** **

**UNITED STATESSECURITIES AND EXCHANGECOMMISSION**

**Washington, D.C. 20549**

** **

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** **

**FORM 10-QSB**

** **

**(Mark One)**

** **
|                                                                                 |                                                                                             |                                                            |
|---------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------|-----------------------------------------------------------------|
| **x**                                                                           | **QUARTERLY REPORT UNDER SECTION 13 OR  15(d) OF THE SECURITIES EXCHANGE|ACT OF 1934** |
| ** **                                                                      |                                                                                             | ** **                                                      |
| ** **                                                                      |                                                                                             | **For  quarterly period ended   March 31, 2007** |
| ** **                                                                      |                                                                                             | ** **                                                      |
| **o**                                                                           | **TRANSITION REPORT UNDER SECTION 13 OR  15(d) OF THE EXCHANGE ACT**                   |
| ** **                                                                      |                                                                                             | ** **                                                      |
| **For the  transition period from       to** |
| ** **                                                                      |
| **Commission  file number:  000-28882**                               |

** **

**WORLD HEART CORPORATION**

(Exact name of small business issuer asspecified in its charter)

 

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

 

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

(Address of principal executive offices)

 

**(510)563-5000**

(Issuer’s telephone number)

 

**N/A**

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

 

Checkwhether the issuer (1) filed all reports required to be filed bySection 13 or 15(d) of the Exchange Act during the past 12 months (orfor such shorter period that the registrant was required to file such reports),and (2) has been subject to such filing requirements for the past 90 days.      Yes x    No o

 

Indicateby check mark whether the Registrant is a shell company (as defined inRule 12b-2 of the Exchange Act).

Yes o    No x

 

Statethe number of shares outstanding of each of the issuer’s classes of commonequity, as of the latest practicable date:

 

Thenumber of common shares outstanding as of May 5, 2007 was 115,072,749.

 

TransitionalSmall Business Disclosure Format (Check one):      Yeso    No x

 

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**TABLE OF CONTENTS**

 
|              | ** ** | **Item** | ** ** | ** **                                                      |
|--------------|------------|----------|------------|-----------------------------------------------------------------|
|         |       |     |       |                                                            |
| Part I  |       | 1        |       | Financial Statements                                            |
|         |       |     |       |                                                            |
|         |       | 2        |       | Management’s  Discussion and Analysis or Plan of Operation |
|         |       |     |       |                                                            |
|         |       | 3        |       | 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.  FINANCIALSTATEMENTS.**

**WORLD HEART CORPORATION**

## **Consolidated BalanceSheets**

(United States Dollars)
| ** **                                                                                                 | ** ** | **March 31, 2007** | ** **     | **December 31, 2006** | ** ** |
|------------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|---------------------------------|------------|
| ** **                                                                                                 | ** ** | **(Unaudited)**              | ** **     | ** **                      | ** ** |
| **ASSETS**                                                                                                 | ** ** | ** **                   | ** **     | ** **                      | ** ** |
| **Current assets**                                                                                         | ** ** | ** **                   | ** **     | ** **                      | ** ** |
| Cash and cash  equivalents                                                                                 |       | $                            | 9,103,296      |                            | $          | 12,216,671 |   |
| Trade and other  receivables                                                                               |       | 1,735,556                    |           | 2,297,769                       |       |
| Prepaid expenses                                                                                           |       | 779,017                      |           | 703,689                         |       |
| Inventory                                                                                                  |       | 2,823,536                    |           | 3,088,359                       |       |
|                                                                                                       |       | 14,441,405                   |           | 18,306,488                      |       |
| **Long-term assets**                                                                                       | ** ** | ** **                   | ** **     | ** **                      | ** ** |
| Cash pledged as  collateral for lease                                                                      |       | 750,000                      |           | 750,000                         |       |
| Capital assets                                                                                             |       | 955,459                      |           | 950,470                         |       |
| Intangible  assets                                                                                         |       | 442,908                      |           | 490,764                         |       |
|                                                                                                       |       | 2,148,367                    |           | 2,191,234                       |       |
| **Total  assets**                                                                                          | ** ** | **$**                        | **16,589,772** | ** **                      | **$**      | **20,497,722** | ** ** |
|                                                                                                       |       |                         |           |                            |       |
| **LIABILITIES AND SHAREHOLDERS'  EQUITY**                                                                  | ** ** | ** **                   | ** **     | ** **                      | ** ** |
| **Current liabilities**                                                                                    | ** ** | ** **                   | ** **     | ** **                      | ** ** |
| Accounts payable  and accrued liabilities                                                                  |       | $                            | 3,355,611      |                            | $          | 3,526,448 |   |
| Accrued site  restoration                                                                                  |       | 982,000                      |           | 876,000                         |       |
| Accrued  compensation                                                                                      |       | 465,290                      |           | 919,146                         |       |
| Deferred  clinical fees                                                                                    |       | 309,998                      |           | 309,998                         |       |
| Deferred revenue                                                                                           |       | 162,700                      |           | 159,801                         |       |
| **Total liabilities**                                                                                      |       | 5,275,599                    |           | 5,791,393                       |       |
| ** **                                                                                                 | ** ** | ** **                   | ** **     | ** **                      | ** ** |
| **Shareholders' equity**                                                                                   | ** ** | ** **                   | ** **     | ** **                      | ** ** |
| Share capital:                                                                                             |       |                         |           |                            |       |
| Issued and  outstanding—115,072,749 common shares  (December 31, 2006—115,072,749 common shares) |       | 290,750,131                  |           | 290,750,131                     |       |
| Additional  paid-in-capital                                                                                |       | 2,413,329                    |           | 2,375,497                       |       |
| Cumulative other  comprehensive income                                                                     |       | (6,285,577                   | )              | (6,285,577                      | )          |
| Accumulated  deficit                                                                                       |       | (275,563,710                 | )              | (272,133,722                    | )          |
| Total  shareholders' equity                                                                                |       | 11,314,173                   |           | 14,706,329                      |       |
|                                                                                                       |       |                         |           |                            |       |
| **Total liabilities and shareholders'  equity**                                                            | ** ** | **$**                        | **16,589,772** | ** **                      | **$**      | **20,497,722** | ** ** |
|                                                                                                       |       |                         |           |                            |       |

 

(The accompanying notesare an integral part of these consolidated financial statements.)

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**WORLD HEART CORPORATION**

## **ConsolidatedStatements of Operations**

(United States Dollars)

(Unaudited)

 
| ** **                                                | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                                      |       |                                                 |       |   |   |
| **Revenue**                                               |       | $                                                    | 847,715    |   | $ | 3,284,816 |   |
| **Cost of goods sold**                                    |       | (1,068,764                                           | )          | (1,411,741 | ) |
| ** **                                                |       |                                                 |       |   |   |
| **Gross margin**                                          |       | (221,049                                             | )          | 1,873,075 |   |
| ** **                                                |       |                                                 |       |   |   |
| **Operating expenses**                                    |       |                                                 |       |   |   |
| Selling, general  and administrative                      |       | 1,545,472                                            |       | 2,455,842 |   |
| Research and  development                                 |       | 1,868,948                                            |       | 2,898,898 |   |
| Amortization of  intangibles                              |       | 47,856                                               |       | 47,856 |   |
|                                                      |       |                                                 |       |   |   |
| **Total  operating expenses**                             |       | 3,462,276                                            |       | 5,402,596 |   |
| ** **                                                |       |                                                 |       |   |   |
| **Operating loss**                                        |       | (3,683,325                                           | )          | (3,529,521 | ) |
| ** **                                                |       |                                                 |       |   |   |
| **Other income (expenses)**                               |       |                                                 |       |   |   |
| Foreign exchange  gain (loss)                             |       | 134,953                                              |       | (6,698 | ) |
| Investment and  other income (expense)                    |       | 118,384                                              |       | 93,272 |   |
| Loss on disposal  of capital assets                       |       | —                                               |       | (271 | ) |
| Interest expense  and financing costs                     |       | —                                               |       | 1,627 |   |
| ** **                                                |       |                                                 |       |   |   |
| **Net loss for the quarter**                              |       | $                                                    | (3,429,988 | ) | $ | (3,441,591 | ) |
| ** **                                                |       |                                                 |       |   |   |
| **Weighted average number of  common shares outstanding** |       | 115,072,749                                          |       | 55,479,549 |   |
| ** **                                                |       |                                                 |       |   |   |
| **Basic and diluted loss per common share**               |       | $                                                    | (0.03      | ) | $ | (0.06 | ) |

 

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

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** **

**WORLDHEART CORPORATION**

**ConsolidatedStatements of Cash Flow**

(United StatesDollars)

(Unaudited)

 
| **CASH FLOWS FROM (USED IN)**          | ** ** | **Three Months Ended March 31,** | ** **    |
|------------------------------------------------------------|------------|------------------------------------------------------|---------------|
| ** **                                                 | ** ** | **2007**                                             | ** **    | **2006** | ** ** |
|                                                       | ** ** | ** **                                           | ** **    | ** ** | ** ** |
| **Operating activities**                                   |       |                                                 |          |   |   |
| Net loss for the period                                    |       | $                                                    | (3,429,988    | ) | $ | (3,441,591 | ) |
| Items not involving  cash —                           |       |                                                 |          |   |   |
| Amortization and  depreciation                             |       | 59,497                                               |          | 199,705 |   |
| Loss on disposal  of capital assets                        |       | —                                               |          | 271 |   |
| Write down of  inventory                                   |       | 235,000                                              |          | — |   |
| Stock-based  compensation expense                          |       | 37,832                                               |          | 31,556 |   |
| Unrealized  foreign exchange loss (gain)                   |       | 37,193                                               |          | 945 |   |
| Change in operating  components of working capital         |       | (37,648                                              | )             | (196,342 | ) |
| **Cash used in operating  activities**                     | ** ** | **(3,098,114**                                       | **)**         | **(3,405,456** | **)** |
|                                                       |       |                                                 |          |   |   |
| **Investing activities**                                   |       |                                                 |          |   |   |
| Purchase of capital  assets                                |       | (16,630                                              | )             | (28,709 | ) |
| **Cash used in investing  activities**                     | ** ** | **(16,630**                                          | **)**         | **(28,709** | **)** |
|                                                       |       |                                                 |          |   |   |
| **Effect of exchange rates on  cash and cash equivalents** | ** ** | **1,369**                                            | ** **    | **—** | ** ** |
| **Change in cash and cash  equivalents for the period**    | ** ** | **(3,113,375**                                       | **)**         | **(3,434,165** | **)** |
| ** **                                                 | ** ** | ** **                                           | ** **    | ** ** | ** ** |
| **Cash and cash equivalents,  beginning of the period**    | ** ** | **12,216,671**                                       | ** **    | **10,661,682** | ** ** |
| ** **                                                 | ** ** | ** **                                           | ** **    | ** ** | ** ** |
| **Cash and cash equivalents, end  of the period**          | ** ** | **$**                                                | **9,103,296** | ** ** | **$** | **7,227,517** | ** ** |

 

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

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** **

**WORLD HEART CORPORATION**

#### **Notes to Unaudited Consolidated FinancialStatements**

 

**1.****              Going ConcernAssumption**

These consolidatedfinancial statements have been prepared on the basis of accounting principlesapplicable to a going concern, which assume that World Heart Corporation andits subsidiaries (collectively referred to as WorldHeart or the Corporation)will continue in operation for the foreseeable future and will be able torealize its assets and discharge its liabilities in the normal course of operations.

During the quarter endedMarch 31, 2007, the Corporation incurred a net loss of $3.4 million andused cash in its operations of $3.1 million. At March 31, 2007, WorldHearthad cash and cash equivalents of $9.1 million and current liabilities of $5.3 million.The Corporation expects to continue to generate operating losses at leastthrough 2007 and 2008. As a result, there is substantial doubt about theability of the Corporation to meet its obligations as they come due and theappropriateness of the use of accounting principles applicable to a goingconcern.

In November 2006,the Corporation entered into a purchase agreement with certain new and currentinvestors for a private placement financing. The private placement was approvedby shareholders at the Corporation’s Annual and Special Meeting held onDecember 20, 2006. Net proceeds from the financing were $13.8 million.

In November 2006,the Corporation announced a significant restructuring and realignment of itsbusiness operations to focus on development of its LevacorTM Rotary VAD product and reduced commercialefforts on the Novacor® LVAS product. The restructuring program wasdirected at reducing manufacturing, selling and administrative costs,associated with the Corporation’s Novacor LVAS product.

Despite the 2006financing and restructuring, the Corporation will be required to raiseadditional capital to allow for the on-going satisfaction of its obligations ona timely basis and to continue in operation. WorldHeart is exploring variousfinancing alternatives, including equity financing transactions and corporatecollaborations, to meet cash requirements. Equity financings could include, butare not limited to, private investments in public equity transactions orstrategic equity investments by interested companies. Corporate collaborationscould include licensing the Corporation’s products for upfront and milestonepayments, or co-development and co-funding of the Corporation’s products. Therecan be no assurance that the alternatives the Corporation is exploring will besuccessful.

These consolidated financialstatements do not reflect adjustments in the carrying values of assets andliabilities, the reported revenues and expenses, and the balance sheetclassifications used that would be necessary if the going concern assumptionwere not appropriate. These adjustments could be material.

**2.****              SignificantAccounting Policies**

*Basis of presentation*

The accompanying interimunaudited consolidated financial statements have been prepared by management inaccordance with accounting principles generally accepted in the United States(U.S. GAAP), and include all assets, liabilities, revenues and expenses of theCorporation and its wholly owned subsidiaries: World Heart Inc. and World HeartB.V. All material inter-company transactions and balances have been eliminated.These interim unaudited consolidated financial statements follow the sameaccounting policies and methods of application as the Corporation’s auditedconsolidated financial statements for the year ended December 31, 2006.These interim unaudited consolidated financial statements do not conform in allrespects to the requirements of  U.S.GAAP for annual financial statements and are not necessarily indicative ofresults expected for the entire year. These condensed notes to the interimunaudited consolidated financial statements should be read in conjunction withthe audited consolidated financial statements and notes for the year endedDecember 31, 2006. In the opinion of management, these interim unauditedconsolidated financial statements reflect all normal and recurring adjustmentsconsidered necessary to state fairly the results for the periods presented.

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** **

*Use ofestimates*

Thepreparation of these consolidated financial statements in conformity with U.S.GAAP requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities and disclosure of contingent assetsand liabilities at the dates of the financial statements and the reportedamounts of revenues and expenses during the reporting periods.  Actual results could differ from theseestimates.

**3.**              Stock-based Compensation

WorldHeart recorded $32,000 of stockcompensation expense in the unaudited consolidated statement of operations andaccumulated deficit for the three months ended March 31, 2007.  The unrecognized expense of awards not yetvested is $609,000. This will be recognized over the next twelve quarters.WorldHeart uses the Black-Scholes valuation model for estimating the fair valueof stock compensation.

The following table summarizes stock optionactivity for the quarter ended March 31, 2007: 
| ** **                             | ** ** | **Employees** | ** ** | **Non-Employees**                              | ** ** | ** **  | ** ** |
|----------------------------------------|------------|---------------|------------|------------------------------------------------|------------|-------------|------------|
| ** **                             | ** ** | **Options**   | ** ** | **Weighted average  exercise price** | ** ** | **Options** | ** ** | **Weighted average  exercise price** | ** ** | **Total Options** | ** ** |
| ** **                             |       | #             |       | $                                              |       | #           |       | $ |   | # |   |
| Outstanding at  December 31, 2006 |       | 6,003,478     |       | $                                              | 1.23       |        | 617,918    |   | $ | 1.80 |   | 6,621,396 |   |
| Granted                                |       | 2,973,000     |       | 0.41                                           |       | 250,000     |       | 0.41 |   | 3,223,000 |   |
| Expired                                |       | (20,686       | )          | 13.45                                          |       | (548        | )          | 38.64 |   | (21,234 | ) |
| Outstanding at March  31, 2007         |       | 8,955,792     |       | $                                              | 0.93       |        | 867,370    |   | $ | 1.38 |   | 9,823,162 |   |

 

As of March 31, 2007, 6,311,665 of theoutstanding options are exercisable.

The weighted average fair value of the optionsgranted during the quarters ended March 31, 2007 and March 31, 2006 were $0.26and $0.44, respectively. The following weighted average assumptions wereutilized:
|                           | ** ** | **Three Months Ended March 31,** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|
| ** **                | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| Risk free  interest rate  |       | 4.60                                                 | %          | 4.55 | % |
| Expected life  (in years) |       | 5.5                                                  |       | 6.0 |   |
| Expected  volatility      |       | 70                                                   | %          | 84 | % |
| Dividend yield            |       | 0                                                    | %          | 0 | % |

 

The dividend yield ofzero is based on the fact that WorldHeart has never paid cash dividends and hasno present intention to pay cash dividends. Expected volatility is based on the historical volatility of theCorporation’s common shares over the period commensurate with the expected lifeof the options.  The risk free interestrate is based on average rates for 5 and 7 year treasury notes as published bythe Federal Reserve.

**4.**              Performance Bonus

On March 8, 2007 the Compensation Committee of the Board of Directorsapproved a 2007 Performance Bonus plan for its employees.  The bonus will be earned based on achievementof goals related to the Corporation’s business. The maximum bonus is approximately $861,000 and will be paid 25% in cashand 75% in common shares.   

 

The cash and share payments will be paid when the CompensationCommittee determines that the 2007 performance goals have been achieved.  If the performance goals are not achieved onor before December 31, 2007, then no performance bonuses will be paid. Noexpense was recorded related to this plan in the first quarter of 2007 as nosignificant progress towards the goals was achieved.  

 

**5.**              Comprehensive Income

For the three months endedMarch 31, 2007 and March 31, 2006, there were no significant differencesbetween the Corporation’s comprehensive loss and its net loss.

7

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####  

**6.**              Warrant and Certain Stock OptionsDenominated in Canadian dollars

Effective January 1,2004, WorldHeart determined that its functional currency had changed from theCanadian dollar to the U.S. dollar because the majority of its businessoperations and investors were in the United States.

Concurrent with this changein functional currency, WorldHeart adopted the U.S. dollar as its reportingcurrency. Prior to January 1, 2004 the functional and reporting currencywas the Canadian dollar.

WorldHeart has primarilyfinanced its operations from the sale of equity and debt securities that havebeen denominated in U.S. and Canadian dollars. As part of these financings,WorldHeart has issued warrants to purchase common stock that have also beendenominated in U.S. and Canadian dollars, and therefore, had warrantsoutstanding at March 31, 2007 and December 31, 2006 that are denominatedin both currencies.

The SEC and FASB have issuedrecent interpretations for U.S. GAAP that suggest warrants whose exercise priceis different from the entity’s functional currency cannot be classified asequity and should be treated as derivatives, which would be recorded asliabilities and carried at their fair value. Changes in the fair value fromperiod to period would be recorded as a gain or loss in the statement ofoperations.

Therecent SEC and FASB interpretations relate to FASB Statement No. 133, “Accountingfor Derivative Instruments and Hedging Activities” and  Emerging Issue Task Force  (“EITF”) “EITF 00-19 “Accounting forDerivative Financial Instruments Indexed to and Potentially Settled in aCompany’s Own Stock”. The FASB has initiated a project to determine theaccounting treatment for certain equity instruments with elements offoreign currency risk. This project is expected to provide further guidancewith respect to U.S. GAAP accounting for such items.

WorldHeart is awaitingthe results of the FASB’s project and has not, therefore, recorded warrantsoutstanding that have exercise prices in Canadian dollars, as derivatives. Ifthe Corporation had recorded such instruments as derivatives, it would havereported an incremental gain in net income of approximately $0.1 million forthe quarter ended March 31, 2007 and an incremental loss in net income ofapproximately $0.8 million for the quarter ended March 31, 2006, related tothese instruments in the statement of operations for these periods. The amountswere calculated using the Black-Scholes option pricing model. The Corporationused the following assumptions to value the instruments: a 0% dividend rate forboth quarters presented, volatility of 70% and 84% for quarters ended March 31,2007 and March 31, 2006, respectively, the actual exercise price of eachinstrument, the actual Corporation closing share price for March 31, 2007 andMarch 31, 2006, the estimated remaining life of the underlying warrant at March31, 2007 and March 31, 2006, and the Canadian risk free interest rate based onthe estimated remaining life of the related warrant.

**7.**              Commitments and Contingencies

***(a) Operating Leases***

The Corporation iscommitted to minimum lease payments for office facilities and equipment andlicenses. There is also a $750,000 balance of pledged cash used as collateralfor the Oakland lease as of March 31, 2007. In addition, WorldHeart has paid a$150,000 security deposit and has established a $982,000 reserve for potentialsite restoration associated with the Oakland lease. The reserve increased by$106,000 from December 31, 2006. The Oakland lease expired on April 30, 2007.Management is still in the process of negotiating a new lease, but could besubject to certain holdover penalties, if the new lease is not finalized.

***(b) Research Agreement***

Effective April 1,1996, the Corporation entered into a research agreement with the CardiovascularDevices Division (CVD) of the Ottawa Heart Institute Research Corporation(Research Agreement) under which the Corporation agreed to fund a substantialportion of CVD’s remaining research efforts relating to artificial hearttechnology. The

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####  

Corporation acquiredjoint ownership with CVD of the technology arising from CVD’s research underthe Research Agreement and an exclusive twenty-five year license to market theproduct and certain other related technologies for an initial license fee of$147,544 and royalties of 7%. The Corporation is no longer focused ondeveloping or commercializing this technology and as a result is not expectedto make any royalty payments to CVD.

The Corporation’sresearch funding to CVD under the Research Agreement was $13,400,000 for theperiod from April 1, 1996 to December 31, 2004. No payments were madeduring 2005 or 2006 and the Corporation does not anticipate any future paymentsunder the Research Agreement, as it is not pursuing development of the CVDartificial heart technology.

The Corporation has beenin and actively continues discussions with the Ottawa Heart Institute toresolve certain payments which both parties believe are owed by the other. Inaddition, a former officer of WorldHeart currently employed at CVD has madeadditional claims for certain payments, which WorldHeart disputes. At March 31,2007, World Heart has accrued liabilities of approximately $1,076,000 andrecorded accounts receivable of $613,000 related to CVD and the former officer.

 

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** **

**ITEM 2.   MANAGEMENT’SDISCUSSION AND ANALYSIS OR PLAN OF OPERATION**

**INTRODUCTION**

WorldHeart Corporation and its subsidiaries are collectively referred to asWorldHeart. The following Management Discussion and Analysis of FinancialCondition and Results of Operations (MD&A) discusses material changes inWorldHeart’s financial condition and results of operations and cash flows forthe three months ended March 31, 2007 and March 31, 2006. Such discussion andcomments on the liquidity and capital resources should be read in conjunctionwith the information contained in WorldHeart’s audited consolidated financialstatements for the year ended December 31, 2006, prepared in accordancewith U.S. GAAP included in our Annual Report on Form 10 — KSB,as amended, for the fiscal year ended December 31, 2006.

The discussion andcomments contained hereunder include both historical information andforward-looking information. The forward-looking information, which generallyis information stated to be anticipated, expected, or projected by management,involves known and unknown risks, uncertainties and other factors that maycause the actual results and performance to be materially different from anyfuture results and performance expressed or implied by such forward-lookinginformation. Potential risks and uncertainties include, without limitation: ourability to raise additional funding, numerous uncertainties and time delaysinherent in the development of products, particularly our LevacorTM Rotary VAD; WorldHeart’s need to establishreimbursement mechanisms and product acceptance from third-party payers;extensive government regulation of our products; rapid developments intechnology by competitors some of whom have significantly greater financial,production and marketing resources; and slower than anticipated growth in theDestination Therapy market, as well as other risks and uncertainties set forthunder the heading “Risk Factors” in our Annual Report on Form 10-KSB,as amended, for year ended December 31, 2006.

**OVERVIEW**

WorldHeart is engaged indevelopment of mechanical circulatory support systems focused oncommercializing implantable ventricular assist devices (VADs), which aremechanical pumps that allow for the restoration of normal blood circulation topatients suffering from advanced heart failure. WorldHeart believes that it hasa broad platform of next-generation products under development for long-termcirculatory support and that both pulsatile and rotary pumps are required totreat the full spectrum of clinical needs of end and late-stage heart failurepatients. WorldHeart believes that rotary devices are best suited to late-stagepatients, with some contractility, who require only partial support, or anassist. Alternatively, pulsatile devices are best suited for end-stage patientswith poor ventricular contractility, who require full support, or functionalreplacement.

WorldHeart currentlyderives all of its revenue from its Novacor LVAS and related peripheralequipment, which it sells directly to medical clinics and hospitals in theUnited States, Europe and Canada and through a distributor in certain othercountries. The Novacor LVAS is commercially approved as a Bridge-to-Transplantdevice in the United States and Canada. In Europe, the Novacor LVAS has unrestrictedapproval 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.

In July 2005,WorldHeart acquired the assets of MedQuest Products, Inc. (MedQuest)including a rotary VAD, now called the Levacor Rotary VAD. In conjunction withthe acquisition, WorldHeart 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 Levacor Rotary VADwas accelerated after the acquisition, with successful initial humanfeasibility clinical implants in Europe completed during 2006. Further clinicaluse is planned in Canada during 2007, and clinical trials are expected to beginin the United States late in 2007.

In November 2006,WorldHeart announced a restructuring plan, which included a reduction ofcommercial operations associated with the Novacor LVAS, and a refocusing of itsresources on the development of its next generation products, particularly theLevacor Rotary VAD. WorldHeart also reduced its workforce and is consolidatingits facilities in Oakland, in an effort to further reduce expenses.

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WorldHeart is alsodeveloping a next-generation implantable pulsatile VAD, called theNovacor II. Development work on the Novacor II achieved an importantmilestone with successful initial animal implants completed in 2005 and 2006.Further development work on the Novacor II is expected to resume aftercompletion of the development of Levacor Rotary VAD and subject to additionalfunding availability.

In addition, WorldHeartis developing a pediatric VAD (PVAD) and a minimally invasive VAD (MIVAD) basedon PVAD technology.  The PVAD is a small,magnetically levitated, axial rotary VAD currently under development by aconsortium, including WorldHeart, intended for use in infants. Development isfunded by the National Institutes of Health, under a contract awarded to theUniversity of Pittsburgh.  WorldHeart’sMIVAD design is based on the technology incorporated in the PVAD device usingvascular connections to allow placement through minimally invasive techniques.It is intended to provide partial circulatory support in patients at an earlierstage of heart failure than currently used VADs.

Research and developmentby WorldHeart’s competitors is proceeding on several rotary flow devices.Certain of these devices have received the CE mark in Europe and are advancingthrough clinical trials in the United States and Europe. WorldHeart believesthat its Levacor Rotary VAD is the most advanced rotary device underdevelopment.

Although the DestinationTherapy patient population continues to be largely untreated by cardiac assistdevices, and the adoption rates have been slower than anticipated, we believethat the Destination Therapy market will evolve more rapidly as next-generationdevices are evaluated clinically and as experience with these VADs increases.

 

 

**Summaryof Quarterly Results**

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

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
| ** **                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                        |       |                             |       |   |   |   |   |   |   |
| Net revenue                                 |       | $                                | 848        |   | $ | 956 |   | $ | 1,387 |   | $ | 2,988 |   |
| Net loss for the  period                    |       | (3,430                           | )          | (5,136 | ) | (7,619 | ) | (3,888 | ) |
| Net loss  applicable to common shareholders |       | (3,430                           | )          | (5,136 | ) | (7,619 | ) | (3,888 | ) |
| Basic and  diluted loss per share           |       | $                                | (0.03      | ) | $ | (0.08 | ) | $ | (0.14 | ) | $ | (0.07 | ) |

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **March 31,**               | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
| ** **                                  | ** ** | **2006**                         | ** ** | **2005** | ** ** | **2005** | ** ** | **2005** | ** ** |
|                                        |       |                             |       |   |   |   |   |   |   |
| Net revenue                                 |       | $                                | 3,285      |   | $ | 3,630 |   | $ | 2,150 |   | $ | 2,449 |   |
| Net loss for the  period                    |       | (3,442                           | )          | (21,998 | ) | (22,251 | ) | $ | (4,643 | ) |
| Net loss  applicable to common shareholders |       | (3,442                           | )          | (21,998 | ) | (28,111 | ) | $ | (4,643 | ) |
| Basic and  diluted loss per share           |       | $                                | (0.06      | ) | $ | (0.40 | ) | $ | (0.64 | ) | $ | (0.27 | ) |

 

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**RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODENDED MARCH 31, 2007 COMPARED WITH THE THREE MONTH PERIOD ENDED MARCH 31,2006**

 

(Unaudited)

 
| ** **                           | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                                 |       |                                                 |       |   |   |
| **Revenue**                          |       | $                                                    | 847,715    |   | $ | 3,284,816 |   |
| **Cost of  goods sold**              |       | (1,068,764                                           | )          | (1,411,741 | ) |
| ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Gross  margin**                    |       | (221,049                                             | )          | 1,873,075 |   |
| ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Operating  expenses**              | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Selling, general and administrative  |       | 1,545,472                                            |       | 2,455,842 |   |
| Research and development             |       | 1,868,948                                            |       | 2,898,898 |   |
| Amortization of intangibles          |       | 47,856                                               |       | 47,856 |   |
|                                 |       |                                                 |       |   |   |
| **Total operating expenses**         |       | 3,462,276                                            |       | 5,402,596 |   |
| ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Operating  loss**                  |       | (3,683,325                                           | )          | (3,529,521 | ) |
| ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Other  income (expenses)**         | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| Foreign exchange gain (loss)         |       | 134,953                                              |       | (6,698 | ) |
| Investment and other income          |       | 118,384                                              |       | 93,272 |   |
| Loss on disposal of capital assets   |       | —                                               |       | (271 | ) |
| Interest expense and financing costs |       | —                                               |       | 1,627 |   |
| ** **                           | ** ** | ** **                                           | ** ** | ** ** | ** ** |
| **Net loss for the quarter**         |       | $                                                    | (3,429,988 | ) | $ | (3,441,591 | ) |

 

***Revenue:*******The sale of Novacor LVAS implant kits andrelated peripheral equipment and services accounts for all of WorldHeart’srevenues.  We primarily sell our productsdirectly, except for a few countries where we sell through distributors.

The composition ofrevenue in thousands ($000’s) is as follows except for units:
| ** **             | ** ** | **Three Months Ended March 31,** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|
| ** **             | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
| ** **             | ** ** | **$**                                                | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
|                   |       |                                                 |       |   |   |   |   |   |   |
| Implant kits           |       | $                                                    | 293        |   | 4 |   | $ | 2,225 |   | 32 |   |
| Peripherals and  other |       | 555                                                  |       |   |   | 1,060 |   |   |   |
|                   |       |                                                 |       |   |   |   |   |   |   |
| Revenue                |       | $                                                    | 848        |   |   |   | $ | 3,285 |   |   |   |

 

Net revenue for the first quarter ended March 31, 2007 was $0.8million reflecting a decrease of  $2.4million, or 74%, compared with the first quarter ended March 31, 2006. Implantkit revenue in the first quarter of 2007 decreased by $1.9 million, comparedwith the first quarter of 2006. During the first quarter of 2007, the average price per kit was $73,000,compared with $70,000 during the first quarter of 2006. Novacor implant kits,recognized as revenue, decreased significantly on a year over year basis due toour November 2006 restructuring plan in which we reduced commercial efforts onour Novacor LVAS program. We expect Novacor implant kit sales to remain atapproximately the first quarter level throughout the remainder of 2007.

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Peripherals and other revenues, including Novacor LVAS hardware andperipheral sales, services and other revenue, for the quarter endedMarch 31, 2007 were $0.6 million, a decrease of 48%, compared withperipherals and other revenue of $1.1 million recorded in the quarter endedMarch 31, 2006.

***Cost of goods sold:***  For thethree months ended March 31, 2007, cost of goods sold exceeded revenue by$221,000, compared with the three months ended March 31, 2006, where cost ofgoods sold was equal to 43% of revenues. The higher cost of goods sold in this year’sfirst quarter was due, principally, to the write-off of $0.2 million inredundant Novacor LVAS inventories and unfavorable manufacturing variances.

*** ***

***Selling, general andadministrative:*** Selling, general andadministrative expenses consist primarily of payroll and related expenses forexecutives, sales, marketing, accounting and administrative personnel. Ourother administrative expenses, include professional fees, communicationexpenses, insurance premiums, public reporting costs and general corporateexpenses.

 
| ** **                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------|------------|------------------------------------------------------|------------|
| ** **                  | ** ** | **2007**                                             | ** ** | **2006** | ** ** |
|                        |       |                                                 |       |   |   |
| Selling                     |       | $                                                    | 483        |   | $ | 1,023 |   |
| General and  administrative |       | 1,062                                                |       | 1,433 |   |
| Total                       |       | $                                                    | 1,545      |   | $ | 2,456 |   |

 

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

Selling expensesfor the three months ended March 31, 2007 decreased by $0.5 million, or 53%,compared with the same period in 2006. Selling expenses decreased due to our November 2006 restructuring, whicheliminated most of our sales force, as well as reduced personnel costs inEurope.

General andadministrative expenses decreased by $0.4 million, or 26%, in the first quarterof 2007, compared with the first quarter of 2006. These reductions areprimarily due to cost savings associated with the November 2006 restructuring.For the three months ended March 31, 2007, WorldHeart recorded $32,000 instock-based compensation expense, compared with $32,000 recorded in the quarterended March 31, 2006.  Administrativeexpenses are expected to remain at about current levels in the next quarterincreasing somewhat thereafter with the implementation of information systemupgrades and internal control improvements, as well as administrative supportof our product development programs.

***Research and development:***Research anddevelopment expenses consist principally of salaries and related expenses forresearch personnel, prototype manufacturing, testing, clinical trials, materialpurchases and regulatory affairs incurred at our Oakland and Salt Lake Cityfacilities.

Research anddevelopment expenses for the three months ended March 31, 2007 decreased by$1.0 million, or 36%, compared with the three months ended March 31, 2006.  This decrease is primarily due to asuspension of   development and relatedexpenses on the next-generation Novacor II product in the fourth quarter 2006and reduced clinical expenses, offset somewhat by an addition to the reservefor restoration of our leased facility in the Oakland, California. Research anddevelopment expenses for our Levacor Rotary VAD are expected to increasethroughout 2007 in preparation for animal studies and U.S. feasibility clinicaltrials.

***Amortization of intangibles:*****Amortization of the acquired MedQuestworkforce for each of the three months ended March 31, 2007 and March 31, 2006was $48,000. This intangible asset is being amortized on a straight-line basisover four years.

***Foreign Exchange:***Foreign exchangetransactions resulted in a gain of $135,000 for the three-month period endedMarch 31, 2007, compared with a loss of $7,000 for the three-month period endedMarch 31, 2006.

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*** ***

***Investment and other Income:***Investment and other income for the quarter ended March 31, 2007 was $118,000,compared with $93,000 during the three months ended March 31, 2006. Theincrease reflects higher average invested cash balances in the first quarter of2007.

**LIQUIDITY AND CAPITAL RESOURCES**

Historically,WorldHeart has funded losses from operations through the sale of equity andissuance of debt instruments. Combined with revenues and investment income,these funds have provided WorldHeart with the resources to operate ourbusiness, sell and support our products, fund our research and developmentprogram and clinical trials, apply for and obtain the necessary regulatory approvalsand develop new technologies and products.

AtMarch 31, 2007, we had cash and cash equivalents of  $9.1 million, a decrease of $3.1 millionfrom December 31, 2006. During the first quarter of 2007, cash used tofund operating activities was $3.1 million, consisting primarily of thenet loss for the period of $3.4 million offset somewhat by non-cash chargesrelated primarily to an inventory write-off of $0.2 million associated with theNovacor product. Working capital changes consisted of a $0.6 million decreasein trade and other receivables, offset by a $0.6 million decrease in accountspayable and accrued compensation.

Investingactivities requiring cash resources consisted of $17,000 in capital equipmentadditions. There were no financing activities during the first quarter of 2007.

With the completion ofthe private placement and restructuring programs initiated in the fourthquarter of 2006, based on our current operating expenses and projected sales ofour Novacor LVAS and Levacor Rotary VAD products, we believe we have sufficientcash to fund operations into the first quarter of 2008.

We are continuing toexplore various financing alternatives, including equity financing transactionsand corporate collaborations. Equity financings could likely include, but arenot limited to, private investments in public equity transactions or strategicequity investment by interested companies. Corporate collaborations couldinclude licensing of one or more of our products for upfront and milestonepayments, or co-development and co-funding of our products. We have completed arestructuring program initiated in the fourth quarter of 2006 re-aligning ourspending to focus on our key development program, the Levacor Rotary VAD, andwill continue to carefully manage our overall cash usage. While WorldHeart isexploring opportunities to maintain and improve our financial condition, thereis no assurance that these programs will be successful. This would result in asignificant delay in the completion, reduction in scope or termination of ourdevelopment programs.

Our long-term workingcapital and capital requirements depend upon numerous factors, including thefollowing: our continued ability to generate Novacor LVAS sales without anactive selling effort and staff; the rate of investment in our next-generationtechnologies, particularly the Levacor Rotary VAD; the clinical trial costs andthe approval process for our next-generation products; our general efforts toimprove operational efficiency, conserve cash and implement other costconservation programs.

**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 nextgeneration products, WorldHeart wrote-off $4.6 million of Novacor relatedinventories during the third and fourth quarter of 2006 that managementestimated were surplus. In the quarter ended March 31, 2007 the Corporationwrote off a further $0.2 million of inventory. Management estimated futureusage of inventory on hand by projecting future sales of its Novacor product,and used these to predict raw material parts and components that would beconsumed in manufacturing product to meet these sales. Future writedowns may berequired based on actual sales achieved and will be recorded when they can bereasonably determined.

**OFF- BALANCESHEET ARRANGEMENTS**

None.

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** **

**ITEM3.    CONTROLS AND PROCEDURES**

*Evaluation of disclosure controls and procedures*: Based on their evaluation of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct) as of March 31, 2007, 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 designed to ensurethat information required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’srules and forms and are operating in an effective manner at the reasonableassurances level.

*Changes in internal controls over financial reporting:* There was no change in our internal controls over financial reportingthat occurred during the quarter ended March 31, 2007 that has materially affected, or is reasonably likely to materiallyaffect, our internal controls over financial reporting.

 

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** **

**PART II—OTHER INFORMATION**

**ITEM 1. LEGAL PROCEEDINGS**

(None)

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

The Corporation has made norepurchases of common shares during the period covered by this report.

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

(None)

**ITEM 4. SUBMISSIONS OF MATTERS TO A VOTE OF SECURITYHOLDERS**

(None)

**ITEM 5. OTHER INFORMATION**

(None)

 

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** **

**ITEM 6.  EXHIBITS**

(a)               Exhibits
|  Exhibit  10.16 |   | Form of Stock Option Grant Notice to World Heart  Corporation 2006 Equity Incentive Plan (incorporated by reference to Exhibit  99.1 to the Corporation’s Form 8-K filed on February 7, 2007 (Commission File  No. 000-28882)).                  |
|----------------------|--------|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                                                                                                                                                  |   |   |
| Exhibit 10.17        |   | Form of Restricted Stock Award Agreement to World  Heart Corporation 2006 Equity Incentive Plan (incorporated by reference to  Exhibit 99.2 to the Corporation’s Form 8-K filed on February 7, 2007 (Commission  File No. 000-28882)).           |
|                 |   |                                                                                                                                                                                                                                                  |   |   |
| Exhibit 10.18        |   | Form of Performance Share Grant Notice and Agreement  to World Heart Corporation 2006 Equity Incentive Plan (incorporated by  reference to Exhibit 99.1 to the Corporation’s Form 8-K filed on March 14,  2007 (Commission File No. 000-28882)). |
|                 |   |                                                                                                                                                                                                                                                  |   |   |
| Exhibit 10.19        |   | Summary of Bonus Program for Certain Executive  Officers (incorporated by reference to Exhibit 99.2 to the Corporation’s Form  8-K filed on March 14, 2007 (Commission File No. 000-28882)).                                                     |
|                 |   |                                                                                                                                                                                                                                                  |   |   |
| Exhibit 10.20        |   | Incentive Compensation Agreement with A. Richard  Juelis, dated April 6, 2007.                                                                                                                                                                        |
|                 |   |                                                                                                                                                                                                                                                  |   |   |
| Exhibit 31.1    |   | Certification of Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Exley Act of 2002.                                                                                                                                              |
|                 |   |                                                                                                                                                                                                                                                  |   |   |
| Exhibit 31.2    |   | Certification of Principal Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                         |
|                 |   |                                                                                                                                                                                                                                                  |   |   |
| Exhibit 32.1    |   | Certification of Principal Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  1350.                                                                                                                        |
|                 |   |                                                                                                                                                                                                                                                  |   |   |
| Exhibit 32.2    |   | Certification of Principal Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  1350.                                                                                                                        |

 

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** **

**SIGNATURES**

In accordance with the requirements of the ExchangeAct, the registrant caused this report to be signed on its behalf by theundersigned, thereunto duly authorized.

 
|                           |   |                                       | World Heart Corporation |
|---------------------------|--------|--------------------------------------------|-------------------------|
|                      |   |                                       | (Registrant)            |
|                      |   |                                       |                    |   |
|                      |   |                                       |                    |   |
| Dated:  May 14, 2007 |   | /s/ JAL S.  JASSAWALLA                     |                    |   |
|                      |   | Jal S. Jassawalla, President and Chief     |
|                      |   | Executive Officer                          |                    |   |
|                      |   |                                       |                    |   |
|                      |   |                                       |                    |   |
| Dated:  May 14, 2007 |   | /s/ A. RICHARD  JUELIS                     |
|                      |   | A. Richard Juelis, Vice President, Finance |
|                      |   | and Chief Financial Officer                |
|                           |        |                                            |                         |  |  |  |

 

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