-month period ended September 30, 2007 was due,principally, to the write-off of excess Novacor LVAS inventories and expensingof manufacturing variances. Gross profit for the nine-month period of 2008 hasimproved when compared to the same periods in 2007 as a result of the shift inrevenue from lower margin Novacor products to higher margin SPUS product.

 

***Selling******, general and administrative:*** Selling, general and administrativeexpenses consist primarily of payroll and related expenses for executives,sales, marketing, accounting and administrative personnel. Selling expensesprimarily relate to enrollment of new centers in the anticipated Levacorclinical trials, field support of existing Novacor patients and marketing/tradeshow costs. Our other administrative expenses include professional fees,communication expenses, insurance premiums, public reporting costs and generalcorporate expenses.

 

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

 
| ** **                 | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|-------------------------------------|------------|
| **(Unaudited)**            | ** ** | **2008**                             | ** ** | **2007**                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                       |       |                                 |       |                                |       |   |   |   |   |
| Selling                    |       | $                                    | 214        |                                | $          | 199 |   | $ | 693 |   | $ | 1,051 |   |
| General and administrative |       | 822                                  |       | 1,258                               |       | 2,748 |   | 3,408 |   |
| Total                      |       | $                                    | 1,036      |                                | $          | 1,457 |   | $ | 3,441 |   | $ | 4,459 |   |

 

Selling expenses for the threemonths ended September 30, 2008 increased by $15,000, or 8%, compared withthe same period in 2007. For the nine-month period ended September 30,2008 selling expenses decreased $358,000, or 34%, compared with the nine-monthperiod ended September 30, 2007. The decrease is attributable to our November 2006restructuring, which eliminated most of our sales force by the second quarterof 2007, as well as reduced personnel costs in Europe. For the three and ninemonth periods ended September 30, 2008, we recorded $5,000 and $16,000,respectively, in stock-based compensation expense compared with $0 in thecomparable 2007 periods. Selling expenses are expected to remain at currentlevels for the next several quarters.

 

General and administrativeexpenses for the three months ended September 30, 2008 decreased by$436,000, or 35% compared with the same period in 2007. For the nine-monthperiod ended September 30, 2008, general and administrative expensesdecreased $660,000, or 19% compared with the nine-month period ended September 30,2007. The decreases in both, the current quarter and nine months to date areattributable to non-recurring charges incurred in 2007 for site restoration ofone of the two Oakland headquarters buildings previously occupied under a leasewhich expired in April, 2007, cost savings realized from consolidation of ourOakland facilities in late 2007, reduced legal expenses and $0 provision forthe 2008 annual employee bonus plan as performance milestones through September 30,2008 have not been met. For the three and nine month periods ended September 30,2008, we recorded $32,000, and $128,000, respectively, in stock-basedcompensation expense compared with $131,000 and $273,000 recorded in thecomparable 2007 periods. General and administrative expenses are expected toremain at about current levels for the next several quarters.

 

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***Research anddevelopment:***Research and development expenses consist principally of salaries andrelated expenses for research personnel, consulting, prototype manufacturing,testing, clinical trials, material purchases and regulatory affairs incurred atour Oakland and Salt Lake City facilities.

 

Research and development expenses for the three months ended September 30,2008 increased $62,000, or 3%, compared with the three months ended September 30,2007. The increase is attributable to non-recurring charges incurred related tothe R&D purchased technology from LaunchPoint in the third quarter of 2008(See Note 10 of the Notes to Unaudited Condensed Consolidated FinancialStatements), offset in part by third quarter 2007 expenses related to site restoration of oneof the two Oakland headquarters buildings previously occupied under a lease,which expired in April 2007, and cost savings from consolidation of theOakland facilities during the fourth quarter of 2007. Additionally, due to cashconstraints during the second quarter of 2008 and into the third quarter of2008, expenditures for Levacor development were curtailed.  Research and development expenses for thenine-month period ended September 30, 2008 decreased by $517,500, or 7%,from the nine-month period ended September 30, 2007, primarily related to the non-recurring siterestoration charges incurred in 2007, the Oakland facilities consolidation and$0 provision for the 2008 annual employee bonus plan as performance milestonesthrough September 30, 2008 have not been met. Research anddevelopment expenses for our Levacor Rotary VAD are expected to increase duringthe remainder of 2008 with additional development and pre-clinical testing.

 

***Clinical andmarketing support-non-cash:******In the first quarter of2008,***we recorded non-cash expense of $6.5 millionrelated to the fair value of the warrants to purchase 90,000 shares issued toAbiomed. There was no such charge recorded for the quarter and nine-month periodended September 30, 2007. (See Note 8 of the Notes to Unaudited CondensedConsolidated Financial Statements).

 

***Debtinducement expense:******In the third quarter of2008, we recorded an expense of $3.9 million associated with the inducedconversion of the Abiomed Note and termination of previously existingagreements and warrants (See Note 8 and Note 9***of the Notesto Unaudited Condensed Consolidated Financial Statements***). There was no such chargerecorded for the quarter and nine- month period ended September 30, 2007.***

 

***Amortizationof intangibles:*****Amortization of the acquired MedQuest workforce for the quarterended September 30, 2008 and September 30, 2007 was $48,000 for bothperiods. Amortization expense for the nine-month period September 30, 2008and September 30, 2007 was $144,000, for both periods. This intangibleasset is being amortized on a straight-line basis over four years.

 

***ForeignExchange:***Foreign exchange transactions resultedin gains of $15,000 and $5,000 for the three and nine-month periods ended September 30,2008 respectively. This compares with losses of $160,000 and $29,000 for thethree and nine-month periods ended September 30, 2007 respectively.

 

***Investmentand other income:*** Investment and other income forthe quarter ended September 30, 2008 was $103,000 compared to $665,000during the quarter ended September 30, 2007. The 2007 period included$620,000 of other income from the recognition of deferred revenue for certainpreviously shipped Novacor product and the recognition of deferred clinicalfees associated with previously shipped Levacor VAD clinical product.Investment and other income for the nine-month period ended September 30,2008 was $121,000, compared to $924,000 for the nine-month period ended September 30,2007. The decrease is primarily attributable to lower average invested cashbalances along with lower interest rates, immediate payment discounts grantedto customers in the second quarter of 2008 and the recognition in thenine-month period ended September 30, 2007 of deferred revenue andclinical fees.

 

***Interestexpense:***Interest expense was $44,000 for thethird quarter of 2008 compared to $0 for the third quarter of 2007. In thethird quarter of 2008, interest expense on the Abiomed Note was $35,000 andinterest expense on the Bridge Loan was $8,000. For the nine-month period endedSeptember 30, 2008, interest expense was $1,659,000. Interest expense of$1,414,000 for the nine-month period ended September 30, 2008 was relatedto the beneficial conversion feature of the Abiomed Note recorded in the firstquarter, $234,000 was interest expense on the Note and $10,000 was interestexpense on the Bridge Loan. The Note and accumulated interest was convertedinto common shares as part of the Recapitalization Agreement and the BridgeLoan, along with accumulated interest, was deducted from the finalrecapitalization proceeds. There were no such charges recorded for the quarterand nine month periods ended September 30, 2007 (See Note 8 and Note 9 ofthe Notes to Unaudited Condensed Consolidated Financial Statements). We do notanticipate incurring interest expense in the foreseeable future.

 

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**LIQUIDITY AND CAPITAL RESOURCES**

 

Historically, we have fundedlosses 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, fund our research and development program and clinical trials, applyfor and obtain the necessary regulatory approvals and develop new technologiesand products.

 

At September 30, 2008,we had cash and cash equivalents of $23.9 million, an increase of $23.2 millionfrom December 31, 2007. We received $4.0 million in proceeds in January 2008from the second tranche of the Abiomed Note, Bridge Loan proceeds of $1.0million in June 2008 and another $0.4 million in July 2008, andrecapitalization proceeds of $28.6 million, net of deductions of Bridge Loansand interest, on July 31, 2008. For the first nine months of 2008, cashused to fund operating activities was $9.5 million, consisting primarily of thenet loss for the period of $21.7 million, offset by non-cash charges of $1.5million related to the beneficial conversion feature of the Abiomed note, $6.5million related to the fair value of warrants issued to Abiomed and $3.9million related to the Abiomed induced warrant conversion charge. Additionalnon-cash charges of $0.9 million consist of amortization and depreciation,write-down of inventory and stock option expense. Working capital changesconsisted of a $0.5 million decrease in inventories and a $1.0million decreasein accounts payable and accrued compensation offset by an increase of $0.1million in accounts receivable and prepaid expenses.

 

Investing activities in 2008requiring cash resources consisted of $45,000 in property and equipmentadditions.

 

On July 31, 2008, WorldHeart completed a $30.0 million privateplacement transaction and recapitalization under the terms of theRecapitalization Agreement dated June 20, 2008 and amended on July 31,2008 (See Note 9 of the Notes to Unaudited Condensed ConsolidatedFinancial Statements). With the completion of the private placement and recapitalization,the Corporation believes it has sufficient cash to fund operations for at leasttwelve months and believes that it will be able to realize its assets and dischargeits liabilities in the normal course of business.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

As a result of theCorporation’s decision to reduce commercial operations associated with theNovacor LVAS, and refocus its resources on the development of its next generationproducts, WorldHeart wrote-off $4.6 million of Novacor related inventories in2006 that management estimated were surplus. In 2007 the Corporation wrote offan additional $1.4 million of inventory. Through the first nine months of 2008an additional $0.4 million of Novacor inventory was written-off. Managementestimated future usage of inventory on hand by projecting future sales of itsNovacor product, and used these to predict raw material parts and componentsthat would be consumed in manufacturing product to meet these sales. Futurewrite-downs may be required based on actual sales achieved and will be recordedwhen they can be reasonably determined.

 

**OFF- BALANCE SHEET ARRANGEMENTS**

 

None.

 

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

 

**NotRequired**

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

*Evaluationof disclosure controls and procedures*: Based on theirevaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of September 30, 2008, ourpresident and chief executive officer (principal executive officer) and ourchief financial officer (principal accounting and financial officer) haveconcluded that our disclosure controls and procedures are effective at thereasonable assurance level.

 

*Changes ininternal control over financial reporting:* There was nochange in our internal control over financial reporting that occurred duringthe quarter ended September 30, 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlover financial reporting.

 

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**PART II—OTHERINFORMATION**

 

#### **ITEM 1. 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-KSB/Afor the year ended December 31, 2007.

 

**ITEM 2.UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS**

 

(None)

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

(None)

 

**ITEM 4.SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS**

 

(None)

 

**ITEM 5.OTHER INFORMATION**

 

(None)

 

**ITEM6.  EXHIBITS**

 

(a)               Exhibits

 
|              |   |                                                                                                                                                                                                             |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| Exhibit 3.1  |   | Amendment to Articles,  dated October 27, 2008 (4)                                                                                                                                                          |
|              |   |                                                                                                                                                                                                             |
| Exhibit 4.1  |   | Share certificate                                                                                                                                                                                                |
|              |   |                                                                                                                                                                                                             |
| Exhibit 4.2  |   | Registration Rights  Agreement between World Heart Corporation, its wholly-owned subsidiary World  Heart Inc. and certain investors named therein dated as of July 31, 2008  (1)                            |
|              |   |                                                                                                                                                                                                             |
| Exhibit 4.3  |   | Recapitalization  Agreement between World Heart Corporation, its wholly-owned subsidiary World  Heart Inc. and certain investors named therein dated as of June 20, 2008  (2)                               |
|              |   |                                                                                                                                                                                                             |
| Exhibit 4.4  |   | Amendment No. 1 to  the Recapitalization Agreement among World Heart Corporation, its  wholly-owned subsidiary World Heart Inc. and certain investors named therein  dated as of July 31, 2008 (1)     |
|              |   |                                                                                                                                                                                                             |
| Exhibit 4.5  |   | Amendment and Waiver to  Registration Rights Agreement between World Heart Corporation, its  wholly-owned subsidiary World Heart Inc. and certain investors named therein  dated as of November 3, 2008 (3) |
|              |   |                                                                                                                                                                                                             |
| Exhibit 10.1 |   | Release Agreement (1)                                                                                                                                                                                            |
|              |   |                                                                                                                                                                                                             |
| Exhibit 10.2 |   | Consulting Agreement  Amendment, dated October 30, 2008, between World Heart Inc. and Pellone  Enterprises Incorporated (4)                                                                                 |
|              |   |                                                                                                                                                                                                             |
| 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.                                                                                   |

 

----

(1) Incorporatedby reference to exhibits to our Current Report on Form 8-K filed August 6,2008.

(2) Incorporatedby reference to exhibits to our Current Report on Form 8-K filed June 30,2008.

(3) Incorporatedby reference to exhibits to our Registration Statement on Form S-3 filed November 6,2008.

(4) Incorporatedby reference to exhibits to our Current Report on Form 8-K filed October 31,2008.

 

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**SIGNATURES**

 

Pursuant to the requirements of the Securities Exchange Act of 1934, theregistrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 
|                                            | World Heart Corporation                                               |
|-------------------------------------------------|-----------------------------------------------------------------------|
|                                            | (Registrant)                                                          |
|                                            |                                                                  |
|   Dated:   November 14, 2008     | /s/ Jal S. Jassawalla                                                 |
|                                            | Jal S.  Jassawalla, President and Chief   Executive Officer           |
|                                            |                                                                  |
|   Dated:  November 14, 2008 | /s/ David Pellone                                                     |
|                                            | David  Pellone, Vice President, Finance   and Chief Financial Officer |

 

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