Table of Contents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**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, 2009** |
|                                                        |   |
| **o****  **                                       | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |

 

**For the transition periodfrom       to      **

 

**Commission file number:  000-28882**

 

**WORLD HEART CORPORATION**

(Exact name of registrant as specified in its charter)

 

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

 

**4750 Wiley Post Way, Suite 120, Salt Lake City, UT84116 USA**

(Address of principalexecutive offices)

 

**(801) 355-6255**

(Registrant’s telephonenumber)

 

**7799 Pardee Lane, Oakland, CA 94621 USA**

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

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 duringthe preceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.   Yes x   No o

 

Indicate by acheckmark whether the registrant has submitted electronically and posted on itscorporate Website, if any, every Interactive Data File required to be submittedand posted pursuant to Rule 405 of Regulation S-T during the preceding 12months (or for such shorter period that the registrant was required to submitand post such files).   Yes o   No o

 

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

 

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

 

Indicate by check mark whether the Registrant isa shell company (as defined in Rule 12b-2 of the Exchange Act).

Yeso   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 asof  November 5, 2009 was 13,312,297.

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **                             | ** **                                                                                  | **Page** |
|----------------------------------------|---------------------------------------------------------------------------------------------|----------|
| **Part I. Financial Information** | ** **                                                                                  |
|                                   |                                                                                        |     |
| Item 1.                                | Financial  Statements                                                                       |     |
|                                   | Condensed Consolidated Balance Sheets                                                       | 3        |
|                                   | Condensed Consolidated Statements of Operations                                             | 4        |
|                                   | Condensed Consolidated Statements of Cash Flows                                             | 5        |
|                                   | Notes to Condensed Consolidated Financial Statements                                        | 6        |
| Item 2.                                | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 16       |
| Item 3.                                | Quantitative  and Qualitative Disclosures About Market Risk                                 | 21       |
| Item 4.                                | Controls and  Procedures                                                                    | 22       |
|                                   |                                                                                        |     |
|                                   |                                                                                        |     |
| **Part II.  Other Information**   | ** **                                                                                  |
|                                   |                                                                                        |     |
| Item 1.                                | Legal Proceedings                                                                           | 23       |
| Item 1A.                               | Risk Factors                                                                                | 23       |
| Item 2.                                | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 24       |
| Item 3.                                | Defaults  Upon Senior Securities                                                            | 24       |
| Item 4.                                | Submission  to Matters to a Vote of Security Holders                                        | 24       |
| Item 5.                                | Other Information                                                                           | 25       |
| Item 6.                                | Exhibits                                                                                    | 26       |
|                                   | Signatures                                                                                  |     |

 

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**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**WORLD HEART CORPORATION**

## **Condensed Consolidated Balance Sheets**

(United States Dollars) (Unaudited)

 
| ** **                                                                                                                                                                 | ** ** | **September 30, 2009** | ** **     | **December 31, 2008 (1)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------|----------------|-------------------------------------|------------|
| **ASSETS**                                                                                                                                                                 |       |                             |           |                                |       |
| **Current assets**                                                                                                                                                         |       |                             |           |                                |       |
| Cash  and cash equivalents                                                                                                                                                 |       | $                                | 9,959,963      |                                | $          | 20,703,724 |   |
| Trade  and other receivables, net of allowance for doubtful accounts of $233,151 and  $204,133 at September 30, 2009 and December 31, 2008, respectively         |       | 111,002                          |           | 322,548                             |       |
| Inventory,  net of allowance for excess and obsolete of $0 and $2,650,787 at  September 30, 2009 and December 31, 2008, repectively                              |       | 134,801                          |           | —                              |       |
| Prepaid  expenses                                                                                                                                                          |       | 186,097                          |           | 458,294                             |       |
|                                                                                                                                                                       |       | 10,391,863                       | ** **     | 21,484,566                          | ** ** |
| **Long-term assets**                                                                                                                                                       | ** ** | ** **                       | ** **     | ** **                          | ** ** |
| Property  and equipment, net                                                                                                                                               |       | 912,459                          |           | 651,572                             |       |
| Intangible  assets, net                                                                                                                                                    |       | —                           |           | 107,916                             |       |
| Other  long-term assets                                                                                                                                                    |       | 156,360                          |           | 156,360                             |       |
|                                                                                                                                                                       |       | 1,068,819                        | ** **     | 915,848                             | ** ** |
| **Total assets**                                                                                                                                                           | ** ** | **$**                            | **11,460,682** | ** **                          | **$**      | **22,400,414** | ** ** |
| ** **                                                                                                                                                                 | ** ** | ** **                       | ** **     | ** **                          | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                              |       |                             |           |                                |       |
| **Current liabilities**                                                                                                                                                    |       |                             |           |                                |       |
| Accounts  payable and accrued liabilities                                                                                                                                  |       | $                                | 1,395,821      |                                | $          | 1,388,675 |   |
| Accrued  compensation                                                                                                                                                      |       | 1,101,277                        |           | 897,086                             |       |
| Current  portion of capital lease obligations                                                                                                                              |       | 8,481                            |           | —                              |       |
| Deferred  revenue                                                                                                                                                          |       | —                           |           | 3,671                               |       |
|                                                                                                                                                                       |       | 2,505,579                        |           | 2,289,432                           |       |
|                                                                                                                                                                       |       |                             |           |                                |       |
| **Long-term liabilities**                                                                                                                                                  |       |                             |           |                                |       |
| Non-current  portion of capital lease obligations                                                                                                                          |       | 17,393                           |           | —                              |       |
| **Total liabilities**                                                                                                                                                      |       | 2,522,972                        |           | 2,289,432                           |       |
|                                                                                                                                                                       |       |                             |           |                                |       |
| **Shareholders’ equity**                                                                                                                                              |       |                             |           |                                |       |
| Common  stock, no par value, 13,312,297 shares issued and outstanding at  September 30, 2009 and 13,253,964 shares issued and outstanding at  December 31, 2008, |       | 325,279,751                      |           | 325,087,252                         |       |
| Additional  paid-in-capital                                                                                                                                                |       | 17,992,216                       |           | 17,323,629                          |       |
| Cumulative  other comprehensive loss                                                                                                                                       |       | (6,285,577                       | )              | (6,285,577                          | )          |
| Accumulated  deficit                                                                                                                                                       |       | (328,048,680                     | )              | (316,014,322                        | )          |
| Total  shareholders’ equity                                                                                                                                           |       | 8,937,710                        |           | 20,110,982                          |       |
| **Total liabilities and shareholders’ equity**                                                                                                                        | ** ** | **$**                            | **11,460,682** | ** **                          | **$**      | **22,400,414** |   |

 

See accompanying notes tocondensed consolidated financial statements

 

----

(1)  Derived fromthe Company’s audited consolidated financial statements as of December 31,2008.

 

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**WORLD HEART CORPORATION**

## **CondensedConsolidated Statements of Operations**

(United States Dollars)

(Unaudited)

 
| ** **                                                                  | ** ** | **Three Months Ended September 30,** | ** **     | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|----------------|------------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                                  | ** **     | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                        |       |                                      |           |                                     |       |   |   |   |   |
| **Revenue**                                                                 |       | $                                         | —         |                                     | $          | 191,705 |   | $ | 4,765 |   | $ | 1,363,235 |   |
| **Cost of goods sold**                                                      |       | 25,000                                    |           | 203,289                                  |       | 78,238 |   | 889,720 |   |
| **Gross profit (loss)**                                                     |       | (25,000                                   | )              | (11,584                                  | )          | (73,473 | ) | 473,515 |   |
|                                                                        |       |                                      |           |                                     |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                      |           |                                     |       |   |   |   |   |
| Selling,  general and administrative                                        |       | 1,314,857                                 |           | 1,036,002                                |       | 4,233,750 |   | 3,441,193 |   |
| Research  and development                                                   |       | 2,557,053                                 |           | 2,226,423                                |       | 7,268,863 |   | 6,651,608 |   |
| Clinical  and marketing support - non-cash                                  |       | —                                    |           | —                                   |       | — |   | 6,478,619 |   |
| Restructuring  costs                                                        |       | 98,124                                    |           | —                                   |       | 349,036 |   | — |   |
| Amortization  of intangibles                                                |       | 12,204                                    |           | 47,856                                   |       | 107,916 |   | 143,568 |   |
| **Total operating expenses**                                                |       | 3,982,238                                 |           | 3,310,281                                |       | 11,959,565 |   | 16,714,988 |   |
|                                                                        |       |                                      |           |                                     |       |   |   |   |   |
| **Operating loss**                                                          |       | (4,007,238                                | )              | (3,321,865                               | )          | (12,033,038 | ) | (16,241,473 | ) |
|                                                                        |       |                                      |           |                                     |       |   |   |   |   |
| **Other income (expenses)**                                                 |       |                                      |           |                                     |       |   |   |   |   |
| Debt  inducement expense                                                    |       | —                                    |           | (3,914,357                               | )          | — |   | (3,914,357 | ) |
| Unrealized  foreign exchange gain (loss)                                    |       | (13,324                                   | )              | 15,110                                   |       | (19,506 | ) | 4,594 |   |
| Investment  and other income                                                |       | 4,922                                     |           | 102,834                                  |       | 19,285 |   | 120,665 |   |
| Interest  expense                                                           |       | (338                                      | )              | (43,625                                  | )          | (1,099 | ) | (1,658,703 | ) |
| **Net loss**                                                                | ** ** | **$**                                     | **(4,015,978** | **)**                                    | **$**      | **(7,161,903** | **)** | **$** | **(12,034,358** | **)** | **$** | **(21,689,274** | **)** |
|                                                                        |       |                                      |           |                                     |       |   |   |   |   |
| **Weighted average number of common shares outstanding basic  and diluted** |       | 13,272,781                                |           | 8,962,943                                |       | 13,260,374 |   | 3,295,793 |   |
|                                                                        |       |                                      |           |                                     |       |   |   |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                         | (0.30          | )                                        | $          | (0.80 | ) | $ | (0.91 | ) | $ | (6.58 | ) |

 

See accompanyingnotes to condensed consolidated financial statements

 

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**WORLD HEART CORPORATION**

## **CondensedConsolidated Statements of Cash Flows**

(United States Dollars)

(Unaudited)

 
| ** **                                                           | ** ** | **Nine Months Ended September 30,** | ** **    |
|----------------------------------------------------------------------|------------|------------------------------------------|---------------|
| ** **                                                           | ** ** | **2009**                                 | ** **    | **2008** | ** ** |
|                                                                 |       |                                     |          |   |   |
| Net  loss for the period                                             |       | $                                        | (12,034,358   | ) | $ | (21,689,274 | ) |
| Adjustments  to reconcile net loss to net cash used in operations:   |       |                                     |          |   |   |
| Amortization  and depreciation                                       |       | 249,636                                  |          | 359,369 |   |
| Gain  on sale of property and equipment                              |       | (1,309                                   | )             | — |   |
| Write  down of inventory                                             |       | —                                   |          | 355,285 |   |
| Non-cash  stock compensation expense                                 |       | 668,587                                  |          | 211,638 |   |
| 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)                             |       | 18,716                                   |          | (34,471 | ) |
| Change  in operating components of working capital                   |       | 532,370                                  |          | (538,549 | ) |
| **Net cash used in operating activities**                            | ** ** | **(10,566,358**                          | **)**         | **(9,476,883** | **)** |
|                                                                 |       |                                     |          |   |   |
| **Investing activities**                                             |       |                                     |          |   |   |
| Purchase  of property and equipment                                  |       | (372,110                                 | )             | (45,460 | ) |
| **Net cash used in investing activities**                            | ** ** | **(372,110**                             | **)**         | **(45,460** | **)** |
|                                                                 |       |                                     |          |   |   |
| **Financing activities**                                             |       |                                     |          |   |   |
| Repayment  of capitalized leases                                     |       | (4,814                                   | )             | — |   |
| Proceeds  from sale of property and equipment                        |       | 1,500                                    |          | — |   |
| Gross  proceeds from exercise of warrants                            |       | 192,499                                  |          | — |   |
| Convertible  bridge notes payable                                    |       | —                                   |          | 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 | ) |
| **Net cash provided by financing activities**                        | ** ** | **189,185**                              | ** **    | **32,737,709** | ** ** |
| **Effect of exchange rates on cash and cash equivalents**            | ** ** | **5,522**                                | ** **    | **(3,630** | **)** |
| **Increase (decrease) in cash and cash equivalents for the  period** | ** ** | **(10,743,761**                          | **)**         | **23,211,736** | ** ** |
| **Cash and cash equivalents, beginning of the period**               | ** ** | **20,703,724**                           | ** **    | **664,504** | ** ** |
| **Cash and cash equivalents, end of the period**                     | ** ** | **$**                                    | **9,959,963** | ** ** | **$** | **23,876,240** | ** ** |
|                                                                 |       |                                     |          |   |   |
| **Supplemental Disclosures of 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 |   |

 

See accompanying notes tocondensed consolidated financial statements

 

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**WORLD HEART CORPORATION**

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

#### ** **

**1.             Natureof Operations of the Company**

 

WorldHeart Corporation, together with its subsidiaries (collectivelyreferred to as “WorldHeart” or the “Company”, is focused on developing andcommercializing implantable ventricular assist devices (VADs), which aremechanical pumps that allow for the restoration of normal blood circulation topatients suffering from advanced heart failure. WorldHeart has facilities inSalt Lake City, Utah, Oakland, California and Herkenbosch, Netherlands.Historically, WorldHeart has derived its revenue from its Novacor LVAS (leftventricular assist system) and related peripheral equipment. Commercialactivities related to the Novacor LVAS device were discontinued in November 2006due to more advanced technology becoming available on the market. The Companyis currently focusing on the development of its next-generation LevacorTM RotaryVAD (the “Levacor”). In August 2009, the Company received a conditionalInvestigational Device Exception from the U.S. Food and Drug Administration(“FDA”) for the Levacor and expects to initiate a clinical trial in the fourthquarter of 2009. The Company expects to realize cost recoveries from the use ofthe Levacor in the US clinical trials. Such recoveries are expected to be animportant part of the Company’s overall operating cash flows starting in 2010.The Company is also developing a small, minimally invasive VAD (“MiVAD”) aimedat providing partial circulatory support to patients in an earlier stage ofheart failure.

 

**2.             Basisof Presentation and Liquidity**

 

The accompanying interim unaudited condensed consolidated financialstatements have been prepared by management in accordance with the rules andregulations of the United States Securities and Exchange Commission (“SEC”).The unaudited condensed consolidated financial statements are comprised of thefinancial statement of WorldHeart and its subsidiaries. In management’sopinion, the interim financial data presented includes all adjustmentsconsisting solely of normal recurring items necessary for fair presentation.All material inter-company transactions and balances have been eliminated.These interim unaudited condensed consolidated financial statements and notesthereto should be read in conjunction with Management’s Discussion and Analysisof Financial Condition and Results of Operations and the audited financial statementsand notes thereto included in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2008. Certain information required by U.S.generally accepted accounting principles has been condensed or omitted inaccordance with the rules and regulations of the SEC. The results for theperiod ended September 30, 2009 are not necessarily indicative of theresults to be expected for the entire fiscal year ended December 31, 2009or for any future period.

 

The preparation of theseconsolidated financial statements in accordance with generally acceptedaccounting principles in the United States of America, requires management tomake estimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the dates ofthe financial statements and the reported amounts of revenue and expensesduring the reporting periods. Such management estimates include allowance fordoubtful accounts, sales and other allowances, inventory reserves, incometaxes, realizability of deferred tax assets, stock-based compensation, deferredrevenue, warranty, legal and restructuring reserves. Actual results coulddiffer from these estimates.

 

The accompanyingcondensed consolidated financial statements contemplate continuation as a goingconcern. The Company has sustained substantial losses from operations sinceinception, and such losses have continued through September 30, 2009. Asof September 30, 2009, the Company had an accumulated deficit of approximately$328.1 million. The Company believes that cash on hand is sufficient to supportits planned operations through the middle of 2010.

 

**3.     Summary ofAccounting Policies**

 

*Cash Equivalents*

 

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

 

*Inventory*

 

Inventory is valued atthe lower of average cost or net realizable value. Cost is determined on astandard cost basis which approximates the first-in-first-out, or FIFO, method.Work-in-process and finished goods include direct and indirect labor andmanufacturing overhead. Provisions are made to reduce excess and obsolete inventoriesto net realizable value. 

 

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**WORLD HEART CORPORATION**

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

#### ** **

Prior to August 20,2009, primarily all costs associated with manufacturing the Levacor system wereincluded in research and development expense. Effective August 20, 2009,we began to capitalize in inventory the costs of manufacturing which as of September 30,2009 consisted primarily of raw material components. At that date, the Companyhad product on hand that had been previously expensed, which is subsequentlybeing utilized in the production and sales of finished goods. Until the Companysells all inventories for which costs were previously expensed, the carryingvalue of its inventories and related cost of revenues do not include the costof this previously expensed inventory. The Company could be required to expensecapitalized costs of the Levacor system in the event of a denial or delay ofapproval by U.S. regulatory body or delay in commercialization, or otherpotential factors.

 

All costs associated with developing andmanufacturing products other than the Levacor system are included in researchand development expense.

 

*Foreign Currency Translation and Functional Currency*

 

The condensedconsolidated financial statements of the Company are presented in U.S. dollars.Since January 1, 2004, the functional currency of the Company has been theU.S. dollar. The accumulated other comprehensive loss on the balance sheetrepresents the impact of converting to U.S. dollars prior to January 1,2004. Exchange gains and losses are included in net loss for the year.

 

*Fair Value Measurements and Financial Instruments*

 

TheCompany measures certain financial assets (cash and cash equivalents) at fairvalue on a recurring basis. The Company’s investments in cash and cashequivalents are classified within Level 1 of the fair value hierarchy becausethey are valued based on quoted market prices in active markets.  Thecarrying amounts of certain of the Company’s non-financial instrumentsincluding accounts receivable, accounts payable, accrued liabilities andcapital lease liability approximate fair value due to their short maturities.

 

*RevenueRecognition, Accounts Receivable and Deferred Revenue*

 

Revenue from product andservice sales is recognized when all of the following criteria are met:  persuasive evidence of an agreement exists;delivery has occurred or services have been rendered; the price is fixed ordeterminable; and collection is reasonably assured.

 

The significant elementsof the Company’s multiple-element offerings are Implant Kits, Peripherals andOther. For arrangements with multiple elements, the Company recognizes revenueusing the residual method as described in FASB Accounting StandardsCodification (“ASC”)  985-605 *“Revenue Recognition- Software”* or ASC 605-*25 “Revenue Recognition of Multiple Element Arrangements”*  Under the residual method, revenue isallocated and deferred for the undelivered elements based on relative fairvalue. The determination of fair value of the undelivered elements in multipleelements arrangements is based on the price charged when such elements are soldseparately, which is commonly referred to as vendor-specificobjective-evidence, or VSOE. Each element’s revenue is recognized when all ofthe revenue recognition criteria are met for each of the elements.

 

The Company regularlyevaluates the collectability of its accounts receivable. An allowance fordoubtful accounts is maintained for estimated credit losses. When estimatingcredit losses, the Company considers a number of factors including the aging ofa customer’s account, creditworthiness of specific customers, historical trendsand other information. The Company has provided certain customers with deferredpayment terms. Certain products are covered by a limited warranty. Warrantycosts are based on historical experience and estimated and recorded when therelated sales are recognized. Any additional costs are recorded when incurredor when they can reasonably be estimated.

 

*Warranty*

 

The Company provided warranty for its Novacor LVASproduct for various periods against defects in material or installationworkmanship. The Company provided for a three year warranty related to the saleof Novacor LVAS Implant Kits and Peripherals. The warranty reserve is includedin accounts payable and accrued expenses. The Company is currently providing atwo year warranty related to the sale of its Levacor system peripherals.

 

*Researchand Development Costs*

 

Research and development(“R&D”) costs, including research performed under contract by thirdparties, are expensed as incurred.  Forthe purchase of research and development technology under an assignment orlicense agreement, the Company records R&D expense in accordance with ASC730 *“Research and Development*”.

 

*RestructuringExpense*

 

The Company recordscosts and liabilities associated with exit and disposal activities, as definedin Financial Accounting Standards Board ASC 420 *“Exit orDisposal Cost Obligations”* based on estimates of fair value in theperiod the liabilities are 

 

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**WORLD HEART CORPORATION**

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

 

incurred. In periodssubsequent to initial measurement, changes to the liability are measured usingthe credit-adjusted risk-free discount rate applied in the initial period. Theliability is evaluated and adjusted as appropriate, for changes incircumstances.

 

*Shipping and Handling Costs*

 

In accordance with *ASC605-45-20, *the Companyrecords freight billed to its customers as sales of product and services andthe related freight costs as a cost of sales, product and services. TheCompany’s shipping and handling costs are not significant.

 

*Earnings Per Share*

 

Basic earnings per shareare computed by dividing net income by the weighted average number of commonshares outstanding during the period presented. Diluted earnings per share arecomputed using the weighted average number of common shares outstanding duringthe periods plus the effect of dilutive securities outstanding during theperiods. For the three and nine months ended September 30, 2009 and 2008,basic earnings per share are the same as diluted earnings per share as a resultof the Company’s  common stockequivalents being anti-dilutive due to the Company’s net loss.

 

*Concentrationof Credit Risk*

 

Financial instrumentsthat potentially subject the Company to significant concentrations of creditrisk consist primarily of cash investments and accounts receivable.Substantially, all of the Company’s liquid cash equivalents are invested inmoney market funds. The Company has no trade accounts receivable as of September 30,2009. Once clinical trials begin, the Company expects its trade accountsreceivable to increase and expects for this to be derived primarily from salesto customers located in the United States. The Company will perform ongoingcredit evaluations of its customers and generally will not require acollateral. The Company maintains reserves for potential credit losses.

 

*IntangibleAssets*

 

Intangible assets with adefinite life are amortized over their legal or estimated useful lives,whichever is shorter.

 

The Company reviews thecarrying amounts of intangible assets with a definite life whenever events orchanges in circumstances indicate that the carrying amount of an asset may notbe recoverable. Such events or circumstances might include a significantdecline in market share, a significant decline in profits, changes intechnology, significant litigation or other items. The Company records animpairment loss in the period when it is determined that the carrying amountsmay not be recoverable. The impairment loss would be calculated as the amountby which the carrying amount exceeds the undiscounted future cash flows from theasset.

 

The Company’s intangibleassets have a carrying value of zero and are fully amortized as of September 30,2009. This intangible asset was related entirely to the $766,000 value assignedto the workforce acquired in the MedQuest Acquisition in July 2005.  These intangible assets were amortized on astraight-line basis over their estimated useful life of four years.  Other intangible assets that relate to theCompany’s Novacor product have been fully amortized since December 2005.

 

*IncomeTaxes*

 

Income taxes areprovided for using the asset and liability method whereby deferred tax assetsand liabilities are recognized using current tax rates on the differencebetween the financial statement carrying amounts and the respective tax basisof the assets and liabilities. The Company provides a valuation allowance ondeferred tax assets when it is more likely than not that such assets will notbe realized.

 

The Company adopted the provisions of ASC 740 *“Income Taxes”*, on January 1, 2007. Previously, the Companyhad accounted for tax contingencies in accordance with SFAS No. 5, *Accounting for Contingencies*. As requiredby ASC 740, the Company recognizes the financial statement benefit of a taxposition only after determining that the relevant tax authority would morelikely than not sustain the position following an audit. For tax positionsmeeting this standard, the amount recognized in the financial statements is thelargest benefit that has a greater than 50 percent likelihood of being realizedupon ultimate settlement with the relevant tax authority. At the adoption date,the Company applied ASC 740  to all taxpositions for which the statute of limitations remained open.

 

*Stock-BasedCompensation*

 

The Company accounts forstock based compensation in accordance with Financial Accounts Standards BoardsAccounting Standards Codification  (FASC)Topic 718 which requires the recognition of the fair value of stockcompensation as an expense in the calculation of net income. WorldHeartrecognizes the stock compensation expense in the period in which the employeeis required to provide service, which is generally over the vesting period ofthe individual equity instruments. Stock options issued in lieu of cash tonon-employees for services performed are recorded at the fair value of theoptions at the time they are issued and are expensed as service is provided.

 

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**WORLD HEART CORPORATION**

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

 

**4.     ReverseStock Split**

 

On October 27, 2008, the Companyeffected a thirty-for-one reverse stock split of its capital and previously, onMay 30, 2007, the Company effected a ten-for-one reverse stock split ofits capital stock. The reverse stock split in both years was approved by theCompany’s Board of Directors and by the Company’s shareholders.

 

Pursuant to the October 2008 reversestock split, each holder of the Company’s common shares on October 27,2008, the date of effectiveness of the most recent reverse stock split, becameentitled to receive one new common share in exchange for every thirty oldcommon shares held by such shareholder.

 

The effect of the reverse stock split hasbeen retroactively applied throughout the financial statements containedherein.

 

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

 

The Company determined that itsfirst-generation Novacor LVAS reached the natural end of its product life cyclein 2006 and  shifted its business focusto the development, clinical trial and subsequent commercialization of Levacor.The Company wrote-down gross Novacor LVAS inventories of $2,650,787 to a netcarrying value of zero at December 31, 2008. During the three months endedSeptember 30, 2009, fully reserved Novacor LVAS inventories of $2,650,787were written-off against the reserve. To date, the Company has capitalized$134,801 of certain Levacor inventory that will subsequently be utilized in theproduction and future sale of finished goods. The Company could be required toexpense capitalized costs of the Levacor in the event of a denial or delay ofapproval by the FDA, a delay in commercialization, or other potential factors.

 
| ** **       | ** ** | **September 30, 2009** | ** **    | **December 31, 2008** | ** ** |
|------------------|------------|-----------------------------|---------------|----------------------------|------------|
| Raw materials    |       | $                           |  134,801 |                       | $          |  — |   |
| Work in progress |       | —                      |          | —                     |       |
| Finished goods   |       | —                      |          | —                     |       |
| Total inventory  |       | $                           |  134,801 |                       | $          |  — |   |

 

**6.****                                      CurrentLiabilities**

 

**Accrued Compensation**

 

Accrued compensation includesaccruals for employee wages and Board of Director fees, severance, relocationbenefits, vacation, and clinical and performance bonus. The components ofaccrued compensation, inclusive of payroll taxes, are as follows:

 
| ** **                  | ** ** | **September 30, 2009** | ** **          | **December 31, 2008** | ** ** |
|-----------------------------|------------|-----------------------------|---------------------|----------------------------|------------|
| Accrued wages               |       | $                           |  113,722       |                       | $          |  60,090 |   |
| Accrued severance           |       | 179,917                     |                | 65,344                     |       |
| Accrued relocation benefits |       | 51,461                      |                | —                     |       |
| Accrued vacation            |       | 443,010                     |                | 423,009                    |       |
| Accrued bonuses             |       | 313,167                     |                | 348,643                    |       |
| Total accrued compensation  | ** ** | **$**                       | ** 1,101,277** | ** **                 | **$**      | ** 897,086** | ** ** |

 

**CEO Relocation Benefits**

 

The terms of theemployment agreement of the Company’s CEO, hired in the first quarter of 2009,contained a Relocation Benefits package to cover reimbursement for certainrelocation-related expenses in an amount of up to $107,000, plus additional taxgross-up payments amounting to approximately $48,000. During the three monthperiod ended June 30, 2009, the physical move was completed and anestimated restructuring charge of $150,000 was recorded. During the threemonths ended September 30, 2009, $90,000 of the estimated $150,000 waspaid; the balance to be paid upon final determination of the actual charges.

 

**Performance Bonus**

 

On March 25, 2009, the Compensation Committee, as confirmed by theBoard of Directors of the Company, approved the 2009 Performance Bonus Plan,including the potential payments under the plan and the performance milestonesto be achieved. Based 

 

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**WORLD HEART CORPORATION**

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

 

on management’s judgment as of September 30, 2009 of milestonesachieved or achievable, the Company accrued bonus expense of $275, 000 for thenine months ended September 30, 2009.

 

**Accounts Payable and Accrued Liabilities**

 

Accounts payable andaccrued liabilities consist of the following:

 
| ** **                                     | ** ** | **September 30, 2009** | ** **          | **December 31, 2008** | ** ** |
|------------------------------------------------|------------|-----------------------------|---------------------|----------------------------|------------|
| Accounts payable                               |       | $                           |  274,195       |                       | $          |  460,234 |   |
| Accued liabilities                             |       | 1,025,578                   |                | 832,393                    |       |
| Accrued warranty                               |       | 96,048                      |                | 96,048                     |       |
| Total accounts payable and accrued liabilities | ** ** | **$**                       | ** 1,395,821** | ** **                 | **$**      | ** 1,388,675** | ** ** |

 

**7.****                      Property and Equipment**

 

For the three and nine months ended September 30,2009, the Company wrote-off certain property and equipment and booked $1,309 asa gain on the disposal of property and equipment.

 
| ** **                                   | ** ** | **September 30, 2009** | ** **      |
|----------------------------------------------|------------|-----------------------------|-----------------|
| ** **                                   | ** ** | **Cost**                    | ** **      | **Accumulated Depreciation** | ** ** | **Net Book Value** | ** ** |
| Furniture &  fixtures               |       | $                           |  174,410   |   | $ |  (118,538 | ) | $ |  55,872 |   |
| Computer  equipment & software      |       | 638,713                     |            | (518,735 | ) | 119,978 |   |
| Manufacturing &  research equipment |       | 2,534,220                   |            | (1,970,132 | ) | 564,088 |   |
| Leasehold  improvements                      |       | 558,884                     |            | (386,363 | ) | 172,521 |   |
|                                         |       | $                           |  3,906,227 |   | $ |  (2,993,768 | ) | $ |  912,459 |   |

 
| ** **                                   | ** ** | **December 31, 2008** | ** **      |
|----------------------------------------------|------------|----------------------------|-----------------|
| ** **                                   | ** ** | **Cost**                   | ** **      | **Accumulated Depreciation** | ** ** | **Net Book Value** | ** ** |
| Furniture &  fixtures               |       | $                          |  139,977   |   | $ |  (112,080 | ) | $ |  27,897 |   |
| Computer  equipment & software      |       | 607,249                    |            | (491,752 | ) | 115,497 |   |
| Manufacturing &  research equipment |       | 2,231,820                  |            | (1,910,458 | ) | 321,362 |   |
| Leasehold  improvements                      |       | 529,112                    |            | (342,296 | ) | 186,816 |   |
|                                         |       | $                          |  3,508,158 |   | $ |  (2,856,586 | ) | $ |  651,572 |   |

 

Depreciation expense for the three months ended September 30,2009 and September 30, 2008 was $58,056 and $72,337, respectively.Depreciation expense for the nine months ended September 30, 2009 and 2008was $141,720 and $215,800, respectively.

 

**8.****                      Intangible Assets**

 

The cost and accumulated amortization of theCompany’s intangible assets as of September 30, 2009 and December 31,2008 are as follows:

 

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**WORLD HEART CORPORATION**

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

 
| ** **              | ** ** | **September 30, 2009** | ** ** |
|-------------------------|------------|-----------------------------|------------|
| ** **              | ** ** | **Cost**                    | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Purchased technology    |       | $                           | 6,191,698  |   | $ | 6,191,698 |   | $ | — |   |
| Other intangible assets |       | 5,137,242                   |       | 5,137,242 |   | — |   |
|                    |       | $                           | 11,328,940 |   | $ | 11,328,940 |   | $ | — |   |

 
| ** **              | ** ** | **December 31, 2008** | ** ** |
|-------------------------|------------|----------------------------|------------|
| ** **              | ** ** | **Cost**                   | ** ** | **Amortization** | ** ** | **Value** | ** ** |
| Purchased technology    |       | $                          | 6,191,698  |   | $ | 6,191,698 |   | $ | — |   |
| Other intangible assets |       | 5,137,242                  |       | 5,029,326 |   | 107,916 |   |
|                    |       | $                          | 11,328,940 |   | $ | 11,221,024 |   | $ | 107,916 |   |

 

**9.****              Comprehensive Income**

 

For the three and nine months ended September 30,2009 and September 30, 2008, there were no significant differences betweenthe Company’s comprehensive loss and its net loss.

 

**10.  Stock-based Compensation**

 

The Company accounts forstock based compensation in accordance with Financial Accounts Standards BoardsAccounting Standards Codification  (FASC)Topic 718 which requires the recognition of the fair value of stockcompensation as an expense in the calculation of net income. Topic 718 requiresthat stock-based compensation expense be based on awards that are ultimatelyexpected to vest. Stock-based compensation for the three and nine months ended September 30,2009 and 2008 has been reduced for estimated forfeitures. When estimatingforfeitures, voluntary termination behaviors, as well as trends of actualoption forfeitures are considered. To the extent actual forfeitures differ fromthe Company’s current estimates, cumulative adjustments to stock-basedcompensation expense are recorded.

 

Except fortransactions with employees and directors that are within the scope of Topic718, all transactions in which goods or services are the consideration receivedfor the issuance of equity instruments are accounted for based on the fair valueof the consideration received or the fair value of the equity instrumentsissued, whichever is more reliably measurable.

 

The Company uses theBlack-Scholes valuation model for estimating the fair value of stockcompensation. The stock-based compensation expense for the three and nine monthperiods ended September 30, 2009 and 2008 is as follows:

 
| ** **                          | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                          | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Selling, general and administrative |       | $                                         | 168,129    |                                     | $          | 37,518 |   | $ | 403,079 |   | $ | 144,645 |   |
| Research and development            |       | 121,093                                   |       | 20,034                                   |       | 265,508 |   | 66,993 |   |
| Total                               |       | $                                         | 289,222    |                                     | $          | 57,552 |   | $ | 668,587 |   | $ | 211,638 |   |

 

As of September 30,2009, approximately $3,454,851 of total unrecognized compensation cost relatedto stock options is expected to be recognized over a period of approximatelyseventeen quarters.

 

The aggregate intrinsicvalue is calculated as the difference between the exercise price of alloutstanding options and the quoted price of the Company’s common shares thatwere in the money at September 30, 2009. At September 30, 2009, theaggregate intrinsic value of all outstanding options was $1,865,554 with aweighted average remaining contractual term of approximately 9.4 years. Of the1,509,063 outstanding options, 26,123 options were exercisable, with a weightedaverage remaining contractual life of 4.6 years and 1,482,940 options wereunvested, with a weighted average remaining contractual life of 9.5 years. Nooptions were exercised under the Company’s 2006 Equity Incentive Plan duringthe three and nine months ended September 30, 2009.

 

A summary of the statusand changes the Company’s non-vested options, subject to Topic 718 calculationfor the three and nine months ended September 30, 2009 is presented below:

 

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**WORLD HEART CORPORATION**

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

 
| ** **                           | ** ** | **Shares**    | ** ** | **Weighted Average Grant-Date Fair Value** | ** ** |
|--------------------------------------|------------|---------------|------------|--------------------------------------------|------------|
| Nonvested at December 31, 2008  |       | 7,436         |       | $                                          | 87.33      |   |
| Granted                              |       | 1,027,169     |       | 2.42                                       |       |
| Vested                               |       | (3,367        | )          | 96.45                                      |       |
| Forfeited                            |       | —        |       | —                                     |       |
| Nonvested at March 31, 2009     |       | 1,031,238     |       | $                                          | 2.73       |   |
| Granted                              |       | 329,079       |       | 2.33                                       |       |
| Vested                               |       | (213          | )          | 80.51                                      |       |
| Forfeited                            |       | —        |       | —                                     |       |
| Nonvested at June 30, 2009      |       | 1,360,104     |       | $                                          | 2.62       |   |
| Granted                              |       | 131,000       |       | 4.41                                       |       |
| Vested                               |       | (147          | )          | 49.38                                      |       |
| Forfeited                            |       | (8,017        | )          | 2.54                                       |       |
| Nonvested at September 30, 2009 | ** ** | **1,482,940** | ** ** | **$**                                      | **2.77**   | ** ** |

 

*Valuation Assumptions*

 

The Company calculatesthe fair value of each option award on the date of grant using theBlack-Scholes option pricing model. During the three and nine months ended September 30, 2009, 131,000and 1,487,248 stock options were granted, respectively.  For the three and nine month periods ended September 30,2009, the weighted average fair value of the options granted was $4.41 and$2.58, respectively. The following weighted average assumptions were utilized:

 
| ** **                      | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|---------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **                      | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| Average risk free interest rate |       | 2.8                                       | %          | —                                   |       | 2.4 | % | 3.4 | % |
| Expected life (in years)        |       | 5.5                                       |       | —                                   |       | 5.5 |   | 5.5 |   |
| Expected volatility             |       | 156.4                                     | %          | —                                   |       | 155 | % | 133 | % |
| Dividend yield                  |       | 0.0                                       | %          | —                                   |       | 0.0 | % | 0.0 | % |

 

The dividend yield ofzero is based on the fact that the Company has never paid cash dividends andhas no present intention to pay cash dividends. Expected volatility is based onthe historical volatility of the Company’s common shares over the periodcommensurate with the expected life of the options. Expected life in years is basedon the “simplified” method as permitted by Topic 718. The Company believes thatall stock options issued under its stock option plans meet the criteria of“plain vanilla” stock options. The Company 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 2009:

 

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**WORLD HEART CORPORATION**

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

 
| ** **                             | ** ** | **Employees** | ** ** | **Non-Employees**                     | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **   | ** ** |
|----------------------------------------|------------|---------------|------------|---------------------------------------|------------|-------------|------------|----------------------------------------|------------|--------------|------------|
| ** **                             | ** ** | **Options**   | ** ** | **Weighted  average  exercise price** | ** ** | **Options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Warrants** | ** ** | **Weighted  average  exercise price** | ** ** | **Total** | ** ** |
| ** **                             | ** ** | **#**         | ** ** | **$**                                 | ** ** | **#**       | ** ** | **$**                                  | ** ** | **#**        | ** ** | **$** | ** ** | **#** | ** ** |
| Outstanding at December 31, 2008  |       | 29,803        |       | $                                     | 324.80     |        | 2,969      |                                   | $          | 298.61       |       | 84,395 |   | $ | 7.32 |   | 117,167 |   |
| Granted                                |       | 1,027,169     |       | 2.59                                  |       | —      |       | —                                 |       | —       |       | — |   | 1,027,169 |   |
| Expired                                |       | (241          | )          | 1,632.93                              |       | (7          | )          | 4,089.99                               |       | —       |       | — |   | (248 | ) |
| Forfeited                              |       | —        |       | —                                |       | —      |       | —                                 |       | —       |       | — |   | — |   |
| Outstanding at March 31, 2009     |       | 1,056,731     |       | $                                     | 11.31      |        | 2,962      |                                   | $          | 289.65       |       | 84,395 |   | $ | 7.32 |   | 1,144,088 |   |
| Granted                                |       | 329,079       |       | 2.50                                  |       | —      |       | —                                 |       | —       |       | — |   | 329,079 |   |
| Expired                                |       | (509          | )          | 460.00                                |       | —      |       | —                                 |       | —       |       | — |   | (509 | ) |
| Forfeited                              |       | —        |       | —                                |       | —      |       | —                                 |       | —       |       | — |   | — |   |
| Outstanding at June 30, 2009      |       | 1,385,301     |       | $                                     | 9.05       |        | 2,962      |                                   | 2.89.65    |         | 84,395     |   | $ | 7.32 |   | 1,472,658 |   |
| Granted                                |       | 126,000       |       | 4.63                                  |       | 5,000       |       | 2.75                                   |       | —       |       |   |   | 131,000 |   |
| Expired                                |       | (2,123        | )          | 383.00                                |       | (60         | )          | (880.00                                | )          | (646         | )          | 465.00 |   | (2,829 | ) |
| Exercised                              |       | —        |       | —                                |       | —      |       | —                                 |       | (58,333      | )          | 3.30 |   | (58,333 | ) |
| Forfeited                              |       | (8,017        | )          | 2.76                                  |       | —      |       | —                                 |       | —       |       | — |   | (8,017 | ) |
| Outstanding at September 30, 2009 |       | 1,501,161     |       | $                                     | 8.18       |        | 7,902      |                                   | $          | 117.03       |       | 25,416 |   | $ | 19.97 |   | 1,534,479 |   |

 

**11.  SubsequentEvents**

 

The Company hasevaluated subsequent events for recognition or disclosure through the time offiling these consolidated financial statements on Form 10-Q with the SECon November 16, 2009.

 

On November 13, 2009, theCompany and LaunchPoint Technologies LLC (“LaunchPoint”) entered into anAmendment Agreement amending the existing Assignment Agreement that the Companyand LaunchPoint entered into in September 2008. Under the Amendment Agreement,LaunchPoint assigned additional technology and intellectual property to theCompany in exchange for (a) increased royalty on net future sales through 2020(or the date of expiry of the last to expire patents assigned to the Company)of products using all technology, with minimum annual royalties to LaunchPointof approximately $129,000 for the first four years and payment of $60,000,thereafter, (b) entry into an R&D services agreement of $225,000, and (c)the issuance of a $1.0 million convertible promissory note.

 

The Company, at its discretionand depending on its involvement, can choose to reimburse LaunchPoint to covermarket rates for government grants and contracts. LaunchPoint provided theCompany an Option on all future technology related to rotary pumps that provideassisted circulation, whether or not reimbursed by WorldHeart. 

 

Within 30 days of November 1,2009 (the “Amendment Date”), WorldHeart will issue to LaunchPoint a convertiblepromissory note (the “LaunchPoint Note”) in the principal amount of $1,000,000,with interest at 4.5% per annum, maturing six years from the date of issuance(the “Issuance Date”). Twenty percent of the principal amount of theLaunchPoint Note, together with accrued interest, will be converted intorestricted shares of the Company’s common stock, on each anniversary of theIssuance Date for 5 years.  LaunchPoint’sright of resale for each annual issuance of restricted shares will be limitedto no more than one-twelfth of such shares in each of the next 12 months withthe restrictions lifted after 12 months. The stock price used for determiningthe conversion rate will be the publicly traded weighted average closing priceof the Company’s common stock for the three month period preceding the relevantanniversary date. The Company will have the right to repurchase, at any timeprior to the second anniversary of the Amendment Date, any outstanding balanceof the LaunchPoint Note at a 15% discount. 

 

**12.****       Recent AccountingPronouncements**

 

With the exception ofthose discussed below, there have been no recent accounting pronouncements orchanges in accounting pronouncements during the three and nine months ended September 30,2009, as compared to the recent accounting pronouncements described in theCompany’s Annual Report on Form 10-K for the year ended December 31,2008, that the Company believes are of significance, or potential significanceto the Company based upon current operations.

 

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**WORLD HEART CORPORATION**

**Notesto Unaudited Condensed Consolidated Financial Statements - continued**

 

Effective January 1,2009, the Company adopted SFAS No. 141 (revised 2007), BusinessCombinations (“SFAS 141(R)”) which was primarily codified into FASB AccountingStandards Codification (“ASC”) 805, Business Combinations (“ASC 805”).Under current guidance, an entity is required to recognize the assets acquired,liabilities assumed, contractual contingencies, and contingent consideration attheir fair value on the acquisition date. It further requires thatacquisition-related costs be recognized separately from the acquisition andexpensed as incurred; that restructuring costs generally be expensed in periodssubsequent to the acquisition date; and that changes in accounting for deferredtax asset valuation allowances and acquired income tax uncertainties after themeasurement period be recognized as a component of provision for taxes. Inaddition, acquired in-process research and development is capitalized as anindefinite-lived intangible asset for which no amortization is taken untilabandonment or termination of the research and development activity; theintangible asset will be tested annually for impairment. The rules regardingasset acquisitions of in process research and development items was modified byEITF 09-02 “Research and development assets acquired in an Asset acquisition”issued in March 2009 to comply with FAS 141(R).  The current guidanceis effective on a prospective basis for all business combinations for which theacquisition date is on or after January 1, 2009, with the exception of theaccounting for valuation allowances on deferred taxes and acquiredcontingencies. With the adoption of the current guidance, any tax relatedadjustments associated with acquisitions that closed prior to January 1,2009 will be recorded through income tax expense, whereas the previousaccounting treatment would require any adjustment to be recognized throughgoodwill. The adoption of the current guidance had no impact on the Company’scondensed consolidated financial statements as of, and for the three and ninemonths ended September 30, 2009.

 

Effective January 1,2009, the Company adopted, FASB Staff Position (FSP) No. 142-3,Determination of the Useful Life of Intangible Assets  (“FSP No. 142-3”)which was primarily codified into FASB ASC 350,  Intangibles — Goodwilland Other (“ASC 350”). The current guidance amends the factors considered indeveloping renewal or extension assumptions used to determine the useful life ofa recognized intangible asset. The current guidance also requires enhanceddisclosures when an intangible asset’s expected future cash flows are affectedby an entity’s intent and/or ability to renew or extend the arrangement. Theadoption did not have a material impact on the Company’s condensed consolidatedresults of operations or financial condition as of, and for the three and ninemonths ended September 30, 2009.

 

Effective January 1,2009, the Company adopted FSP APB 14-1, Accounting for Convertible DebtInstruments That May Be Settled in Cash Upon Conversion (Including PartialCash Settlement)  (“FSP 14-1”) which was primarily codified into FASB ASC470 —  Debt  (“ASC 470”). Current guidance specifies that theliability and equity components of convertible debt instruments that may besettled in cash upon conversion (including partial cash settlement) beseparately accounted for in a manner that reflects an issuer’s nonconvertibledebt borrowing rate and requires retrospective application for all periodspresented. The adoption did not have a material impact on the Company’scondensed consolidated results of operations or financial condition for allperiods presented.

 

Effective April 1,2009, the Company adopted SFAS No. 165, Subsequent Events (“SFAS 165”)which was primarily codified into FASB ASC 855 —  Subsequent Events (“ASC 855”). The current guidance is intended to establish general standards ofaccounting for, and disclosure of, events that occur after the balance sheetdate but before financial statements are issued. It requires the disclosure ofthe date through which an entity has evaluated subsequent events and the basisfor that date. The Company has evaluated subsequent events through November 16,2009, the date the condensed consolidated financial statements were issued.

 

Effective April 1,2009, the Company adopted FSP No. 115-2 and 124-2, Recognition andPresentation of Other-Than-Temporary Impairments (“FSP 115-2” and “FSP124-2”) which was primarily codified into FASB ASC 320 — Investments — Debt andEquity Securities (“ASC 320”). The current guidance provides new guidance onthe recognition and presentation of an other-than-temporary impairments, aswell as extends certain annual disclosure requirements to interim periods. Theadoption did not have a material impact on the Company’s condensed consolidatedfinancial statements.

 

Effective September 30,2009, the Company adopted SFAS No. 168, The FASB Accounting StandardsCodification (Codification) and the Hierarchy of Generally Accepted AccountingPrinciples- a replacement of Financial Statement No. 162 (“SFAS 168”)which was primarily codified into FASB ASC 105 —  Generally AcceptedAccounting Principles . Current guidance establishes the FASB AccountingStandards Codification as the source of authoritative accounting principlesrecognized by the FASB to be applied by nongovernmental entities in preparationof financial statements in conformity with generally accepted accountingprinciples in the United States. The adoption did not have a material impact onthe Company’s condensed consolidated financial statements.

 

In September 2009,the FASB ratified Accounting Standards Update (“ASU”) 2009-13 (“ASU2009-13”) (previously Emerging Issues Task Force (“EITF”) Issue No. 08-1, Revenue Arrangements with Multiple Deliverables  (“EITF 08-1”)). ASU2009-13 

 

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**WORLD HEART CORPORATION**

**Notesto Unaudited Condensed Consolidated Financial Statements - continued**

 

superseded EITF 00-21and addresses criteria for separating the consideration in multiple-elementarrangements. ASU 2009-13 will require companies to allocate the overallconsideration to each deliverable by using a best estimate of the selling priceof individual deliverables in the arrangement in the absence of vendor-specificobjective evidence or other third-party evidence of the selling price. ASU2009-13 will be effective prospectively for revenue arrangements entered intoor materially modified in fiscal years beginning on or after June 15, 2010and early adoption will be permitted. The Company is currently evaluating thepotential impact, if any, of the adoption of ASU 2009-13 on its condensedconsolidated financial statements.

 

In September 2009,the FASB ratified ASU 2009-14 (“ASU 2009-14”) (previously EITF No. 09-3,Certain Revenue Arrangements That Include Software Elements). ASU 2009-14modifies the scope of Software Revenue Recognition to exclude (a) non-softwarecomponents of tangible products and (b) software components of tangibleproducts that are sold, licensed, or leased with tangible products when thesoftware components and non-software components of the tangible productfunction together to deliver the tangible product’s essential functionality.ASU 2009-14 has an effective date that is consistent with ASU 2009-13. TheCompany is currently evaluating the potential impact, if any, of the adoptionof ASU 2009-14 on our condensed consolidated financial statements and whetherthe Company will adopt the standard early.

 

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

 

**INTRODUCTION**

 

World Heart Corporation and its subsidiaries are collectivelyreferred to as “WorldHeart” or the “Company.” The following ManagementDiscussion and Analysis of Financial Condition and Results of Operations(MD&A) discusses material changes in our financial condition and results ofoperations and cash flows for the three and nine months ended September 30,2009 and September 30, 2008. Such discussion and comments on the liquidityand capital resources should be read in conjunction with the informationcontained in our audited consolidated financial statements for the year ended December 31,2008, prepared in accordance with U.S. GAAP, included in our Annual Report on Form 10-Kfor the fiscal year ended December 31, 2008.

 

*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, manufacturing,pre-clinical testing and clinical trials for our products and next-generationproduct candidates, such as the Levacor Rotary VAD; our ability to manufacture,sell and market our products; decisions, and the timing of decisions, made byhealth regulatory agencies regarding approval of our products; competition fromother products and therapies for heart failure; continued slower thananticipated destination therapy adoption rate for VADs; limitations onthird-party reimbursements; our ability to obtain and enforce in a timelymanner patent and other intellectual property protection for our technology andproducts; our ability to avoid, either by product design, licensing arrangementor otherwise, infringement of third parties’ intellectual property; our abilityto enter into corporate alliances or other strategic relationships relating tothe development and commercialization of our technology and products; loss ofcommercial market share to competitors due to our financial condition; ourability to remain listed on the NASDAQ Capital Market; as well as other risksand uncertainties set forth under the heading “Risk Factors” in our AnnualReport on Form 10-K, for the fiscal year ended December 31, 2008.*

 

**OVERVIEW**

** **

Ourbusiness is focused on the development and sale of ventricular assist devices(“VADs”), particularly our Levacor Rotary VAD (the “Levacor VAD” or the“Levacor”). VADs are mechanical assist devices that supplement the circulatoryfunction of the heart by re-routing blood flow through a mechanical pumpallowing for the restoration of normal blood circulation. In August 2009,the Company received a conditional Investigational Device Exception from theU.S. Food and Drug Administration (“FDA”) for the Levacor at ten U.S. centersand expects to initiate the clinical trial in the fourth quarter of 2009.Clinical study enrollment will involve approximately 205 subjects with anopportunity to demonstrate statistical significance through a planned interimanalysis of approximately 155 subjects. The follow-up period for subjects inthe Bridge-to-Transplant (“BTT”) clinical trial is six months with the endpoints of the BTT study being heart transplant or six month survival. We expectto initiate a CE Mark clinical trial in Europe with Levacor by the end of 2010and plan to initiate a destination therapy clinical study in the U.S. withLevacor by the first half of 2011.

 

Inaddition, we, in conjunction with a consortium consisting of the University ofPittsburgh, Children’s Hospital of Pittsburgh, Carnegie Mellon and LaunchpointTechnologies, LLC, have been developing a small, magnetically levitated, axialrotary pediatric VAD (“PediaFlowTM”). The PediaFlow is intended for use in newbornsand infants and has been primarily funded by the National Institutes of Health(“NIH”). The technology embodied in the PediaFlow is also intended to form thebasis for a small, minimally invasive VAD (“MiVAD”). The MiVAD is aimed atproviding partial circulatory support in early-stage heart failure patients. Weexpect to be in the clinic with the MiVAD in 2013.

 

Inthe past, we derived most of our revenue from our Novacor LVAS and relatedperipheral equipment, which we sold directly to medical clinics and hospitalsin the United States, Europe and Canada and through a distributor in certainother countries. In November 2006, we announced a restructuring plan,which included a reduction of commercial operations associated with the NovacorLVAS, and a refocusing of our resources on the development of next generationproducts, particularly the Levacor VAD.

 

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, amongWorldHeart, 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,

 

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L.P. and Austin W. Marxe(collectively, “SSF”) and New Leaf Ventures II, L.P. (“New Leaf”).Simultaneously with the closing of the recapitalization, Abiomedentered into a Termination and Release Letter Agreement with us and convertedthe full amount of principal and interest owed on the $5,000,000, 8% SecuredConvertible Promissory Note (the “Note”) previously issued to Abiomed by us andWHI into 2,866,667 of our common shares, 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 of $1,400,000 that Venrock and SSF had previously providedto us. As part of the recapitalization transaction, we issuedwarrants to purchase an aggregate of 83,333 common shares to our advisors,Pacific Growth Equities, LLC and Stifel, Nicolaus and Company.

 

On August 21,2008, we announced that we were embarking on a phased consolidation into aprimary facility at our current location in Salt Lake City, Utah. As part ofour consolidation plan, on February 4, 2009, we announced that we hadappointed Mr. John Alexander Martin as our President and Chief ExecutiveOfficer and on August 10, 2009, we announced that we had appointed Mr. MorganR. Brown as our Executive Vice President and Chief Financial Officer, with bothpositions based in Salt Lake City, Utah. Mr. Jal S. Jassawalla, our formerPresident and CEO, currently our Executive Vice President and Chief TechnologyOfficer, continues to be based in Oakland, California, along with certain keyemployees in areas such as Research and Development, Clinical Affairs andRegulatory Affairs.

 

Research and development by ourcompetitors is proceeding on several rotary flow devices. Certain of thesedevices have received the CE mark in Europe and are advancing through clinicaltrials in the United States and Europe, and one device received U.S. marketingapproval for the Bridge-to-Transplant indication in 2008. We believethat our Levacor VAD has significant clinical durability and ease of usebenefits as compared to our competitors.

 

**RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHPERIODS ENDED SEPTEMBER 30, 2009 COMPARED WITH THE THREE AND NINE MONTHPERIODS ENDED SEPTEMBER 30, 2008**

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

 
| ** **                                                                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **(Unaudited)**                                                             | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenue**                                                                 |       | —                                    |       | $                                        | 192        |   | 5 |   | $ | 1,363 |   |
| **Cost of goods sold**                                                      |       | 25                                        |       | 204                                      |       | 78 |   | 890 |   |
|                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| **Gross profit**                                                            |       | (25                                       | )          | (12                                      | )          | (73 | ) | 474 |   |
|                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                      |       |                                     |       |   |   |   |   |
| Selling,  general and administrative                                        |       | 1,315                                     |       | 1,036                                    |       | 4,234 |   | 3,441 |   |
| Research  and development                                                   |       | 2,557                                     |       | 2,226                                    |       | 7,269 |   | 6,651 |   |
| Clinical  and marketing support                                             |       | —                                    |       | —                                   |       | — |   | 6,479 |   |
| Restructuring  costs                                                        |       | 98                                        |       | —                                   |       | 349 |   | — |   |
| Amortization  of intangibles                                                |       | 12                                        |       | 48                                       |       | 108 |   | 144 |   |
| **Total operating expenses**                                                |       | 3,982                                     |       | 3,310                                    |       | 11,960 |   | 16,715 |   |
|                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| **Operating loss**                                                          |       | (4,007                                    | )          | (3,322                                   | )          | (12,033 | ) | (16,241 | ) |
|                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| **Other income (expense)**                                                  |       | (9                                        | )          | (3,840                                   | )          | (1 | ) | (5,448 | ) |
|                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| **Net loss applicable to common shareholders**                              |       | $                                         | (4,016     | )                                        | $          | (7,162 | ) | $ | (12,034 | ) | $ | (21,689 | ) |
|                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| **Weighted average number of common shares outstanding basic  and diluted** |       | 13,273                                    |       | 8,963                                    |       | 13,260 |   | 3,296 |   |
|                                                                        |       |                                      |       |                                     |       |   |   |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                         | (0.30      | )                                        | $          | (0.80 | ) | $ | (0.91 | ) | $ | (6.58 | ) |

 

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***Revenue:*******In the past,****sales ofNovacor LVAS implant kits and related peripheral equipment and servicesaccounted for the majority of our revenue. In addition, we generated revenuefrom sales of SPUS (Segmented Poly Urethane Solution) used by one other medicaldevice manufacturer. We have historically sold our products directly, exceptfor a few countries where we sold 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,** | ** ** |
|------------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **(Unaudited)**              | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
| ** **                   | ** ** | **$**                                     | ** ** | **Units**                                | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
| **Novacor Product Revenues** |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Implant  kits                |       | $                                         | —     |                                     | Nil        |   | $ | — |   | Nil |   | $ | — |   | Nil |   | $ | 318 |   | 5 |   |
| Peripherals  and other       |       | —                                    |       |                                     |       | 102 |   |   |   | 5 |   |   |   | 440 |   |   |   |
|                         |       | —                                    |       |                                     |       | 102 |   |   |   | 5 |   |   |   | 758 |   |   |   |
| **SPUS Revenues**            |       | —                                    |       |                                     |       | 90 |   |   |   | — |   |   |   | 605 |   |   |   |
| **Total Revenue**            | ** ** | **$**                                     | **—** | ** **                               | ** ** | ** ** | **$** | **192** | ** ** | ** ** | ** ** | **$** | **5** | ** ** | ** ** | ** ** | **$** | **1,363** | ** ** | ** ** | ** ** |

 

Total revenue for the three months ended September 30, 2009 wasnil reflecting a decrease of $192,000, or 100%, compared with the three monthsended September 30, 2008. There were no Novacor LVAS implant kits soldduring the three months ended  September 30,2009 and September 30, 2008. Novacor peripherals and other revenue was nilfor the three months ended September 30, 2009, a decrease of $102,000, or100%, compared with the quarter ended September 30, 2008. The overallrevenue decrease is attributable to our November 2006 decision to reduceour commercial efforts with respect to the Novacor LVAS and focus our resourceson the development of our Levacor VAD. In 2007 and 2008, we made the NovacorLVAS available to medical centers only until our inventory was depleted, whichoccurred in mid-2008. We continue to support our Novacor patients but have discontinuedthe manufacture and sale of additional Novacor implant kits. We do notanticipate any Novacor product revenues throughout the remainder of 2009.  There was no SPUS revenue for the threemonths ended September 30, 2009 compared with $90,000 during the threemonths ended September 30, 2008. The decrease is a result of this revenuebeing associated with one customer with no purchase orders being placed in2009. We anticipate that SPUS revenues will continue to be unpredictable as weare dependent on only one customer.

 

Total revenue for the nine months ended September 30, 2009 was$5,000, a decrease of $1,358,000, compared with $1,363,000 recorded in the sameperiod in 2008. Novacor implant kit revenue was nil and $318,000, for the ninemonths ended September 30, 2009 and 2008, respectively. We sold fiveNovacor implant kits during the nine months ended September 30, 2008compared to zero in the nine months ended September 30, 2009 whichcontributed to this significant decrease. Revenue generated from peripheralsand others was $5,000 for the nine months ended September 30, 2009,compared to $758,000 for the same period in 2008, a decrease of $753,000, or99%. The decrease is a result of our 2006 decision to no longer supportcommercial sales of Novacor LVAS. SPUS revenues were nil for the first ninemonths of 2009 compared with $605,000 for the same nine month period in 2008.This fluctuation in SPUS sales is a result of our dependence on only onecustomer. We do not anticipate any Novacor-related revenues throughout theremainder of 2009.

 

***Cost of goods sold:*** For the three and nine months ended September 30, 2009, cost ofgoods sold consisted entirely of royalties payable under a minimum annualroyalty agreement with Vertellus UK Limited. For the three and nine monthsended September 30, 2008, cost of goods sold was 106% and 65%,respectively, of total revenue. Cost of goods sold during the three and ninemonths ended September 30, 2008 consisted of raw materials, labor,royalties and other costs related to the manufacture of our Novacor LVAS, aswell as Novacor LVAS inventory write-downs of $99,000 and $355,000,respectively.

 

***Selling******, general andadministrative:***Selling, general andadministrative expenses consist primarily of payroll and related expenses forexecutives, sales, marketing, accounting and administrative personnel. Sellingexpenses primarily relate to enrollment of new centers in the anticipatedLevacor clinical trials, field support of existing Novacor LVAS patients andmarketing/trade show costs. Our administrative expenses include professionalfees, communication expenses, insurance premiums, public reporting costs andgeneral corporate expenses.

 

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

 
| ** **                  | ** ** | **Three Months Ended September 30,** | ** ** | **Nine Months Ended September 30,** | ** ** |
|-----------------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| **(Unaudited)**             | ** ** | **2009**                                  | ** ** | **2008**                                 | ** ** | **2009** | ** ** | **2008** | ** ** |
|                        |       |                                      |       |                                     |       |   |   |   |   |
| Selling                     |       | $                                         | 169        |                                     | $          | 214 |   | $ | 554 |   | $ | 693 |   |
| General  and administrative |       | 1,146                                     |       | 822                                      |       | 3,680 |   | 2,748 |   |
| Total                       |       | $                                         | 1,315      |                                     | $          | 1,036 |   | $ | 4,234 |   | $ | 3,441 |   |

 

Selling expenses for the three months ended September 30,2009 decreased by $45,000, or 21%, compared with the same period in 2008. Thedecrease is attributable to the continued decline of Novacor LVAS supportefforts. For the nine months ended September 30, 2009, selling expensesdecreased $139,000, or 20%, compared with the nine months ended September 30,2008. For the three and nine months ended September 30, 2009, we recorded$22,000 and $54,000, respectively, in stock-based compensation expense comparedwith $5,000 and $16,000, respectively, in the comparable 2008 periods. Sellingexpenses are expected to increase as we begin to supply our Levacor device forevaluation in clinical trials.

 

General and administrative expenses for thethree months ended September 30, 2009 increased $324,000 or 39% comparedwith the same period in 2008. The increase is primarily attributable to anincrease in stock based compensation expense ($114,000), increased legal fees($83,000), increased salaries from the addition of a new CEO and CFO($125,000), and increased costs associated with filing of our annual meeting, proxystatement and other annual meeting related costs. For the nine months ended September 30,2009, general and administrative expenses increased $932,000, or 34% comparedwith the nine months ended September 30, 2008. This increase isattributable to salaries, benefits, recruitment, consulting  and legal fees associated with our phasedconsolidation plan, including hiring of our new CEO and CFO and the transitionof our former CEO into another executive position ($580,000), an increase inthe accrual for bonuses ($128,000), and increased stock based compensationexpense ($220,000). For the three and nine months ended September 30,2009, we recorded $146,000, and $349,000, respectively, in stock-basedcompensation expense associated with general and administrative employeescompared with $32,000 and $128,000, respectively, recorded in the comparable2008 periods. General and administrative expenses are expected to continue toincrease as we add additional employees and activities to support the Levacorclinical trials.

 

***Research and development:***Research and development expenses consist principallyof salaries and related expenses for research personnel, consulting, prototypemanufacturing, testing, clinical trials, material purchases and regulatoryaffairs incurred at our Salt Lake City and Oakland facilities.

 

Researchand development expenses for the three months ended September 30, 2009increased $331,000, or 15%, compared with the three months ended September 30,2008. The increase isprimarily attributable to increased R&D efforts related to the Levacorbuild for clinical trials ($153,000) and increased stock based compensationexpense ($122,000). Research anddevelopment expenses for the nine months ended September 30, 2009increased by $618,000, or 9%, from the nine months ended September 30,2008. The increase isprimarily attributable to increased R&D efforts related to the Levacorbuild for clinical trials ($272,000), increased stock based compensationexpense ($220,000), an increase in the accrual for bonuses ($180,000), increased ClinicalResearch Organization (“CRO”) costs associated with our planned Levacorclinical study ($93,000) and increased consultant costs ($87,000). These increases were offset in part bydecreased salaries resulting from our phased consolidation plan to our SaltLake City, Utah facility announced in August, 2008.For the three and nine months ended September 30, 2009, we recorded$121,000, and $266,000, respectively, in stock-based compensation expenseassociated with research and development employees compared with $21,000 and$67,000, respectively, recorded in the comparable 2008 periods. Research anddevelopment expenses are expected to increase during the remainder of 2009 aswe continue to develop our Levacor Rotary VAD and continue activities onpre-clinical testing and other product development.

 

***Clinical and marketing support-non-cash:***On December 11,2007, we issued a 5-year warrant to Abiomed to purchase up to 113,333 of ourcommon shares, exercisable at $0.30 per share, as compensation for clinical andmarketing support services. Upon issuance, approximately 20% of the warrant wasimmediately exercisable and the remaining 80% became exercisable in January 2008.In the first quarter of 2008, we recorded non-cash expense of $6.5 millionrelated to the fair value of the warrant. There were no such charges recordedfor the three and nine months ended September 30, 2009. The warrant wasterminated in July 2008 pursuant to the terms of the RecapitalizationAgreement.

 

***Debtinducement expense:******In the three and nine monthsended September 30, 2008, we recorded an expense of $3.9 millionassociated with the induced conversion of a secured convertible promissory note in the principal amount of $5.0million that was held by Abiomed and termination of previously existingagreements and warrants. There was no such charge recorded for the three andnine months ended September 30, 2009.***

 

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***Restructuring costs:***Restructuring costs consist primarily oftermination benefits of several employees and relocation benefits of our newCEO. The terms of the employment agreement of our new CEO, hired in the firstquarter of 2009, contained a Relocation Benefits package to cover reimbursementfor certain relocation-related expenses in an amount of up to $107,000, plusadditional estimated tax gross-up payments of up to $48,000. As such, we haverecorded an estimated restructuring charge of $150,000, inclusive of tax grossup payment during the nine months ended September 30, 2009. We do notexpect to record additional relocation expenses for the CEO in the future.Additionally, we recorded $48,000 and $199,000, respectively, during the threeand nine months ended September 30, 2009 for termination benefits foremployees whose positions will be eliminated over time in connection with therelocation of our corporate office to Salt Lake City, Utah. There were no suchcharges recorded for the three and nine months ended September 30, 2008.

 

***Amortization ofintangibles:*****Amortization of acquiredworkforce for the three months ended September 30, 2009 and September 30,2008 was $12,000 and $48,000, respectively. Amortization expense for the ninemonths ended September 30, 2009 and September 30, 2008 was $108,000and $144,000 respectively. This intangible asset was being amortized on astraight-line basis over four years and became fully amortized in August 2009.

 

***Foreign Exchange:*******Foreign exchange transactions resulted in losses of $13,000 and$20,000, respectively, for the three and nine months ended September 30,2009. This compares with gains of $15,000 and $5,000, respectively, for thethree and nine months ended September 30, 2008. Gains and losses relate primarily tofluctuations in the relative value of the U.S. dollar compared with the Euroand Canadian dollar. We anticipate continued fluctuations of foreignexchange gains and losses.

 

***Investment andother income:*** Investment and other income for the three monthsended September 30, 2009 was $5,000 compared to $103,000 during the threemonths ended September 30, 2008. Investment and other income for the ninemonths ended September 30, 2009 was $19,000, compared to $121,000 for thenine months ended September 30, 2008. Although average daily balances ofinvested cash were greater in the three and nine months ended September 30,2009, compared to the corresponding periods of the prior years, the earningswere lower due to the significant decline in interest rates in 2009. Weanticipate our investment income will decrease over the remainder of 2009resulting from consumption of cash to fund operations.

 

***Interestexpense******: For the nine months ended September 30, 2008,we recorded interest expense of $1,659,000, of which $1,414,000 related to thebeneficial conversion feature of the $4.0 million convertible note issued toAbiomed on January 3, 2008, $236,000 was accrued interest calculated at 8%on the entire $5.0 million convertible note, $8,000 was interest on the abridge loan facility of $1,400,000 that Venrock and SSF had previously providedto us and $1,000 related to other financing arrangements.*** The noteand accumulated interest was converted into common shares as part of theRecapitalization Agreement. There were no similar charges for the three andnine months ended September 30, 2009 and only minor interest expenserelated to capital leases of $300 and $1,100, respectively, was incurred duringthe three and nine months ended September 30, 2009.

 

**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 programs and clinical trials, applyfor and obtain the necessary regulatory approvals and develop new technologiesand products.

 

At September 30, 2009, wehad cash and cash equivalents of $10.0 million, a decrease of $10.7 millionfrom December 31, 2008. For the first nine months of 2009, cash used tofund operating activities was $10.6 million, consisting primarily of the netloss for the period of $12.0 million, offset by non-cash charges of $250,000for depreciation and amortization and $669,000 for non-cash stock compensationexpense. Working capital changes consisted of a $484,000 decrease in accountsreceivable and prepaid expenses and a $184,000 increase in accounts payable andaccrued compensation. This was offset by an increase in inventories of$135,000. For the first nine months of 2008, cash used to fund operatingactivities was $9.5 million, consisting primarily of the net loss for theperiod of $21.7 million and working capital increases of $248,000, offset bynon-cash charges of $359,000 for depreciation and amortization, $212,000 instock compensation, $1.5 million related to the beneficial conversion of ourdebt, $6.5 million in warrant expense, and $3.9 million in debt inducementexpense.

 

Investing activities in 2009requiring cash resources consisted of $372,000 in property and equipmentadditions primarily related to Levacor tooling and manufacturing equipment,compared to $45,000 during the same period in 2008.

 

Financing activities in 2009included proceeds of $192,000 from the exercise of warrants and $2,000 from thesale of property and equipment offset by $5,000 of capital lease repayments.Financing activities in 2008 consisted of $30.0 million proceeds from ourprivate placement transaction and recapitalization, $1.4 million in a bridgeloan, and $4.0 million in convertible debentures, offset by $1.3 million inexpenses related to the private placement and convertible debentures..

 

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With the receipt of theproceeds from the July 2008 recapitalization and based on our currentoperating expenses and projected sales of our Levacor VAD when we begin ourclinical trials, we believe we have sufficient cash to fund operations into themiddle of 2010.

 

We are continuing toexplore strategic and financing alternatives, including equity financingtransactions and corporate collaborations. Equity financings could include, butare not limited to, private investments in public equity transactions,convertible debentures and strategic equity investment by interested companies.Corporate collaborations could include licensing of one or more of our productsor co-funding of our products. We initiated a phased-in restructuring programin the third quarter of 2008 and continue to re-align our spending to focus onour key development program, the Levacor VAD, and will continue to carefullymanage our overall cash usage.

 

Our long-term working capital and capital requirementswill depend upon numerous factors, including the following: our ability tobring the Levacor VAD to clinical trials in the fourth quarter of 2009 and itsacceptance in the marketplace, the rate of investment in our next-generationtechnologies, particularly the Levacor VAD; the clinical trial costs and theapproval process for our next-generation products; our general efforts toimprove operational efficiency, conserve cash and implement other costconservation programs; and our ability to raise additional capital throughequity financings on reasonable terms, or at all.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

For a discussion of our critical accounting polices,see “Item 7. Management’s Discussion and Analysis of Financial Condition andResults of Operations” in our 2008 Form 10-K.

 

**NEW ACCOUNTING STANDARDS**

 

Refer to Note 12, in “Notes to Unaudited CondensedConsolidated Financial Statements” for a discussion of new accountingstandards.

 

**OFF- BALANCE SHEET ARRANGEMENTS**

 

None.

 

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

 

Market risk represents the risk of changes in thevalue of market risk sensitive instruments caused by fluctuations in rates,foreign exchange rates and commodity prices. Changes in these factors couldcause fluctuations in our results of operations and cash flows.

 

**InterestRate Risk**

 

Our exposure to interest rate risk is currentlyconfined to interest earnings on our cash that is invested in highly liquidmoney market funds. The primary objective of our investment activities is topreserve our capital to fund operations. We seek to maximize income from ourinvestments without assuming significant risk. We do not presently usederivative financing instruments in our investing portfolio. Our cash andinvestments policy emphasizes liquidity and preservation of principal and otherportfolio considerations.

 

**ForeignCurrency Rate Fluctuations**

 

SinceJanuary 1, 2004, the functional currency of the Company has been the USdollar. For United Statesreporting purposes, we translate all assets and liabilities of our Netherlandsand Canadian entities, whichhave minimum business activities, at the period-end exchange rate and revenueand expenses at the average exchange rates in effect during the period. The neteffect of these translation adjustments are includedin net loss for the year.

 

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Our Canadian and Netherlands entities hold Canadian dollar and Eurodenominated cash accounts. Fluctuations in the exchange rate of the U.S. dollaragainst the Canadian dollar or Euro can result in foreign currency exchangegains and losses that impact our financial results and our overall cashposition. These foreign currency transaction gains and losses are included inother income (loss), net in the consolidated statements of operations. Thegains and losses are recorded in US dollars, our functional currency, uponconsolidation, for United States reporting purposes. Continued fluctuation ofthe exchange rate could result in financial results that are not comparablefrom quarter to quarter.

 

We do not presently utilize foreign currency forward contracts andinstead hold minimum cash reserves in the currency in which those reserves areanticipated to be expended.

 

**ITEM 4T.  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, 2009, ourpresident and chief executive officer (principal executive officer) and our chieffinancial officer (principal accounting and financial officer) have concludedthat our disclosure controls and procedures are effective at the reasonableassurance level.

 

*Change inInternal Control over Financial Reporting. *No change in ourinternal control over financial reporting occurred during our most recent thequarter ended September 30, 2009 that has materially affected, or isreasonably likely to materially affect, our internal control over financialreporting. However, due to the 2008 Restructuring Plan and the subsequentconsolidation of offices to Salt Lake City, Utah and reduction in employees, weare in the process of reviewing all of our internal controls over financialreporting in an effort to maximize the value of existing internal controls in asmaller more centralized company. Additionally, during the third quarter of2009, we have hired several new accounting personnel in our Salt Lake Cityoffice that will support our internal control efforts over financial reporting.

 

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**PART II—OTHER INFORMATION**

 

#### **ITEM 1. LEGAL PROCEEDINGS**

#### ** **

Inthe normal course of business, we may be a party to legal proceedings. We arenot currently a party to any material legal proceedings, except as described inour Annual report on Form 10-K for the year ended December 31, 2008.

 

**ITEM 1A. RISK FACTORS**

 

Otherthan the risk factors below, there have been no material changes to the riskfactors as set forth in the Company’s Annual Report filed on Form 10-K forthe year ended December 31, 2008. The following risk factors are amendedand restated in its entirety:

 

**Wewill require significant capital investment to continue our product developmentprograms and to bring future products and product enhancements to market, andif adequate funding is not available, our financial condition will be adverselyaffected and we may have to further curtail or eliminate our developmentprograms and significantly reduce our expenses or be forced to ceaseoperations.**

 

Our investment of capitalhas been and will continue to be significant. Developing our technology, futureproducts and continued product enhancements, including those of the LevacorRotary VAD and other technologies, requires a commitment of substantial fundsto conduct the costly and time-consuming research and clinical trials necessaryfor such development and regulatory approval. If adequate funds are notavailable when needed, we may be required to delay, reduce the scope of, oreliminate one or more of our research or development programs or obtain fundsthrough arrangements with collaborative partners or others that may require usto relinquish rights to certain of our technologies, potential products orproducts that we would otherwise seek to develop or commercialize ourselves. Inaddition, while in November 2006 we embarked on a significantrestructuring and cost reduction initiative and in August 2008, weannounced a significant restructuring, cost reductions and consolidationinitiatives, we may be required to further reduce our operating expenses,including but not limited to, reductions in salaries and/or elimination ofemployees and consultants or cessation of operations. We believe that cash onhand will be sufficient to support our planned operations through the middle of2010. We are continuing to explore strategic and financing alternatives,including equity financing transactions and corporate collaborations. Theinability to obtain additional financing or enter into strategic relationshipswhen needed will have a material adverse effect on our business, financialcondition and results of operations. There can be no assurance that we will beable to obtain any sources of financing on acceptable terms, or at all. If weare unsuccessful in raising additional capital from any of these sources, wemay need to defer, reduce or eliminate certain planned expenditures. If we arenot able to reduce or defer our expenditures, secure additional sources ofrevenue or otherwise secure additional funding, we may be unable to continue asa going concern, and we may be forced to restructure or significantly curtailour operations, file for bankruptcy or cease operations.

 

**Wehave had substantial losses since incorporation and expect to continue tooperate at a loss while our products are under development, and we may neverbecome profitable.**

 

Since our inception in1996 through September 30, 2009, we have incurred cumulative losses ofapproximately $328.1 million, a significant portion of which relates to thecosts of internally developed and acquired technologies. Our research anddevelopment expenses have increased over the past years, primarily due to ourinvestment in the development programs for our next generation Levacor RotaryVAD. Our research and development activities will likely result in additionalsignificant losses in future periods. These expenditures include costsassociated with performing pre-clinical testing and clinical trials for ournext generation products, continuing research and development, seekingregulatory approvals and, if we receive these approvals, commencing commercialmanufacturing, sales and marketing of our products.

 

**Weface risks associated with our manufacturing operations, risks resulting fromdependence on third-party manufacturers, and risks related to dependence onsole suppliers.**

 

The manufacture of ourproducts is a complex operation involving a number of separate processes andcomponents. Material costs are high and certain of the manufacturing processesinvolved are labor-intensive. The conduct of manufacturing operations issubject to numerous risks, including reliance on third-party manufacturers,unanticipated technological problems and delays. From time to time in the past,we have experienced manufacturing challenges and delays, and we may experiencemanufacturing challenges and delays in the future.  Any such challenges ordelays, if significant, could negatively affect our ability to develop anddeliver our products in a timely manner, which could have a material adverseeffect on our business, financial condition and results of operations. Inaddition, we, or any entity manufacturing products or components on our behalf,may not be able to comply with applicable governmental regulations or satisfyregulatory inspections in connection with the manufacture of our products,which would have a material adverse effect on our business, financial conditionand results of operations.

 

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

 

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

 

(None)

 

**ITEM 3. DEFAULTSUPON SENIOR SECURITIES**

 

(None)

 

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

 

(a)          Our SpecialMeeting of Shareholders was held on September 17, 2009.

 

(b)          In anuncontested election, eight nominees of the Board of Directors were elected.The votes were as follows:

 
| **Number  of Votes** | ** ** |
|----------------------|------------|
| ** **           | ** ** |
| ** **           | ** ** | **For** | ** ** | **Withheld** | ** ** | **Broker non-  votes** | ** ** |
| Jeanie Delagardelle  |       | 10,130,789 |   | 691 |   | 0 |   |
| Michael S. Estes     |       | 10,130,794 |   | 686 |   | 0 |   |
| William C. Garriock  |       | 10,130,746 |   | 734 |   | 0 |   |
| Gary W. Goertz       |       | 10,130,746 |   | 734 |   | 0 |   |
| Anders D. Hove       |       | 10,130,790 |   | 690 |   | 0 |   |
| J. Alex Martin       |       | 10,130,580 |   | 900 |   | 0 |   |
| Austin W. Marxe      |       | 10,130,790 |   | 690 |   | 0 |   |
| Michael R. Minogue   |       | 10,130,731 |   | 749 |   | 0 |   |

 

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(c)          The resultof voting on Proposals 2 through 5 (as numbered in our September 2009Proxy Statement) were as follows:

 

(2)   Appointment of Burr, Pilger &Mayer LLPS as our independent registered public accounting firm andauthorization of the Board of Directors to fix their remuneration

 

**Numberof Votes**

** **
| For:             |   | 10,130,940 |   |
|------------------|--------|------------|--------|
| Withheld:        |   | 540        |   |
| Broker non-votes |   | 0          |   |

 

(3)  Approving a plan of arrangement pursuantto Section 192 of the Canada Business Corporations Act as a result ofwhich, among other matters, our jurisdiction of incorporation would be changedfrom the federal jurisdiction of Canada to the State of Delaware, by way of adomestication under Section 388 of the Delaware General Corporation Law,and to adopt the certificate of incorporation authorized in the specialresolution to be effective as of the date of the reincorporation(domestication)

 

**Numberof Votes**

 
| For:              |   | 10,102,868 |   |
|-------------------|--------|------------|--------|
| Against:          |   | 5,312      |   |
| Abstained:        |   | 539        |   |
| Broker  non-votes |   | 22,761     |   |

 

(4)  To reduce the stated capital of ourcommon shares to an aggregate amount of US$1.00

 

**Numberof Votes**

** **
| For:              |   | 10,125,142 |   |
|-------------------|--------|------------|--------|
| Against           |   | 6,323      |   |
| Abstained:        |   | 13         |   |
| Broker  non-votes |   | 2          |   |

 

(5)  To approve the amendment of our 2006Equity Incentive Plan to increase the aggregate number of shares common stockauthorized for issuance under the plan by 700,000 common shares

 

**Numberof Votes**

** **
| For:              |   | 10,124,752 |   |
|-------------------|--------|------------|--------|
| Against           |   | 6,654      |   |
| Abstained:        |   | 73         |   |
| Broker  non-votes |   | 1          |   |

 

**ITEM 5.OTHER INFORMATION**

 

On November 13,2009, the Company and LaunchPoint Technologies LLC (“LaunchPoint”) entered intoan Amendment Agreement amending the existing Assignment Agreement that theCompany and LaunchPoint entered into in September 2008. Under theAmendment Agreement, LaunchPoint assigned additional technology and intellectualproperty to the Company in exchange for (a) increased royalty on netfuture sales through 2020 (or the date of expiry of the last to expire patentsassigned to the Company) of products using all technology, with minimum annualroyalties to LaunchPoint of approximately $129,000 for the first four years andpayment of $60,000, thereafter, (b) entry into an R&D servicesagreement of $225,000, and (c) the issuance of a $1.0 million convertiblepromissory note.

 

The Company, at itsdiscretion and depending on its involvement, can choose to reimburseLaunchPoint to cover market rates for government grants and contracts.LaunchPoint provided the Company an Option on all future technology related torotary pumps that provide assisted circulation, whether or not reimbursed byWorldHeart.

 

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Within 30 days of November 1,2009 (the “Amendment Date”), WorldHeart will issue to LaunchPoint a convertiblepromissory note (the “LaunchPoint Note”) in the principal amount of $1,000,000,with interest at 4.5% per annum, maturing six years from the date of issuance(the “Issuance Date”). Twenty percent of the principal amount of theLaunchPoint Note, together with accrued interest, will be converted intorestricted shares of the Company’s common stock, on each anniversary of theIssuance Date for 5 years.  LaunchPoint’sright of resale for each annual issuance of restricted shares will be limitedto no more than one-twelfth of such shares in each of the next 12 months withthe restrictions lifted after 12 months. The stock price used for determiningthe conversion rate will be the publicly traded weighted average closing priceof the Company’s common stock for the three month period preceding the relevantanniversary date. The Company will have the right to repurchase, at any timeprior to the second anniversary of the Amendment Date, any outstanding balanceof the LaunchPoint Note at a 15% discount.

 

**ITEM 6.  EXHIBITS**

 
| Exhibit 10.1 |   | Letter  Agreement, dated August 10, 2009, between World Heart Inc. and Morgan R.  Brown (incorporated by reference to  Exhibit 99.2 to the Corporation’s Form 8-K filed on August 10,  2009 (Commission File No. 000-28882)) |
|-------------------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 10.2 |   | Change of Control and Severance Agreement with J.  Alex Martin.                                                                                                                                                                                            |
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 10.3 |   | Change of Control and Severance Agreement with  Morgan R. Brown.                                                                                                                                                                                           |
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 10.4 |   | Change of Control and Severance Agreement with  Jal S. Jassawalla.                                                                                                                                                                                         |
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 10.5 |   | Form of Change of Control and Severance Agreement.                                                                                                                                                                                                         |
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 10.6 |   | World Heart Corporation 2006 Equity Incentive  Plan, as amended.                                                                                                                                                                                           |
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 31.1 |   | Certification of Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              |
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 31.2 |   | Certification of Principal Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                              |
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 32.1 |   | Certification of Principal Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  1350.                                                                                                                             |
|              |   |                                                                                                                                                                                                                                                       |
| Exhibit 32.2 |   | Certification of Principal Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  1350.                                                                                                                             |

 

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**SIGNATURES**

 

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

 
|                                 | World Heart Corporation                                                                                                |
|--------------------------------------|------------------------------------------------------------------------------------------------------------------------|
|                                 | (Registrant)                                                                                                           |
|                                 |                                                                                                                   |
|                                 |                                                                                                                   |
| Dated:   November 16, 2009 | /s/ J. Alex Martin                                                                                                     |
|                                 | J. Alex Martin, President and Chief   Executive Officer   (Principal Executive Officer)                                |
|                                 |                                                                                                                   |
|                                 |                                                                                                                   |
| Dated:   November 16, 2009 | /s/ Morgan R. Brown                                                                                                    |
|                                 | Morgan R. Brown, Executive Vice President   and Chief Financial Officer   (Principal Financial and Accounting Officer) |

 

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