**Table of Contents**

** **

 

** **

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

** **

**WASHINGTON,DC 20549**

** **

**FORM 10-Q**

** **
| **(Mark One)**                                         |
|--------------------------------------------------------|
| ** **                                             |
| **ý  **                                 | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE  ACT OF 1934** |
|                                                   |   |
| **For quarterly period ended June 30, 2009** |
|                                                   |   |
| **o  **                                      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT** |

 

**For the transition periodfrom       to       **

 

**Commission filenumber:  000-28882**

 

**WORLD HEART CORPORATION**

(Exact name of registrant as specified in itscharter)

 

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

 

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

(Addressof principal executive offices)

 

**(510)563-5000**

(Registrant’stelephone number)

 

(Former name, former address and former fiscal year, if changed sincelast report) **N/A**

 

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 theRegistrant is a shell company (as defined in Rule 12b-2 of the ExchangeAct).   Yes o No x

 

Indicate thenumber of shares outstanding of each of the issuer’s classes of common stock,as of the latest practicable date: The number of common shares outstanding asof August 5, 2009 was 13,253,964.

 

 

 

----

Table ofContents

 

**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 | 12         |
| Item  3.                               | Quantitative  and Qualitative Disclosures About Market Risk                                 | 17         |
| Item 4.                                | Controls  and Procedures                                                                    | 17         |
|                                   |                                                                                        |       |
|                                   |                                                                                        |       |
| **Part II.  Other Information**   | ** **                                                                                  |
|                                   |                                                                                        |       |
| Item 1.                                | Legal  Proceedings                                                                          | 18         |
| Item 1A.                               | Risk Factors                                                                                | 18         |
| Item  2.                               | Unregistered  Sales of Equity Securities and Use of Proceeds                                | 18         |
| Item  3.                               | Defaults  Upon Senior Securities                                                            | 18         |
| Item  4.                               | Submission  to Matters to a Vote of Security Holders                                        | 18         |
| Item 5.                                | Other  Information                                                                          | 18         |
| Item 6.                                | Exhibits                                                                                    | 18         |
|                                   | Signatures                                                                                  |       |

 

2

----

Table of Contents

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**WORLD HEART CORPORATION**

## **Condensed Consolidated Balance Sheets**

(United States Dollars)

(Unaudited)

 
| ** **                                                                                                                                                    | ** ** | **June 30, 2009** | ** **     | **December 31, 2008 (1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|----------------|-------------------------------------|------------|
| **ASSETS**                                                                                                                                                    |       |                   |           |                                |       |
| **Current assets**                                                                                                                                            |       |                   |           |                                |       |
| Cash  and cash equivalents                                                                                                                                    |       | $                      | 13,342,101     |                                | $          | 20,703,724 |   |
| Trade  and other receivables, net of allowance for doubtful accounts of $215,040 and  $204,133 at June 30, 2009 and December 31, 2008, respectively |       | 98,775                 |           | 322,548                             |       |
| Inventory,  net of allowance for excess and obsolete of $2,650,787 at June 30, 2009  and December 31, 2008, respectively                            |       | 107,847                |           | —                              |       |
| Prepaid  expenses                                                                                                                                             |       | 501,994                |           | 458,294                             |       |
|                                                                                                                                                          |       | 14,050,717             |           | 21,484,566                          | ** ** |
| **Long-term assets**                                                                                                                                          | ** ** | ** **             | ** **     | ** **                          | ** ** |
| Property  and equipment, net                                                                                                                                  |       | 765,621                |           | 651,572                             |       |
| Intangible  assets, net                                                                                                                                       |       | 12,204                 |           | 107,916                             |       |
| Other  long-term assets                                                                                                                                       |       | 156,360                |           | 156,360                             |       |
|                                                                                                                                                          |       | 934,185                |           | 915,848                             | ** ** |
| **Total assets**                                                                                                                                              | ** ** | **$**                  | **14,984,902** | ** **                          | **$**      | **22,400,414** | ** ** |
| ** **                                                                                                                                                    | ** ** | ** **             | ** **     | ** **                          | ** ** |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                 |       |                   |           |                                |       |
| ** **                                                                                                                                                    |       |                   |           |                                |       |
| **Current liabilities**                                                                                                                                       |       |                   |           |                                |       |
| Accounts  payable and accrued liabilities                                                                                                                     |       | $                      | 1,204,847      |                                | $          | 1,388,675 |   |
| Accrued  compensation                                                                                                                                         |       | 1,280,432              |           | 897,086                             |       |
| Current  portion of capital lease obligations                                                                                                                 |       | 8,481                  |           | —                              |       |
| Deferred  revenue                                                                                                                                             |       | —                 |           | 3,671                               |       |
|                                                                                                                                                          |       | 2,493,760              |           | 2,289,432                           |       |
|                                                                                                                                                          |       |                   |           |                                |       |
| **Long-term liabilities**                                                                                                                                     |       |                   |           |                                |       |
| Non-current  portion of capital lease obligations                                                                                                             |       | 19,175                 |           | —                              |       |
| **Total liabilities**                                                                                                                                         |       | 2,512,935              |           | 2,289,432                           |       |
|                                                                                                                                                          |       |                   |           |                                |       |
| **Shareholders’ equity**                                                                                                                                 |       |                   |           |                                |       |
| Common  stock, no par value, 13,253,964 shares issued and outstanding at  June 30, 2009 and December 31, 2008, respectively                         |       | 325,087,252            |           | 325,087,252                         |       |
| Additional  paid-in-capital                                                                                                                                   |       | 17,702,994             |           | 17,323,629                          |       |
| Cumulative  other comprehensive loss                                                                                                                          |       | (6,285,577             | )              | (6,285,577                          | )          |
| Accumulated  deficit                                                                                                                                          |       | (324,032,702           | )              | (316,014,322                        | )          |
| Total  shareholders’ equity                                                                                                                              |       | 12,471,967             |           | 20,110,982                          |       |
| **Total liabilities and shareholders’ equity**                                                                                                           | ** ** | **$**                  | **14,984,902** | ** **                          | **$**      | **22,400,414** | ** ** |

 

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

 

(1)  Derived from the Company’s audited consolidated financialstatements as of December 31, 2008.

 

3

----

Table of Contents

 

## **WORLD HEART CORPORATION**

## **Condensed Consolidated Statements of Operations**

(United States Dollars)

(Unaudited)

 
| ** **                                                                  | ** ** | **Three Months Ended June 30,** | ** **     | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|----------------|------------------------------------|------------|
| ** **                                                                  | ** ** | **2009**                             | ** **     | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Revenue**                                                                 |       | $                                    | —         |                               | $          | 535,534 |   | $ | 4,765 |   | $ | 1,171,530 |   |
| **Cost of goods sold**                                                      |       | 25,000                               |           | 286,312                            |       | 53,238 |   | 686,431 |   |
| **Gross profit**                                                            |       | (25,000                              | )              | 249,222                            |       | (48,473 | ) | 485,099 |   |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                 |           |                               |       |   |   |   |   |
| Selling,  general and administrative                                        |       | 1,476,008                            |           | 1,204,899                          |       | 2,918,893 |   | 2,405,191 |   |
| Research  and development                                                   |       | 2,607,879                            |           | 1,932,738                          |       | 4,711,810 |   | 4,425,185 |   |
| Clinical  and marketing support - non-cash                                  |       | —                               |           | —                             |       | — |   | 6,478,619 |   |
| Restructuring  costs                                                        |       | 198,194                              |           | —                             |       | 250,912 |   | — |   |
| Amortization  of intangibles                                                |       | 47,856                               |           | 47,856                             |       | 95,712 |   | 95,712 |   |
| **Total operating expenses**                                                |       | 4,329,937                            |           | 3,185,493                          |       | 7,977,327 |   | 13,404,707 |   |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Operating loss**                                                          |       | (4,354,937                           | )              | (2,936,271                         | )          | (8,025,800 | ) | (12,919,608 | ) |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Other income (expenses)**                                                 |       |                                 |           |                               |       |   |   |   |   |
| Unrealized  foreign exchange loss                                           |       | (17,691                              | )              | (4,921                             | )          | (6,182 | ) | (10,516 | ) |
| Investment  and other income (expense)                                      |       | 6,033                                |           | (5,465                             | )          | 14,363 |   | 17,831 |   |
| Interest  expense                                                           |       | (361                                 | )              | (103,016                           | )          | (761 | ) | (1,615,078 | ) |
| **Net loss**                                                                | ** ** | **$**                                | **(4,366,956** | **)**                              | **$**      | **(3,049,673** | **)** | **$** | **(8,018,380** | **)** | **$** | **(14,527,371** | **)** |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Weighted average number of common shares outstanding basic  and diluted** |       | 13,253,964                           |           | 384,304                            |       | 13,253,964 |   | 383,944 |   |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                    | (0.33          | )                                  | $          | (7.94 | ) | $ | (0.60 | ) | $ | (37.84 | ) |

 

(The accompanyingnotes are an integral part of these condensed consolidated financialstatements.)

 

4

----

Table of Contents

 

**WORLD HEART CORPORATION**

## **Condensed Consolidated Statements of Cash Flows**

(United States Dollars)

(Unaudited)

 
| ** **                                                           | ** ** | **Six Months Ended June 30,** | ** **     |
|----------------------------------------------------------------------|------------|------------------------------------|----------------|
| ** **                                                           | ** ** | **2009**                           | ** **     | **2008** | ** ** |
|                                                                 |       |                               |           |   |   |
| Net  loss for the period                                             |       | $                                  | (8,018,380     | ) | $ | (14,527,371 | ) |
| Adjustments  to reconcile net loss to net cash used in operations:   |       |                               |           |   |   |
| Amortization  and depreciation                                       |       | 179,376                            |           | 239,175 |   |
| Write  down of inventory                                             |       | —                             |           | 256,172 |   |
| Non-cash  stock compensation expense                                 |       | 379,365                            |           | 154,086 |   |
| Non-cash  interest on debt                                           |       | —                             |           | 1,466,143 |   |
| Non-cash  expense for fair value of warrants                         |       | —                             |           | 6,478,619 |   |
| Unrealized  foreign exchange gain (loss)                             |       | 8,413                              |           | (23,864 | ) |
| Change  in operating components of working capital                   |       | 258,277                            |           | 889,313 |   |
| **Cash used in operating activities**                                | ** ** | **(7,192,949**                     | **)**          | **(5,067,727** | **)** |
|                                                                 |       |                               |           |   |   |
| **Investing activities**                                             |       |                               |           |   |   |
| Purchase  of property and equipment                                  |       | (167,025                           | )              | (45,460 | ) |
| **Cash used in investing activities**                                | ** ** | **(167,025**                       | **)**          | **(45,460** | **)** |
|                                                                 |       |                               |           |   |   |
| **Financing activities**                                             |       |                               |           |   |   |
| Repayment  of capitalized leases                                     |       | (3,031                             | )              | — |   |
| Convertible  bridge notes payable                                    |       | —                             |           | 1,000,000 |   |
| Convertible  debenture proceeds                                      |       | —                             |           | 4,000,000 |   |
| **Cash provided by (used in) financing activities**                  | ** ** | **(3,031**                         | **)**          | **5,000,000** | ** ** |
| **Effect of exchange rates on cash and cash equivalents**            | ** ** | **1,382**                          | ** **     | **(2,550** | **)** |
| **Increase (decrease) in cash and cash equivalents for the  period** | ** ** | **(7,361,623**                     | **)**          | **(115,737** | **)** |
| **Cash and cash equivalents, beginning of the period**               | ** ** | **20,703,724**                     | ** **     | **664,504** | ** ** |
| **Cash and cash equivalents, end of the period**                     | ** ** | **$**                              | **13,342,101** | ** ** | **$** | **548,767** | ** ** |

 

(The accompanyingnotes are an integral part of these condensed consolidated financialstatements.)

 

5

----

Table of Contents

 

**WORLD HEART CORPORATION**

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

#### ** **

**1.****                                     ****Nature of Operations of the Corporation**

 

WorldHeartCorporation (“WorldHeart” or the “Corporation”) 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 inOakland, California, Salt Lake City, Utah and Herkenbosch, Netherlands. In thepast, WorldHeart derived its revenue from its Novacor LVAS (left ventricularassist system) and related peripheral equipment which it sold directly tomedical clinics and hospitals in the United States, Europe and Canada andthrough distributors in other countries. Presently, the Corporation is focusing on the development of itsnext-generation LevacorTM Rotary VAD and expects to realize cost recoveries fromthe use of Levacor in a US clinical trial expected to start in the second halfof 2009.  Such recoveries are expected tobe an important part of the Corporation’s overall operating cash flows startingin 2010.

 

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

 

### *Basis of presentation*

### * *

The accompanying interimcondensed unaudited consolidated financial statements have been prepared bymanagement in accordance with accounting principles generally accepted in theUnited States (“GAAP”) and with the instructions to Form 10-Q and Article 8of Regulation S-X. Accordingly, these consolidated financial statements includeall assets, liabilities, revenue and expenses of the Corporation and its whollyowned subsidiaries: World Heart Inc. and World Heart B.V. All materialinter-company transactions and balances have been eliminated. These interimunaudited condensed consolidated financial statements and notes thereto shouldbe read in conjunction with Management’s Discussion and Analysis of FinancialCondition and Results of Operations and the audited financial statements andnotes thereto included in the Corporation’s Annual Report on Form 10-K forthe year ended December 31, 2008. In the opinion of management, thecondensed balance sheet at December 31, 2008 which has been derived fromaudited financial statements and these interim unaudited consolidated financialstatements reflect all normal and recurring adjustments considered necessary tostate fairly the results for the periods presented. The results for the periodended June 30, 2009 are not necessarily indicative of the results to beexpected for the entire fiscal year ended December 31, 2009 or for anyfuture period.

 

*Use of estimates*

 

The preparation of theseconsolidated financial statements in accordance with accounting principlesgenerally accepted in the United States of America, requires management to makeestimates 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 could differfrom these estimates.

 

*Revenue Recognition, AccountsReceivable 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 Corporation’s multiple-element offerings are Implant Kits, Peripheralsand Other. For arrangements with multiple elements, the Corporation recognizesrevenue using the residual method as described in SOP (“Statement of Position”)98-9. Under the residual method, revenue is allocated and deferred for theundelivered elements based on relative fair value. The determination of fairvalue of the undelivered elements in multiple elements arrangements is based onthe price charged when such elements are sold separately, which is commonlyreferred to as vendor-specific objective-evidence, or VSOE. Each element’srevenue is recognized when all of the revenue recognition criteria are met foreach of the elements.

 

The Corporationregularly evaluates the collectability of its accounts receivable. An allowancefor doubtful accounts is maintained for estimated credit losses. When estimatingcredit losses, the Corporation considers a number of factors including theaging of a customer’s account, creditworthiness of specific customers,historical trends and other information. The Corporation has provided 

 

6

----

Tableof Contents

 

**WORLD HEART CORPORATION**

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

#### ** **

certain customers withdeferred payment terms. Certain products are covered by a limited warranty.Warranty costs are based on historical experience and estimated and recordedwhen the related sales are recognized. Any additional costs are recorded whenincurred or when they can reasonably be estimated.

 

*Restructuring Expense*

 

The Corporation recordscosts and liabilities associated with exit and disposal activities, as definedin Financial Accounting Standards Board (“FASB”) Statement No. 146, “Accountingfor Costs Associated with Exit or Disposal Activities” (“SFAS 146”), basedon estimates of fair value in the period the liabilities are incurred. Inperiods subsequent to initial measurement, changes to the liability aremeasured using the credit-adjusted risk-free discount rate applied in the initialperiod. The liability is evaluated and adjusted as appropriate, for changes incircumstances.

 

*Research and 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 Corporation records R&D expense in accordance withFASB Statement No. 2, “Accounting for Research and Development Costs,” as interpreted byFASB Interpretation (FIN) No. 4, “Applicability of FASB Statement No. 2to Business Combinations Accounted for by the PurchaseMethod.”

* *

*Fair Value Measurementsand Financial Instruments*

 

The Corporation measures certain financialassets (cash and cash equivalents) at fair value on a recurring basis. TheCorporation’s investments in cash and cash equivalents are classified withinLevel 1 of the fair value hierarchy because they are valued based on quotedmarket prices in active markets.  The carrying amounts of certain of theCorporation’s non-financial instruments including accounts receivable, accountspayable, accrued liabilities and capital lease liability approximate fair valuedue to their short maturities.

 

3.                                       **Reverse Stock Split**

 

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

 

Pursuant to the October 2008 reversestock split, each holder of the Corporation’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.

 

4**.****                                      ****Stock-based Compensation**

 

On January 1, 2006,WorldHeart adopted FAS 123(R) using the modified prospective transitionmethod. Under this method, the provisions of FAS 123(R) apply to allstock-based awards granted after the effective date. The unrecognized expenseof awards not yet vested as of January 1, 2006 is recognized as an expensein the calculation of net income. As FAS 123(R) requires that stock-basedcompensation expense be based on awards that are ultimately expected to vest.Stock-based compensation for the second quarter 2009 has been reduced forestimated forfeitures. When estimating forfeitures, voluntary terminationbehaviors, as well as trends of actual option forfeitures are considered. Tothe extent actual forfeitures differ from our current estimates, cumulativeadjustments to stock-based compensation expense are recorded.

 

Except for transactions with employees anddirectors that are within the scope of FAS 123(R), all transactions in whichgoods or services are the consideration received for the issuance of equityinstruments are accounted for based on the fair value of the considerationreceived or the fair value of the equity instruments issued, whichever is morereliably measurable.  Additionally, in accordance with Emerging IssuesTask Force (EITF) 96-18, the Corporation has determined that the dates used tovalue the transaction are either: (1) the date at which a commitment forperformance by the counter party to earn the equity instruments is established;or (2) the date at which the counter party’s performance is complete.

 

7

----

Table of Contents

 

**WORLD HEART CORPORATION**

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

 

WorldHeart uses theBlack-Scholes-Merton valuation model for estimating the fair value of stockcompensation. The stock-based compensation expense for the three and six monthsended June 30, 2009 and 2008 was as follows:

 
| ** **                           | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|--------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(Unaudited)**                      | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| Selling,  general and administrative |       | $                                    | 160,432    |                               | $          | 48,481 |   | $ | 234,950 |   | $ | 107,127 |   |
| Research  and development            |       | 115,104                              |       | 24,857                             |       | 144,415 |   | 46,959 |   |
| Total                                |       | $                                    | 275,536    |                               | $          | 73,338 |   | $ | 379,365 |   | $ | 154,086 |   |

 

Increase in stock basedcompensation expense during the three and six months ended June 30, 2009is a result of the number of options outstanding, issued and vesting during aparticular period. For the three and six months ended June 30, 2009, theCorporation issued approximately 329,000 and 1,356,000 options compared to13,100 options issued for both periods ended June 30, 2008.

 

As of June 30,2009, approximately $3,261,989 of total unrecognized compensation cost relatedto stock options is expected to be recognized over a period of approximatelysixteen quarters beginning July 1, 2009.

 

The aggregate intrinsicvalue is calculated as the difference between the exercise price of alloutstanding options and the quoted price of our common shares that were in themoney at June 30, 2009. At June 30, 2009, the aggregate intrinsicvalue of all outstanding options was $445,084 with a weighted average remainingcontractual term of approximately 9.6 years. Of the 1,388,263 outstandingoptions, exercisable options were 28,159 with a weighted average remainingcontractual life of 4.5 years and 1,360,104 were unvested with a weightedaverage remaining contractual life of 9.7 years. No options were exercisedunder our stock option plan during the quarter ended June 30, 2009.

 

A summary of the statusand changes of our non-vested options, subject to FAS123(R) calculation asof the quarter ended June 30, 2009 is presented below:

 
| ** **                           | ** ** | **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**   | ** ** |

 

*Valuation Assumptions*

 

WorldHeart calculatesthe fair value of each option award on the date of grant using theBlack-Scholes-Merton option pricing model. There were 329,079 option grants for the three-month period ended June 30,2009 and no option grants for three-month period ended June 30, 2008. Forthe six month periods ended June 30, 2009 and June 30, 2008, theweighted average fair value of the options granted was $2.40 and $1.42,respectively. The following weighted average assumptions were utilized:

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                       | ** ** | **June 30, 2009** | ** ** | **June 30, 2008** | ** ** |
| Average  risk free interest rate |       | 2.3                    | %          | 2.2                    | %          | —                 |       | 3.4                  | %          |
| Expected  life (in years)        |       | 5.5                    |       | 5.5                    |       | —                 |       | 5.5                  |       |
| Expected  volatility             |       | 154                    | %          | 154                    | %          | —                 |       | 133                  | %          |
| Dividend  yield                  |       | 0                      | %          | 0                      | %          | —                 |       | 0                    | %          |

 

The dividend yield ofzero is based on the fact that WorldHeart has never paid cash dividends and hasno present intention to pay cash dividends. Expected volatility is based on thehistorical volatility of the Corporation’s common shares over the periodcommensurate with the expected life of the options. Expected life in years isbased on the “simplified” method as permitted by the SEC issued StaffAccounting Bulletin No. 110 (“SAB 110”). WorldHeart believes that itsshare options issued under its share option plans meet the criteria of “plainvanilla” share options and that the Corporation uses a term of 5.5 years forall its “plain vanilla” options. The risk free interest rate is based onaverage rates for five and seven-year treasury notes as published by theFederal Reserve.

 

8

----

Tableof Contents

 

**WORLD HEART CORPORATION**

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

 

Thefollowing table summarizes stock option and warrant activity for the quarterended June 30, 2009:

 
| ** **                              | ** ** | **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      |                                  | $          | 289.65       |       | 84,395 |   | $ | 7.32 |   | 1,472,658 |   |

 

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

 

WorldHeart has determinedthat its first-generation Novacor® LVAS has reached the natural end of its productlife cycle and has shifted its business focus to the development, clinicaltrial and subsequent commercialization of the advanced Levacor RotaryVentricular Assist Device (VAD). Management estimates that there will be nofurther sales of Novacor products in 2009 and has written-down gross Novacorinventories of $2,650,787 to a net carrying value of zero at December 31,2008. In the quarter ended June 30, 2009, the Corporation capitalized$108,000 of certain Levacor inventory prior to regulatory approval and productlaunch based on management’s judgment of high probability of future commercialuse and net realizable value of the inventory. WorldHeart could be required topermanently write down previously capitalized costs related to pre-approval orpre-launch inventory upon a change in such judgment, due to denial or delay ofapproval by regulatory bodies, a delay in commercialization, or other potentialfactors.

 

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

 

**Accrued Compensation**

 

Accrued compensation includesaccruals for quarter-end employee wages and Board of Director fees, vacation,clinical and performance bonuses, severance related to the Corporation’s phasedconsolidation and restructuring plan and relocation benefits for the newlyhired CEO. The components of accrued compensation, inclusive of payroll taxes,are as follows:

 
| ** **                   | ** ** | **June 30, 2009** | ** **    | **December 31, 2008** | ** ** |
|------------------------------|------------|------------------------|---------------|----------------------------|------------|
| Accrued  wages               |       | $                      | 199,616       |                       | $          | 60,090 |   |
| Accrued  severance           |       | 149,537                |          | 65,344                     |       |
| Accrued  relocation benefits |       | 141,131                |          | —                     |       |
| Accrued  vacation            |       | 453,621                |          | 423,009                    |       |
| Accrued  bonuses             |       | 336,527                |          | 348,643                    |       |
| Total  accrued compensation  | ** ** | **$**                  | **1,280,432** | ** **                 | **$**      | **897,086** | ** ** |

 

**CEO Relocation Benefits**

 

The terms of theemployment agreement of the Corporation’s new CEO, hired in the first quarterof 2009, contained a Relocation Benefits package to cover reimbursement forcertain relocation-related expenses in an amount of up to $107,000, plusadditional tax gross-up payments amounting to approximately $48,000. Thephysical move was completed in the quarter ended June 30, 2009 and anestimated restructuring charge of $150,000 was recorded in the quarter ended June 30,2009.

 

9

----

Table ofContents

 

**WORLD HEART CORPORATION**

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

 

**Performance Bonus**

 

OnMarch 25, 2009, the Compensation Committee, as confirmed by the Board ofDirectors of the Corporation, approved the 2009 Performance Bonus Plan,including the potential payments under the plan and the performance milestonesto be achieved. Based on management’s judgment at June 30, 2009 ofmilestones achieved or achievable, the Corporation accrued bonus expense of$299,000, during the quarter ended June 30, 2009.

 

**Accounts Payable and AccruedLiabilities**

 

Accounts payable andaccrued liabilities consist of the following:

 
| ** **                                      | ** ** | **June 30, 2009** | ** **    | **December 31, 2008** | ** ** |
|-------------------------------------------------|------------|------------------------|---------------|----------------------------|------------|
| Accounts  payable                               |       | $                      | 266,166       |                       | $          | 460,234 |   |
| Accued  liabilities                             |       | 804,225                |          | 822,693                    |       |
| Accrued  site restoration                       |       | 5,395                  |          | 5,395                      |       |
| Sales  taxes payable                            |       | 33,013                 |          | 4,305                      |       |
| Accrued  warranty                               |       | 96,048                 |          | 96,048                     |       |
| Total  accounts payable and accrued liabilities | ** ** | **$**                  | **1,204,847** | ** **                 | **$**      | **1,388,675** | ** ** |

 

**7.****                                     ****Comprehensive Loss**

 

Forthe three months ended June 30, 2009 and June 30, 2008, there were nosignificant differences between the Corporation’s comprehensive loss and itsnet loss.

 

**8.****                                     ****Recent Accounting Pronouncements**

 

Thefollowing accounting pronouncements have been issued recently and may impactthe Corporation:

 

InDecember 2007, the FASB issued SFAS No. 141R, “Business Combinations”(FAS 141R). FAS 141R amends FAS 141 and provides revised guidancerequiring the acquirer to recognize and measure, at fair value on theacquisition date, identifiable assets and goodwill acquired, liabilitiesassumed, and any non-controlling interest in the acquiree. Transaction andrestructuring costs generally will be expensed as incurred. The Statement alsoprovides disclosure requirements to enable users of the financial statements toevaluate the nature and financial effects of the business combination. TheCorporation does not expect FAS 141R to impact the Corporation’s financialstatements unless it acquires another business in the future.

 

InMay 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted AccountingPrinciples” (FAS 162), which became effective on November 13, 2008. FAS162 identified the sources of accounting principles and the framework forselecting the principles used in preparing the financial statements ofnongovernmental entities that are presented in conformity with GenerallyAccepted Accounting Principles (GAAP). FAS 162 arranged these sources of GAAPin a hierarchy for users to apply accordingly. This statement documents thehierarchy of the various sources of accounting principles and the framework forselecting the principles used in preparing financial statements. FAS 162 wasreplaced by the issuance of SFAS No. 168, “The FASB Accounting StandardsCodification and the Hierarchy of Generally Accepted Accounting Principles — areplacement of FASB Statement No. 162” (FAS 168) in June 2009. FAS168 will become the source of authoritative GAAP recognized by the FASB to beapplied by nongovernmental entities. Rules and interpretive releases ofthe Securities and Exchange Commission (SEC) under authority of federalsecurities laws are also sources of authoritative GAAP for SEC registrants. Onthe effective date of this Statement, the Codification will supersede allthen-existing non-SEC accounting and reporting standards. All other nongrandfatherednon-SEC accounting literature not included in the Codification will becomenon-authoritative. This Statement is effective for financial statements issuedfor interim and annual periods ending after September 15, 2009. Theadoption of FAS 168 is not expected to have a material effect on theCorporation’s consolidated financial position, results of operations or cashflows.

 

In May 2009, theFASB issued SFAS No. 165, “Subsequent Events” (“SFAS 165”), which providesguidance to establish general standards of accounting for and disclosures ofevents that occur after the balance sheet date but before financial statementsare issued or are available to be issued. SFAS 165 also requires entitiesto disclose the date through which subsequent events were evaluated as well asthe rationale for why that date was selected. This disclosure should alert allusers of financial statements that an entity has not evaluated subsequentevents after that date in the set of financial statements being presented. SFAS165 is 

 

10

----

Table ofContents

 

**WORLD HEART CORPORATION**

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

 

effective for interim andannual periods ending after June 15, 2009. The Corporation has evaluatedsubsequent events for recognition or disclosure through the time of filingthese consolidated financial statements on Form10-Q with the Securities andExchange Commission.

 

In June 2008, theFASB ratified EITF Issue No. 07-5, “Determining Whether an Instrument (orEmbedded Feature) Is Indexed to an Entity’s Own Stock” (“EITF 07-5”).Equity-linked instruments (or embedded features) that otherwise meet thedefinition of a derivative as outlined in SFAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“SFAS 133”), are not accountedfor as derivatives if certain criteria are met, one of which is that theinstrument (or embedded feature) must be indexed to the entity’s own stock.EITF 07-5 provides guidance on how to determine if equity-linked instruments(or embedded features) such as warrants to purchase our stock and convertiblenotes are considered indexed to our stock. The Corporation adopted EITF 07-5 onJanuary 1, 2009 with no impact on operating results or financial position.

 

Management does notbelieve that any other recently issued, but not yet effective accountingpronouncements, if adopted, would have a material effect on the accompanyingfinancial statements.

 

 

11

----

Table ofContents

 

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

 

**INTRODUCTION**

 

World Heart Corporation and its subsidiaries arecollectively referred to as WorldHeart or the Corporation. The followingManagement Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) discusses material changes in WorldHeart’s financialcondition and results of operations and cash flows for the three and six monthsended June 30, 2009 and June 30, 2008. Such discussion and commentson the liquidity and capital resources should be read in conjunction with theinformation contained in WorldHeart’s audited consolidated financial statementsfor the year ended December 31, 2008, prepared in accordance with GAAPincluded in our Annual Report on Form 10—K for the fiscal year ended December 31,2008.

 

The discussion andcomments contained hereunder include both historical information and “forward-lookingstatements” within the meaning of Section 27A of the United StatesSecurities Act of  1933, as amended (the “Securities Act”) and Section 21Eof the United States Securities Exchange Act of 1934, as amended (the “ExchangeAct”). All statements other than statements of historical facts are “forward-lookingstatements” for the purposes of these provisions, including statementsregarding our expectations with respect to future development plans for ournext-generation product candidates, particularly the LevacorTM Rotary VAD(Ventricular Assist Device), the timing and scope of pre-clinical testing andclinical trials, our ability to secure additional funding or to form strategicpartnerships, our cost reduction efforts and their impact on our ability tomaintain operations, as well as other statements that can be identified by theuse of forward-looking language, such as “believe”, “feel”, “expect”, “may”, “will”,“should”, “seek”, “plan”, “anticipate”, “intend” or the negative of thoseterms, or by discussions of strategy or intentions.  These forward-lookingstatements involve 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 statements. Potential risks and uncertainties include, withoutlimitation: our need for additional significant financing in the future; costsand delays associated with clinical trials for our products and next-generationproduct candidates, such as Levacor Rotary VAD; our ability to manufacture,sell and market our products; decisions and timing of decisions made by healthregulatory agencies regarding approval of our products; competition from otherproducts and therapies for heart failure; continued slower than anticipateddestination therapy adoption rate for VADs; limitations on third-partyreimbursements; our ability to obtain and enforce in a timely manner patent andother intellectual property protection for our technology and products; ourability to avoid, either by product design, licensing arrangement or otherwise,infringement of third parties’ intellectual property; our ability to enter intocorporate alliances or other strategic relationships relating to thedevelopment 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 (Levacor VAD or Levacor). VADs aremechanical assist devices that supplement the circulatory function of the heartby re-routing blood flow through a mechanical pump allowing for the restorationof normal blood circulation.

 

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. The legacy generation VAD, the Novacor LVAS, was commerciallyapproved as a Bridge-to-Transplant device in the United States and Canada. InEurope, the Novacor LVAS had unrestricted approval for use as an alternative totransplantation, Bridge-to-Transplantation and to support patients who may beable to recover the use of their natural heart. In Japan, the device wascommercially approved for use in cardiac patients at risk of imminent deathfrom non-reversible left ventricular failure for which there was no alternativeexcept heart transplantation.

 

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

 

In November 2006,we announced a restructuring plan, which included a reduction of commercialoperations associated with the Novacor LVAS, and a refocusing of our resourceson the development of the next generation product, particularly the LevacorVAD. After more than twenty years in clinical use, the Novacor LVAS has reachedthe natural end of its life cycle and we have

 

12

----

Table ofContents

 

beenfocusing on the development of the Levacor VAD and on activities leading to thestart of a US clinical trial with the Levacor VAD in the second half of 2009.In January 2009, we submitted an Investigational Device Exemption (IDE)application to the US Food and Drug Administration for a Bridge-to-Transplantstudy of 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, amongthe Corporation, our wholly owned subsidiary World Heart Inc. (“WHI”), Abiomed, Inc.(“Abiomed”), Venrock Partners V, L.P., Venrock Associates V, L.P. and VenrockEntrepreneurs Fund V, L.P. (collectively, “Venrock”), Special Situations FundIII QP, L.P., Special Situations Cayman Fund, L.P., Special Situations PrivateEquity Fund, L.P., Special Situations Life Sciences Fund, L.P. and Austin W.Marxe (collectively, “SSF”) and New Leaf Ventures II, L.P. (“New Leaf”).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 theCorporation and WHI into 2,866,667 of our common shares, released the securityinterest in all of our assets and those of WHI that secured the Note,terminated the warrant Abiomed held to purchase 113,333 of our common shares,forgave other amounts we owed to Abiomed and terminated previously existingagreements, arrangements and understandings with us. The purchase pricedelivered by Venrock and SSF at the closing was offset by repayment of theprincipal and interest owed on the bridge loan facility of $1,400,000 thatVenrock and SSF had previously provided to us. As part ofthe recapitalization transaction, we issued warrants to purchase an aggregateof 83,333 common shares to our advisors, Pacific Growth Equities, LLC andStifel, Nicolaus and Company.

 

On August 21, 2008, we announced that we were embarking on aphased consolidation into a primary facility at our current location in SaltLake City, Utah. On August 22, 2008, we completed the first phase of ourconsolidation plan and eliminated five positions at our Oakland facility,including the position of Vice President of Manufacturing. On February 4,2009, as part of our consolidation plan, we announced that we had appointedSalt Lake City-based Mr. John Alexander Martin as our President and ChiefExecutive Officer. Mr. Jal S. Jassawalla, our former President and CEO,continues to be based in Oakland, along with certain key employees in areassuch as Research and Development, Clinical Affairs and Regulatory Affairs andcontinues to serve the Corporation as Executive Vice President and ChiefTechnology Officer. Included in the consolidation plan is the appointment of aChief Financial Officer to be based in Salt Lake City, the elimination of somepositions in Oakland and the relocation of certain positions to Salt Lake Cityby approximately the fourth quarter of 2009.

 

Research and developmentby our competitors is proceeding on several rotary flow devices. Certain ofthese devices have received the CE mark in Europe and are advancing throughclinical trials in the United States and Europe, and one device received U.S.marketing approval last year. We believe that our Levacor VAD is the mostadvanced fourth-generation rotary device under development.

 

**Summaryof Quarterly Results**

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

(Unaudited)

 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **June 30,**      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2009**               | ** ** | **2009** | ** ** | **2008** | ** ** | **2008** | ** ** |
|                                        |       |                   |       |   |   |   |   |   |   |
| Net  revenue                                |       | $                      | —     |   | $ | 5 |   | $ | 369 |   | $ | 192 |   |
| Net  loss for the period                    |       | (4,367                 | )          | (3,651 | ) | (3,627 | ) | (7,162 | ) |
| Net  loss applicable to common shareholders |       | (4,367                 | )          | (3,651 | ) | (3,627 | ) | (7,162 | ) |
| Basic  and diluted loss per share           |       | $                      | (0.33      | ) | $ | (0.28 | ) | $ | (0.27 | ) | $ | (0.80 | ) |
|                                        |       |                   |       |   |   |   |   |   |   |
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
| ** **                                  | ** ** | **June 30,**      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
| ** **                                  | ** ** | **2008**               | ** ** | **2008** | ** ** | **2007** | ** ** | **2007** | ** ** |
|                                        |       |                   |       |   |   |   |   |   |   |
| Net  revenue                                |       | $                      | 536        |   | $ | 635 |   | $ | 348 |   | $ | 532 |   |
| Net  loss for the period                    |       | (3,050                 | )          | (11,478 | ) | (7,639 | ) | (3,018 | ) |
| Net  loss applicable to common shareholders |       | (3,050                 | )          | (11,478 | ) | (7,639 | ) | (3,018 | ) |
| Basic  and diluted loss per share           |       | $                      | (7.94      | ) | $ | (29.92 | ) | $ | (19.92 | ) | $ | (7.87 | ) |

 

13

----

Table ofContents

 

**RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHPERIODS ENDED JUNE 30, 2009 COMPARED WITH THE THREE AND SIX MONTH PERIODSENDED JUNE 30, 2008**

** **
| ** **                                                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(Unaudited)**                                                             | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| **Revenue**                                                                 |       | —                               |       | $                                  | 536        |   | 5 |   | $ | 1,172 |   |
| **Cost of goods sold**                                                      |       | 25                                   |       | 287                                |       | 53 |   | 687 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Gross profit**                                                            |       | (25                                  | )          | 249                                |       | (48 | ) | 485 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                 |       |                               |       |   |   |   |   |
| Selling,  general and administrative                                        |       | 1,476                                |       | 1,205                              |       | 2,919 |   | 2,405 |   |
| Research  and development                                                   |       | 2,608                                |       | 1,932                              |       | 4,712 |   | 4,425 |   |
| Clinical  and marketing support                                             |       | —                               |       | —                             |       | — |   | 6,479 |   |
| Restructuring  costs                                                        |       | 198                                  |       | —                             |       | 251 |   | — |   |
| Amortization  of intangibles                                                |       | 48                                   |       | 48                                 |       | 96 |   | 96 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Total operating expenses**                                                |       | 4,330                                |       | 3,185                              |       | 7,978 |   | 13,405 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Operating loss**                                                          |       | (4,355                               | )          | (2,936                             | )          | (8,026 | ) | (12,920 | ) |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Other income (expense)**                                                  |       | (12                                  | )          | (113                               | )          | 8 |   | (1,607 | ) |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Net loss applicable to common shareholders**                              |       | $                                    | (4,367     | )                                  | $          | (3,049 | ) | $ | (8,018 | ) | $ | (14,527 | ) |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Weighted average number of common shares outstanding basic  and diluted** |       | 13,254                               |       | 384                                |       | 13,254 |   | 384 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                    | (0.33      | )                                  | $          | (7.94 | ) | $ | (0.60 | ) | $ | (37.84 | ) |

 

***Revenue:*******In the past,****sales of Novacor LVAS implant kits and related peripheral equipmentand services accounted for the majority of our revenues. In addition, and to agreater percentage of overall revenues in recent quarters, we generate revenuefrom sales of SPUS (Segmented Poly Urethane Solution) used by other medicaldevice manufacturers. We primarily sell our products directly, except for a fewcountries where we sell through distributors.

 

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

 
| ** **                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                   | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
| **(Unaudited)**              | ** ** | **$**                                | ** ** | **Units**                          | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
| **Novacor Product Revenues** |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Implant  kits                |       | $                                    | —     |                               | Nil        |   | $ | — |   | Nil |   | $ | — |   | Nil |   | $ | 318 |   | 5 |   |
| Peripherals  and other       |       | —                               |       |                               |       | 111 |   |   |   | 5 |   |   |   | 339 |   |   |   |
|                         |       | —                               |       |                               |       | 111 |   |   |   | 5 |   |   |   | 657 |   |   |   |
| **SPUS Revenues**            |       | —                               |       |                               |       | 425 |   |   |   | — |   |   |   | 515 |   |   |   |
| **Total Revenue**            | ** ** | **$**                                | **—** | ** **                         | ** ** | ** ** | **$** | **536** | ** ** | ** ** | ** ** | **$** | **5** | ** ** | ** ** | ** ** | **$** | **1,172** | ** ** | ** ** | ** ** |

 

Revenue for the quarter ended June 30, 2009 was nil reflecting adecrease of $536,000 compared with the quarter ended June 30, 2008. Therewere no Novacor LVAS implant kits sold in the quarters ended June 30, 2009and June 30, 2008. Novacor peripherals and other revenue, includingNovacor LVAS hardware, peripherals, and services, was nil for the quarter endedJune 30, 2009 a decrease of $111,000 compared with the comparable prioryear quarter. The overall revenue decrease is attributable to our November 2006decision to reduce our commercial efforts with respect to the Novacor and focusour resources on the development of our Levacor VAD. In 2007 and 2008, we madethe Novacor LVAS available to medical centers only until our inventory wasdepleted, which occurred in mid-2008. We continue to support our Novacorpatients but have discontinued the manufacture and sale of additional Novacorimplant kits. Patient support revenue from peripheral Novacor LVAS products isanticipated to be minimal throughout the remainder of 2009.

 

14

----

Table of Contents

 

There was no SPUS revenue for the quarter ended June 30, 2009compared with $425,000 in the quarter ended June 30, 2008. In allprobabilities, SPUS revenue will end in 2009.

 

Revenue for the first six months of 2009 was $5,000, a decrease of$1,167,000 compared with $1,172,000 recorded in the same period of 2008.Novacor implant kits recognized as revenue for the six months ended June 30,2009 were nil compared with 5 during the same period of 2008. Revenue generatedfrom Novacor hardware, peripherals and services was $5,000 for the first sixmonths of 2009 compared to $339,000 for the same six-month period in 2008. SPUSrevenues were nil for the first six months of 2009 compared with $515,000 forthe same six month period in 2008 We anticipate no implant kit sales, no SPUSsales and minimal Novacor peripheral revenues throughout the remainder of 2009.

 

***Cost of goods sold:***  For the three and six month periods ended June 30, 2009, cost of goods soldconsisted entirely of royalties payable under a minimum annual royaltyagreement with Vertellus UK Limited. For the three and six month periods ended June 30,2008 cost of goods sold, which consisted of raw materials, labor, royalties andother costs related to the manufacture of our Novacor LVAS, was 54% and 59%respectively. The decrease in cost of goods sold during the three and six monthperiods ended June 30, 2009 compared with the same periods last year isattributable to the complete phase out of our Novacor LVAS product and thedecrease in SPUS revenues.

 

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

 

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

 
| ** **                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(Unaudited)**             | ** ** | **2009**                             | ** ** | **2008**                           | ** ** | **2009** | ** ** | **2008** | ** ** |
|                        |       |                                 |       |                               |       |   |   |   |   |
| Selling                     |       | $                                    | 237        |                               | $          | 231 |   | $ | 385 |   | $ | 479 |   |
| General  and administrative |       | 1,239                                |       | 974                                |       | 2,534 |   | 1,926 |   |
| Total                       |       | $                                    | 1,476      |                               | $          | 1,205 |   | $ | 2,919 |   | $ | 2,405 |   |

 

Selling expenses for the three months ended June 30, 2009 increasedby $6,000 or 3%, compared with the same period in 2008. The increase was due tohigher stock based compensation expense and an accrual for bonuses under the2009 Employee Bonus Plan, which is based on achievement of applicablemilestones. These increases were almost entirely offset by the reduction insupport efforts for the Novacor LVAS. There was no provision for the 2008Employee Bonus Plan in the comparable 2008 period as the applicable milestoneswere not achieved. For the six-month period ended June 30, 2009 sellingexpenses decreased $94,000 or 20%, compared with the six month period ended June 30,2008. The decrease is attributable to reduced Novacor LVAS support effortsoffset by increased stock based compensation expense and the accrual of bonusesunder the 2009 Employee Bonus Plan. There was no provision for the 2008Employee Bonus Plan in the comparable 2008 period as the applicable milestoneswere not achieved. For the three and six month periods ended June 30,2009, we recorded $26,000 and $32,000, respectively, in stock-basedcompensation expense compared with $6,000 and $11,000 in the comparable 2008periods. Sellingexpenses primarily relate to enrollment of new centers in the anticipatedLevacor clinical trials, field support of existing Novacor patients andmarketing/show costs. Selling expenses are expectedto increase over the remainder of 2009 as we begin to distribute our nextgeneration Levacor device for evaluation in clinical trials.

 

General and administrative expenses for thethree months ended June 30, 2009 increased by $265,000, or 27%, comparedwith the same period in 2008. The increase is attributable to increased stockbased compensation expense, an accrual for bonuses under the 2009 EmployeeBonus Plan, increased salaries from the addition of a new CEO and consultingexpenses related to SOX 404 controls which are required to be in place by theend of 2009. There was no provision for the 2008 Employee BonusPlan in the comparable 2008 period as the applicable milestones were notachieved. For the three month periodsended June 30, 2009 and June 30, 2008, we recorded $134,000, and$43,000, respectively, in stock-based compensation expense. For the six monthperiod ended June 30, 2009 general and administrative expenses increased$608,000 or 32%, compared with the same period in 2008. This increase isattributable to salaries, benefits, recruitment and legal fees associated withour phased consolidation plan, including hiring of our new CEO, the transitionof our former CEO into another executive position, the accrual for bonusesunder the 2009 

 

15

----

Table of Contents

 

EmployeeBonus Plan and increased stock based compensation expense. We recorded $203,000and $96,000, respectively, in stock-based compensation for the six monthperiods ended June 30, 2009 and 2008, respectively. General andadministrative expenses are expected to remain at approximately the same levelover the next several quarters.

 

***Research and development:***Researchand development (R&D) expenses consist principally of salaries and relatedexpenses for research personnel, consulting, prototype manufacturing, testing,clinical trials, material purchases and regulatory affairs incurred at ourOakland and Salt Lake City facilities.

 

R&D expenses for thethree months ended June 30, 2009 increased by $675,000 or 35%, comparedwith the three months ended June 30, 2008. The increase is primarilyattributable to increased R&D efforts related to the Levacor pilot buildfor clinical trials, increased stock based compensation expense and an accrual for bonuses under the 2009 Employee BonusPlan. For thesix-month periods ended June 30, 2009 and 2008 R&D expenses increasedby $287,000 or 6%. The increase relates to the Levacor pilot build, increasedstock based compensation theaccrual for bonuses under the 2009 Employee Bonus Plan. For the three and six-monthperiods ended June 30, 2009 we recorded $115,000 and $144,000respectively, in stock-based compensation expense compared with $25,000 and $47,000 respectively, inthe comparable prior year periods, R&D expenses for our Levacor VAD areexpected to increase during the remainder of 2009 with additional developmentand pre-clinical testing.

 

***Clinical and marketingsupport-non-cash:*** On December 11, 2007, we issued a 5-year warrant to Abiomed topurchase up to 113,333 of our common shares, exercisable at $0.30 per share, ascompensation for clinical and marketing support services. Upon issuance,approximately 20% of the warrant was immediately exercisable and the remaining80% became exercisable in January 2008. In the first quarter of2008, werecorded non-cash expense of $6.5 million related to the fair value of thewarrant. There were no such charges recorded for the three and six monthperiods ended June 30, 2009.  Thewarrant was terminated in July 2008 pursuant to the terms of theRecapitalization Agreement.

 

***Restructuring costs:***The terms of the employment agreement of ournew CEO hired in the first quarter of 2009 contained a Relocation Benefitspackage to cover reimbursement for certain relocation-related expenses in anamount of up to $107,000, plus additional estimated tax gross-up payments of upto $48,000. For the quarter ended June 30, 2009, an estimatedrestructuring charge of $150,000, inclusive of tax gross up payment, wasrecorded in connection with the CEO’s relocation package. The physical move wascompleted in the quarter ended June 30, 2009 and we do not expect torecord additional relocation expenses for the CEO in the future.  Additionally, we recorded $48,000 in accrualsfor termination benefits for employees whose positions will be eliminated overtime in connection with the relocation of our corporate office to Utah;bringing the total restructuring costs to $198,000 for the quarter ended June 30,2009. For the six month period ended June 30, 2009 restructuring costswere $251,000 consisting primarily of the CEO Relocation Benefits package andaccrued termination benefits. There were no such charges recorded for the threeand six month periods ended June 30, 2008.

 

***Amortization of intangibles:*****Amortization of the acquired MedQuestworkforce for the three and six month periods ended June 30, 2009 and June 30,2008 was $48,000 and $96,000 respectively. This intangible asset is beingamortized on a straight-line basis over four years and will be fully amortizedin the quarter ending September 30, 2009.

 

***Foreign Exchange:*******Foreign exchange transactions resulted inlosses of $18,000 and $6,000 for the three and six month periods ended June 30,2009 respectively. For the three and six month periods ended June 30, 2008foreign exchange losses were $5,000 and $11,000, respectively. The lossesrelate primarily to the fluctuations in the relative value of the U.S. dollarcompared with the Euro and Canadian dollar. We anticipate continuedfluctuations of foreign exchange gains and losses.

 

***Investment and other income:*** Investment and other income for thequarter ended June 30, 2009 was $6,000 compared with a loss of $5,000during the three month period ended June 30, 2008. The loss in the 2008quarter resulted from immediate payment discounts granted to customers in orderto generate operating funds. Investment and other income for the six-monthperiod ended June 30, 2009 was $14,000 compared to $18,000 for thesix-month period ended June 30, 2008. Although average dailybalances of invested cash were greater in the 2009 the earnings were lower dueto the significant decline in interest rates in 2009. We anticipate ourinvestment income will decrease over the remainder of 2009 resulting fromconsumption of cash to fund operations.

 

***Interestexpense:******In the quarter ended June 30, 2008, we recordedinterest expense of $103,000 which was accrued interest on the $5.0 millionAbiomed convertible note. For the six month period ended June 30, 2008 werecorded interest expense of $1,615,000, of which $1,414,000 related to thebeneficial conversion feature of the $4.0 million convertible note issued toAbiomed on January 3, 2008 and $201,000 was accrued interest calculated at8% on the entire $5.0 million convertible note.*** The noteand accumulated interest was converted into common shares as part of theRecapitalization Agreement. There were no such charges for the three andsix-month periods ended June 30, 2009 and only minor interest expense,related to capital leases, of $400 and $800 was incurred in the three and six-monthperiods ended June 30, 2009. For the remainder of 2009 we anticipateinterest expense to increase as we add additional capital leases.

 

16

----

Table ofContents

 

**LIQUIDITYAND CAPITAL RESOURCES**

 

Historically, we have fundedlosses from operations through the sale of equity and issuance of debtinstruments. Combined with revenue and investment income, these funds haveprovided us with the resources to operate our business, sell and support ourproducts, fund our research and development program and clinical trials, applyfor and obtain the necessary regulatory approvals and develop new technologiesand products.

 

At June 30, 2009, wehad cash and cash equivalents of $13.3 million, a decrease of $7.4 million fromDecember 31, 2008. For the first six-months of 2009 cash used to fundoperating activities was $7.2 million consisting primarily of the net loss forthe period of $8.0 million offset by non-cash charges of $179,000 fordepreciation and amortization and $379,000 of non-cash stock compensationexpense. Working capital changes consisted of a $223,000 decrease in accountsreceivable and increases of $108,000 in inventories and $187,000 in accountspayable and accrued compensation offset by an increase of $44,000 in prepaidexpenses and other assets.

 

Investing activitiesrequiring cash resources for the six-months ended June 30, 2009 consistedof $167,000 in property and equipment additions, primarily related to Levacortooling.

 

With the receipt of theproceeds from the July 2008 recapitalization, based on our currentoperating expenses and projected sales of our Levacor VAD when we begin ourclinical trials in the second half of 2009, we believe we have sufficient cashto fund operations into 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 re-aligning our spending to focus on our keydevelopment program, the Levacor VAD, and will continue to carefully manage ouroverall 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 second half 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.

 

**OFF- BALANCE SHEET ARRANGEMENTS**

 

None.

 

**ITEM 3.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK**

 

Not Required.

 

**ITEM 4T. CONTROLS AND PROCEDURES**

 

*Evaluation of disclosure controlsand procedures*: Based on their evaluation of our disclosure controls and procedures(as defined in Rules 13a-15(e) and 15d-15(e) under the ExchangeAct) as of June 30, 2009, our president and chief executive officer(principal executive officer) and our chief financial officer (principalaccounting and financial officer) have concluded that our disclosure controlsand procedures are effective at the reasonable assurance level. A controlsystem cannot provide absolute assurance, however, that the objectives of thecontrol systems are met, and no evaluation of controls can provide absolute assurancethat all control issues and instances of fraud, if any, within a corporationhave been detected*.*

 

*Changes in internal controls overfinancial reporting:* There was no change in our internal controls overfinancial reporting that occurred during the quarter ended June 30, 2009that has materially affected, or is reasonably likely to materially affect, ourinternal controls over financial reporting.

 

17

----

Table ofContents

 

**PART II—OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

In the normal course ofbusiness, we may be a party to legal proceedings. We are not currently a partyto any material legal proceedings, except as mentioned below.

 

On December 21,2007 our registered office in Ottawa, Ontario, Canada received a claim alleginga breach of a letter of intent we entered into with Network Capital, Inc.(NCI) in relation to a potential tax monetization transaction. NCI filed itsclaim in the Court of Queen’s Bench of Alberta Judicial District, Canada andseeks specific performance or damages in the amount of $35 million plus costs.The claim was not properly served and to date no proper service has been made.We believe this claim to be without merit and intend to vigorously defend it.To date, no additional communications regarding this claim have been received.

 

**ITEM 1A. RISK FACTORS**

 

Therehave been no material changes to our risk factors from those reported in ourAnnual Report on Form 10-K for the year ended December 31, 2008.

 

**ITEM 2. UNREGISTERED SALES OF EQUITYSECURITIES AND USE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIORSECURITIES**

 

None.

 

**ITEM 4. SUBMISSIONS OF MATTERS TO AVOTE OF SECURITY HOLDERS**

 

None

 

**ITEM 5. OTHER INFORMATION**

 

The date of our 2009 annual meeting of shareholdershas been delayed by more than 30 calendar days from the anniversary date of our2008 annual meeting. We currently expect that our annual meeting will be heldon September 17, 2009.

 

**ITEM 6.  EXHIBITS**

 

(a)               Exhibits

 
| Exhibit 10.34 | Amendment  and Restatement of Offer Letter,  effective February 4, 2009, between World Heart Inc. and Jal S.  Jassawalla (incorporated by reference to Exhibit 10.34 to the  Corporation’s Form 8-K filed on April 13, 2009 (Commission File  No. 000-28882)). |
|--------------------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |                                                                                                                                                                                                                                                                                         |
| Exhibit 31.1  | Certification of Principal Executive Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                |
|               |                                                                                                                                                                                                                                                                                         |
| Exhibit 31.2  | Certification of Principal Financial Officer  pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                                                                                                                                |
|               |                                                                                                                                                                                                                                                                                         |
| Exhibit 32.1  | Certification of Principal Executive Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  1350.                                                                                                                                                               |
|               |                                                                                                                                                                                                                                                                                         |
| Exhibit 32.2  | Certification of Principal Financial Officer  pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C.  1350.                                                                                                                                                               |

 

18

----

Table ofContents

 

**SIGNATURES**

 

Pursuant tothe requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.

 
|                                          | World Heart Corporation                                              |
|-----------------------------------------------|----------------------------------------------------------------------|
|                                          | (Registrant)                                                         |
|                                          |                                                                 |
|                                          |                                                                 |
|   Dated:  August 7, 2009       | /s/ J. Alex Martin                                                   |
|                                          | J. Alex Martin, President  and Chief   Executive Officer             |
|                                          |                                                                 |
|                                          |                                                                 |
|   Dated:   August 7, 2009 | /s/ David Pellone                                                    |
|                                          | David Pellone, Vice  President, Finance  and Chief Financial Officer |

 

19

----