Tableof Contents

 

 

 

**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

** **

**WASHINGTON,DC 20549**

** **

----

 

**FORM 10-Q/A**

 

**Amendment No. 1**

 

----

** **

**(Mark One)**

 

**x**** ****QUARTERLY REPORT UNDER SECTION 13OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934**

 

**For quarterly period ended March ****31, 2008**

 

**o****  ****TRANSITION REPORT UNDER SECTION 13OR 15(d) OF THE EXCHANGE ACT**

 

**For the transition periodfrom       to       **

 

**Commission filenumber:  000-28882**

 

**WORLDHEART CORPORATION**

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

 

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

 

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

(Addressof principal executive offices)

 

**(510)563-5000**

(Issuer’stelephone number)

 

**N/A**

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

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.     Yesx   No o

 

Indicate by check mark whether the registrant is a large acceleratedfiler, an accelerated filer, a non-accelerated filer, or a smaller reportingcompany. See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

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

 

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

                Yes o    No x

 

State the number of shares outstanding of eachof the issuer’s classes of common equity, as of the latest practicable date:

The number of common shares outstanding as of May 14,2008 was 11,507,275.

 

Transitional Small Business Disclosure Format(Check one):   Yes o  Nox

 

 

 

----

 

Tableof Contents

 

**EXPLANATORY NOTE**

** **

We are filing this Amendment No. 1 on Form10-Q/A for the quarter ended March 31, 2008 to amend our Form 10-Q originallyfiled with the Securities and Exchange Commission on May 15, 2008.  We arefiling this amendment solely for the purpose of providing correctedcertifications filed as Exhibits 31.1 and 31.2 which inadvertently omitted theportion of the language in the introduction to the fourth paragraph and inparagraph 4(b) relating to internal control over financial reporting.

 

Unless otherwise expresslystated, this Amendment No. 1 does not reflect events occurring after the filingof the original Form 10-Q, or modify or update in any way disclosures containedin the original Form 10-Q.

 

**TABLE OF CONTENTS**

 
| ** **   | **Item** | ** ** | ** **                                                      | ** ** |
|--------------|----------|------------|-----------------------------------------------------------------|------------|
|         |     |       |                                                            |       |
| Part I  | 1        |       | Financial Statements                                            | 3          |
|         |     |       |                                                            |       |
|         | 2        |       | Management’s  Discussion and Analysis or Plan of Operation | 14         |
|         |     |       |                                                            |       |
|         | 3        |       | Controls and  Procedures                                        | 18         |
|         |     |       |                                                            |       |
| Part II | 1        |       | Legal  Proceedings                                              | 19         |
|         |     |       |                                                            |       |
|         | 2        |       | Unregistered  Sales of Equity Securities and Use of Proceeds    | 19         |
|         |     |       |                                                            |       |
|         | 3        |       | Defaults  Upon Senior Securities                                | 19         |
|         |     |       |                                                            |       |
|         | 4        |       | Submission  of Matters to a Vote of Security Holders            | 19         |
|         |     |       |                                                            |       |
|         | 5        |       | Other  Information                                              | 19         |
|         |     |       |                                                            |       |
|         | 6        |       | Exhibits                                                        | 19         |
|         |     |       |                                                            |       |
|         |     |       | Signatures                                                      | 20         |

 

----

 

Table of Contents

** **

**PART I—FINANCIALINFORMATION**

** **

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**WORLD HEARTCORPORATION**

## **Condensed Consolidated Balance Sheets**

(United States Dollars)

(Unaudited)

 
| ** **                                                                                                                                                           | ** ** | **March 31, 2008** | ** **    | **December 31, 2007(1)** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------|---------------|------------------------------------|------------|
| **ASSETS**                                                                                                                                                           | ** ** | ** **                   | ** **    | ** **                         | ** ** |
| **Current assets**                                                                                                                                                   | ** ** | ** **                   | ** **    | ** **                         | ** ** |
| Cash and cash equivalents                                                                                                                                            |       | $                            | 1,010,933     |                               | $          | 664,504 |   |
| Trade and other receivables                                                                                                                                          |       | 238,862                      |          | 175,170                            |       |
| Inventory                                                                                                                                                            |       | 520,571                      |          | 864,314                            |       |
| Prepaid expenses                                                                                                                                                     |       | 297,337                      |          | 191,464                            |       |
|                                                                                                                                                                 |       | 2,067,703                    |          | 1,895,452                          |       |
| **Long-term assets**                                                                                                                                                 | * *   | * *                     | * *      | * *                           | * *   |
| Property and equipment                                                                                                                                               |       | 769,801                      |          | 808,383                            |       |
| Intangible assets                                                                                                                                                    |       | 251,484                      |          | 299,340                            |       |
| Other long-term assets                                                                                                                                               |       | 243,973                      |          | 244,420                            |       |
|                                                                                                                                                                 |       | 1,265,258                    |          | 1,352,143                          |       |
| **Total assets**                                                                                                                                                     | ** ** | **$**                        | **3,332,961** | ** **                         | **$**      | **3,247,595** | ** ** |
| * *                                                                                                                                                             | * *   | * *                     | * *      | * *                           | * *   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                        | ** ** | ** **                   | ** **    | ** **                         | ** ** |
| **Current liabilities**                                                                                                                                              | ** ** | ** **                   | ** **    | ** **                         | ** ** |
| Accounts payable and accrued liabilities                                                                                                                             |       | $                            | 1,686,028     |                               | $          | 1,938,531 |   |
| Accrued site restoration                                                                                                                                             |       | 16,395                       |          | 31,000                             |       |
| Accrued compensation                                                                                                                                                 |       | 1,173,370                    |          | 1,318,091                          |       |
| Deferred revenue                                                                                                                                                     |       | —                       |          | 50,618                             |       |
| Convertible debentures                                                                                                                                               |       | 5,000,000                    |          | —                             |       |
|                                                                                                                                                                 |       | 7,875,793                    |          | 3,338,240                          |       |
|                                                                                                                                                                 |       |                         |          |                               |       |
| **Long-term liabilities**                                                                                                                                            |       |                         |          |                               |       |
| Convertible debentures                                                                                                                                               |       | —                       |          | 1,000,000                          |       |
| **Total liabilities**                                                                                                                                                |       | 7,875,793                    |          | 4,338,240                          |       |
| ** **                                                                                                                                                           | ** ** | ** **                   | ** **    | ** **                         | ** ** |
| **Shareholders’ equity (deficit)**                                                                                                                              | ** ** | ** **                   | ** **    | ** **                         | ** ** |
| Common stock, no par value, 11,507,275  shares issued and outstanding at March 31, 2008 and 11,507,275 shares  issued and outstanding at December 31, 2007 |       | 290,750,131                  |          | 290,750,131                        |       |
| Additional paid-in-capital                                                                                                                                           |       | 13,167,850                   |          | 5,142,339                          |       |
| Cumulative other comprehensive income                                                                                                                                |       | (6,285,577                   | )             | (6,285,577                         | )          |
| Accumulated deficit                                                                                                                                                  |       | (302,175,236                 | )             | (290,697,538                       | )          |
| Total shareholders’ equity (deficit)                                                                                                                            |       | (4,542,832                   | )             | (1,090,645                         | )          |
| **Total liabilities and shareholders’ equity  (deficit)**                                                                                                       | ** ** | **$**                        | **3,332,961** | ** **                         | **$**      | **2,247,595** | ** ** |

 

(Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.)

 

(1) Derived from the Company’s audited consolidated financial statements as of December 31,2007.

 

3

----

 

Table of Contents

 

## **WORLD HEART CORPORATION**

## **Condensed Consolidated Statements ofOperations**

(United States Dollars)

(Unaudited)

** **
| ** **                                                                  | ** ** | **Three Months Ended March 31,** | ** **      |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|-----------------|
| ** **                                                                  | ** ** | **2008**                                             | ** **      | **2007** | ** ** |
|                                                                        |       |                                                 |            |   |   |
| **Revenue**                                                                 |       | $                                                    | 635,996         |   | $ | 847,715 |   |
| **Cost of goods sold**                                                      |       | (400,119                                             | )               | (1,068,764 | ) |
| **Gross profit**                                                            |       | 235,877                                              |            | (221,049 | ) |
|                                                                        |       |                                                 |            |   |   |
| **Operating expenses**                                                      |       |                                                 |            |   |   |
| Selling, general and administrative                                         |       | 1,200,292                                            |            | 1,545,472 |   |
| Research and development                                                    |       | 2,492,447                                            |            | 1,868,948 |   |
| Clinical and marketing support                                              |       | 6,478,619                                            |            | — |   |
| Amortization of intangibles                                                 |       | 47,856                                               |            | 47,856 |   |
| **Total operating expenses**                                                |       | 10,219,214                                           |            | 3,462,276 |   |
|                                                                        |       |                                                 |            |   |   |
| **Operating loss**                                                          |       | (9,983,337                                           | )               | (3,683,325 | ) |
|                                                                        |       |                                                 |            |   |   |
| **Other income (expenses)**                                                 |       |                                                 |            |   |   |
| Unrealized foreign exchange gain (loss)                                     |       | (5,595                                               | )               | 134,953 |   |
| Investment and other income                                                 |       | 23,296                                               |            | 118,384 |   |
| Interest expense                                                            |       | (1,512,062                                           | )               | — |   |
| **Net loss**                                                                | ** ** | **$**                                                | **(11,477,698** | **)** | **$** | **(3,429,988** | **)** |
|                                                                        |       |                                                 |            |   |   |
| **Weighted average number of common shares  outstanding basic and diluted** |       | 11,507,275                                           |            | 11,507,275 |   |
|                                                                        |       |                                                 |            |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                                    | (1.00           | ) | $ | (0.30 | ) |

 

(Theaccompanying notes are an integral part of these condensed consolidatedfinancial statements.)

 

4

----

 

Table of Contents

 

**WORLD HEARTCORPORATION**

## **Condensed Consolidated Statements of CashFlows**

(United States Dollars)

(Unaudited)

 
| ** **                                                           | ** ** | **Three Months Ended March 31,** | ** **    |
|----------------------------------------------------------------------|------------|------------------------------------------------------|---------------|
| **CASH FLOWS FROM (USED IN)**                    | ** ** | **2008**                                             | ** **    | **2007** | ** ** |
| **Operating activities**                                             |       |                                                 |          |   |   |
| Net loss for the period                                              |       | $                                                    | (11,477,698   | ) | $ | (3,429,988 | ) |
| Adjustments to reconcile net loss to net  cash used in operations:   |       |                                                 |          |   |   |
| Amortization and depreciation                                        |       | 118,981                                              |          | 59,497 |   |
| Write down of inventory                                              |       | —                                               |          | 235,000 |   |
| Non-cash expense on stock options                                    |       | 80,748                                               |          | 37,832 |   |
| Non-cash interest on debt                                            |       | 1,466,143                                            |          | — |   |
| Non-cash expense on warrants                                         |       | 6,478,619                                            |          | — |   |
| Unrealized foreign exchange gain (loss)                              |       | (24,633                                              | )             | 37,193 |   |
| Change in operating components of working  capital                   |       | (260,390                                             | )             | (37,648 | ) |
| **Cash used in operating activities**                                | ** ** | **(3,618,230**                                       | **)**         | **(3,098,114** | **)** |
|                                                                 |       |                                                 |          |   |   |
| **Investing activities**                                             |       |                                                 |          |   |   |
| Purchase of property and equipment                                   |       | (32,543                                              | )             | (16,630 | ) |
| **Cash used in investing activities**                                | ** ** | **(32,543**                                          | **)**         | **(16,630** | **)** |
|                                                                 |       |                                                 |          |   |   |
| **Financing activities**                                             |       |                                                 |          |   |   |
| Convertible debenture proceeds                                       |       | 4,000,000                                            |          | — |   |
| **Cash provided by financing activities**                            | ** ** | **4,000,000**                                        | ** **    | **—** | ** ** |
| **Effect of exchange rates on cash and cash  equivalents**           | ** ** | **(2,798**                                           | **)**         | **1,369** | ** ** |
| **Increase (decrease) in cash and cash  equivalents for the period** | ** ** | **346,429**                                          | ** **    | **(3,113,375** | **)** |
| **Cash and cash equivalents, beginning of the  period**              | ** ** | **664,504**                                          | ** **    | **12,216,671** | ** ** |
| **Cash and cash equivalents, end of the  period**                    | ** ** | $                                                    | **1,010,933** | ** ** | $ | **9,103,296** | ** ** |

 

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

 

5

----

 

Tableof Contents

 

**WORLD HEART CORPORATION**

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

#### ** **

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

 

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

 

During the quarter endedMarch 31, 2008, the Corporation incurred a net loss of $11.5 million andused cash in its operations of $3.6 million. At March 31, 2008, WorldHearthad cash and cash equivalents of $1.0 million and current liabilities of $7.9million. The Corporation expects to continue to generate operating losses atleast through 2008 and 2009. As a result, there is substantial doubt about theability of the Corporation to meet its obligations as they come due and theappropriateness of the use of accounting principles applicable to a goingconcern.

 

On December 11,2007, the Corporation and WHI entered into a note purchase agreement with Abiomedas part of a strategic transaction with Abiomed. Pursuant to the purchaseagreement, Corporation and WHI issued to Abiomed a secured convertiblepromissory note in the principal amount of up to $5.0 million, funded in twotranches, $1.0 million of which was funded immediately and $4.0 million ofwhich was funded on January 3, 2008. (See Note 9)

 

Despite the fundsreceived from Abiomed, the Corporation has an immediate need to raiseadditional capital to allow for the on-going satisfaction of its obligations ona timely basis and to continue in operation. WorldHeart is aggressivelyexploring financing alternatives, including equity financing transactions andcorporate collaborations, to meet cash requirements but its efforts have notbeen successful as of the date of this report. Equity financings could include,but are not limited to, private investments in public equity transactions andconvertible debt or strategic equity investments by interested companies.Corporate collaborations could include licensing the Corporation’s products,co-funding of the Corporation’s products or potential sale of the Corporationor its subsidiaries. There can be no assurance that the alternatives theCorporation is exploring will be successful. If it is not successful in immediately securing additional financing oron implementing strategic alternatives, WorldHeart will be forced to takeextraordinary business measures which could include filing for bankruptcy,ceasing operations and liquidating assets. (See Note 10)

 

These consolidatedfinancial statements do not reflect adjustments in the carrying values ofassets and liabilities, the reported revenues and expenses, and the balancesheet classifications used that would be necessary if the going concernassumption was not appropriate. These adjustments could be material.

 

**2.****              Nature of Operations of the Corporation**

 

WorldHeart is developingmechanical circulatory support systems 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.WorldHeart currently derives its revenue from its Novacor LVAS (leftventricular assist system) and related peripheral equipment which it sellsdirectly to medical clinics and hospitals in the United States, Europe andCanada and through distributors in other countries. The Corporation is focusingon the development of its next-generation LevacorTM Rotary VAD and expects torealize cost recoveries in 2008 from the use of Levacor in a US clinicaltrial expected to start this year. Such recoveries are expected to be animportant part of our overall operating cash flows.

 

**3.****              Summary ofSignificant Accounting Policies**

 

### *Basis of presentation*

### * *

The accompanying interimunaudited consolidated financial statements have been prepared by management inaccordance with accounting principles generally accepted in the United States (“GAAP”)and with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, these consolidated financial statements include all assets,liabilities, revenues and expenses of the Corporation and its wholly ownedsubsidiaries: World Heart Inc. and World Heart B.V. All material 

 

6

----

 

Tableof Contents

 

**WORLD HEART CORPORATION**

Notes to UnauditedCondensed Consolidated Financial Statements - continued

 

inter-companytransactions and balances have been eliminated. These interim unauditedconsolidated financial statements and notes thereto should be read inconjunction with Management’s Discussion and the audited financial statementsand notes thereto included in the Corporation’s Annual Report on Form 10-KSB,for the year ended December 31, 2007. In the opinion of management, thecondensed balance sheet at December 31, 2007 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 period endedMarch 31, 2008 are not necessarily indicative of the results to beexpected for the entire fiscal year ended December 31, 2008 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 revenues and expensesduring the reporting periods. Such management estimates include allowance fordoubtful accounts, sales and other allowances, inventory reserves, incometaxes, valuation reserve for net deferred tax assets, stock-based compensation,deferred revenue, warranty reserves and legal reserves. Actual results coulddiffer from these estimates.

 

**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 first quarter 2008 has been reduced for estimatedforfeitures. When estimating forfeitures, voluntary termination behaviors, aswell as trends of actual option forfeitures are considered. To the extentactual forfeitures differ from our current estimates, cumulative adjustments tostock-based compensation expense are recorded.

 

WorldHeart uses theBlack-Scholes valuation model for estimating the fair value of stockcompensation. The stock-based compensation expense for the quarters ended March 31,2008 and 2007 was as follows:

 
| ** **                          | ** ** | **Three Months Ended March 31,** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|
| **(Unaudited)**                     | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Selling, general and administrative |       | $                                                    | 58,646     |   | $ | 31,541 |   |
| Research and development            |       | 22,102                                               |       | 6,291 |   |
| Total                               |       | $                                                    | 80,748     |   | $ | 37,832 |   |

 

As of March 31,2008, approximately $705,300 of total unrecognized compensation cost related tostock options is expected to be recognized over a period of approximatelytwelve quarters.

 

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 March 31, 2008. At March 31, 2008, the aggregate intrinsicvalue of all outstanding options was nil with a weighted average remainingcontractual term of approximately 6.0 years. Of the 1,045,390 outstandingoptions, exercisable options were 777,723 with a weighted average remainingcontractual life of 5.2 years and 267,667 were unvested with a weighted averageremaining contractual life of 8.2 years. No options were exercised under ourstock option plan during the first quarter in 2008.

 

A summary of the statusand changes of our non-vested options, subject to FAS 123R calculation as ofthe quarter ended March 31, 2008 is presented below.

 

7

----

 

Tableof Contents

 

**WORLD HEART CORPORATION**

Notes to UnauditedCondensed Consolidated Financial Statements - continued

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date Fair Value** | ** ** |
|-------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Nonvested at December 31, 2007 |       | 371,191    |       | $                                                          | 3.00       |   |
| Granted                             |       | 13,100     |       | 1.42                                                       |       |
| Vested                              |       | (111,824   | )          | 1.52                                                       |       |
| Forfeited                           |       | (4,800     | )          | 2.83                                                       |       |
| Nonvested at March 31, 2008    |       | 267,667    |       | $                                                          | 3.55       |   |

 

*Valuation Assumptions*

 

WorldHeart calculated the fair value of each option award on the dateof grant using the Black-Scholes option pricing model.  The weighted average fair value of theoptions granted during the period ended March 31, 2008 and March 31,2007 was $1.42 and $2.60, respectively. The following weighted averageassumptions were utilized:

 
| ** **               | ** ** | **Three Months Ended March 31,** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|
| ** **               | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| Risk free interest rate  |       | 3.36                                                 | %          | 4.60 | % |
| Expected life (in years) |       | 5.5                                                  |       | 5.5 |   |
| Expected volatility      |       | 133                                                  | %          | 70 | % |
| Dividend yield           |       | 0                                                    | %          | 0 | % |

 

The dividend yield ofzero is based on the fact that WorldHeart has never paid cash dividends and hasno present intention to pay cash dividends. Expected volatility is based on 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.

 

The following table summarizes stock option andwarrant activity for the quarter ended March 31, 2008:

 
| ** **        | ** ** | **Employees** | ** ** | **Non-Employees**       | ** ** | ** **  | ** ** | ** **              | ** ** | ** **   | ** ** |
|-------------------|------------|---------------|------------|-------------------------|------------|-------------|------------|-------------------------|------------|--------------|------------|
| ** **        | ** ** | ** **    | ** ** | **Weighted**            | ** ** | ** **  | ** ** | **Weighted**            | ** ** | ** **   | ** ** | **Weighted** | ** ** | ** ** | ** ** |
| ** **        | ** ** | ** **    | ** ** | **average**             | ** ** | ** **  | ** ** | **average**             | ** ** | ** **   | ** ** | **average** | ** ** | ** ** | ** ** |
| ** **        | ** ** | **Options**   | ** ** | **exercise price** | ** ** | **Options** | ** ** | **exercise price** | ** ** | **Warrants** | ** ** | **exercise price** | ** ** | **Total** | ** ** |
| ** **        | ** ** | **#**         | ** ** | **$**                   | ** ** | **#**       | ** ** | **$**                   | ** ** | **#**        | ** ** | **$** | ** ** | **#** | ** ** |
| Outstanding at    |       |          |       |                    |       |        |       |                    |       |         |       |   |   |   |   |
| December 31, 2007 |       | 943,541       |       | $                       | 11.71      |        | 97,103     |                    | $          | 10.57        |       | 1,909,876 |   | $ | 4.84 |   | 2,950,519 |   |
| Granted           |       | 13,100        |       | $                       | 1.59       |        | —     |                    | $          | —       |       | 2,720,000 |   | $ | 1.75 |   | 2,733,100 |   |
| Expired           |       | (3,395        | )          | $                       | 165.40     |        | (325       | )                       | $          | 134.22       |       | (42,857 | ) | $ | 10.90 |   | (46,578 | ) |
| Forfeited         |       | (4,633        | )          | $                       | 1.74       |        | —     |                    | $          | —       |       | — |   | $ | — |   | (4,633 | ) |
| Outstanding at    |       |          |       |                    |       |        |       |                    |       |         |       |   |   |   |   |
| March 31, 2008    |       | 948,612       |       | $                       | 11.07      |        | 96,778     |                    | $          | 10.15        |       | 4,587,019 |   | $ | 2.90 |   | 5,632,409 |   |

 

8

----

 

Table of Contents

 

**WORLD HEART CORPORATION**

Notes to UnauditedCondensed Consolidated Financial Statements - continued

 

**5.****              Inventory**

 

The components of netinventory are as follows:

 
| ** **       | ** ** | **March 31, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------|------------|------------------------------|------------|---------------------------------|------------|
| Raw materials    |       | $                            | 167,725    |                            | $          | 231,850 |   |
| Work in progress |       | 106,884                      |       | 280,363                         |       |
| Finished goods   |       | 245,962                      |       | 352,101                         |       |
| Total inventory  |       | $                            | 520,571    |                            | $          | 864,314 |   |

** **

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

 

**AccruedCompensation**

 

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

 
| ** **                 | ** ** | **March 31, 2008** | ** **    | **December 31, 2007** | ** ** |
|----------------------------|------------|------------------------------|---------------|---------------------------------|------------|
| Wages                      |       | $                            | 131,346       |                            | $          | 254,216 |   |
| Vacation                   |       | 433,456                      |          | 432,006                         |       |
| Bonus                      |       | 608,568                      |          | 631,869                         |       |
| Total accrued compensation | ** ** | **$**                        | **1,173,370** | ** **                      | **$**      | **1,318,091** | ** ** |

 

**Performance Bonus**

 

On March 8, 2007the Compensation Committee of the Board of Directors approved a 2007 PerformanceBonus plan for its employees. Performance bonuses are for all employees,including the executive officers, and they are earned upon the achievement ofcertain performance milestones relevant to the Corporation’s business.  The total award is paid twenty-five percent(25%) in cash and seventy-five percent (75%) in the Corporation’s common shares(determined by dividing the cash equivalent of the bonus by the price per shareon the day before the date of grant.) The cash and stock payments are fullyvested when paid.

 

On February 5,2008, the Compensation Committee of the Board of Directors determined thatcertain performance goals established in connection with the performance-basedbonus program initiated in March had been met during the 2007 fiscal yearand approved the payment of cash bonuses and of the Corporation’s common sharesto certain of the Corporation’s executive officers and employees in accordancewith terms of the Program. Depending on the availability of the Corporation’sresources, the cash bonus will be paid and shares will be awarded sometimeduring the second quarter of 2008, pursuant to the terms and conditions of theCorporation’s 2006 Equity Incentive Plan (the “Plan”).

 

On February 15,2008, the Compensation Committee of the Board of Directors approved the 2008cash performance bonus program for the Corporation’s executive officers andother employees. Sometime before the end of March 15, 2009, theCompensation Committee will determine the performance goals met for the fiscalyear 2008.

 

**AccountsPayable and Accrued Liabilities**

 

Accounts payable andaccrued liabilities consist of the following:

 

9

----

 

Table of Contents

 

**WORLD HEART CORPORATION**

Notes to UnauditedCondensed Consolidated Financial Statements - continued

 
| ** **                                      | ** ** | **March 31, 2008** | ** **    | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|------------------------------|---------------|---------------------------------|------------|
| Accounts payable                                |       | $                            | 681,176       |                            | $          | 847,460 |   |
| Accued liabilities                              |       | 735,123                      |          | 909,860                         |       |
| Accrued site restoration                        |       | 16,395                       |          | 31,000                          |       |
| Sales taxes payable                             |       | 35,792                       |          | 45,719                          |       |
| Accrued warranty                                |       | 131,048                      |          | 131,048                         |       |
| Interest payable                                |       | 102,889                      |          | 4,444                           |       |
| Deferred revenue                                |       | —                       |          | 50,618                          |       |
| Total accounts payable and accrued  liabilities | ** ** | **$**                        | **1,702,423** | ** **                      | **$**      | **2,020,149** | ** ** |

 

**ConvertibleDebentures**

 

Based upon informationon the Abiomed convertible promissory note, WorldHeart classified the Abiomedpromissory note as a current liability. (See Note 10)

 

**7.    Comprehensive Income**

 

For the three months ended March 31, 2008 and March 31,2007, there were no significant differences between the Corporation’scomprehensive loss and its net loss.

 

**8. Recent Accounting Pronouncements**

 

Effective January 1, 2008, we adopted FAS No. 157,*Fair Value Measurements* (FAS157). In February 2008, the FASB issued FASB Staff Position No. FAS157-2, *Effective Date of FASB Statement No. 157*,which provides a one year deferral of the effective date of FAS 157 fornon-financial assets and non-financial liabilities, except those that arerecognized or disclosed in the financial statements at fair value at leastannually. Therefore, the Corporation adopted the provisions of FAS 157 withrespect to our financial assets and liabilities only. FAS 157 defines fairvalue, establishes a framework for measuring fair value under generallyaccepted accounting principles and enhances disclosures about fair valuemeasurements. Fair value is defined under FAS 157 as the exchange price thatwould be received for an asset or paid to transfer a liability (an exit price)in the principal or most advantageous market for the asset or liability in anorderly transaction between market participants on the measurement date.Valuation techniques used to measure fair value under FAS 157 must maximize theuse of observable inputs and minimize the use of unobservable inputs. Thestandard describes a fair value hierarchy based on three levels of inputs, ofwhich the first two are considered observable and the last unobservable, thatmay be used to measure fair value which are the following:

 

·                  Level1 - Quoted prices in active markets for identical assets or liabilities.

 

·                  Level2 - Inputs other than Level 1 that are observable, either directly orindirectly, such as quoted prices for similar assets or liabilities; quotedprices in markets that are not active; or other inputs that are observable orcan be corroborated by observable market data for substantially the full termof the assets or liabilities.

 

·                  Level3 - Unobservable inputs that are supported by little or no market activity andthat are significant to the fair value of the assets or liabilities.

 

The adoption of this statement did not have amaterial impact on the Corporation’s consolidated results of operations andfinancial condition.

 

In accordance with FAS 157, $1.0 millionrepresents the Corporation’s fair value hierarchy for financial assets (moneymarket funds or cash equivalents) measured and recognized at fair value on arecurring basis as of March 31, 2008.

 

###### **Future Adoption of Accounting Standards**

 

InMarch 2008, the FASB issued FAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133”(“FAS No. 161”). FAS No. 161 requires enhanced disclosure related toderivatives and hedging activities and thereby seeks to improve the transparencyof financial reporting. Under FAS No. 161, entities are required toprovide enhanced disclosures relating to: (a) how and why an entity usesderivative instruments; (b) how derivative instruments and related hedgeitems are accounted for under FAS No. 133, “Accounting

 

10

----

 

Table of Contents

 

**WORLD HEART CORPORATION**

Notes to UnauditedCondensed Consolidated Financial Statements - continued

 

forDerivative Instruments and Hedging Activities” (“FAS No. 133”), and itsrelated interpretations; and (c) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows. FAS No. 161 must be applied prospectively to all derivativeinstruments and non-derivative instruments that are designated and qualify ashedging instruments and related hedged items accounted for under FAS No. 133for all financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008, which for WorldHeart begins with the2009 fiscal year, with early application encouraged. The Corporation iscurrently evaluating the impact that FAS No. 161 will have on itsfinancial statements.

 

OnDecember 4, 2007, the FASB issued FAS No. 141 (Revised 2007), “BusinessCombinations” (“FAS No. 141(R)”). FAS No. 141(R) willsignificantly change the accounting for business combinations. Under FAS No. 141(R),an acquiring entity will be required to recognize all the assets acquired andliabilities assumed in a transaction at the acquisition-date fair value withlimited exceptions. FAS No. 141(R) also includes a substantial numberof new disclosure requirements. FAS No. 141(R) applies prospectivelyto business combinations for which the acquisition date is on or after thebeginning of the first annual reporting period beginning on or after December 15,2008, which for WorldHeart begins with its 2009 fiscal year. FAS No. 141(R) willonly have an impact on the Corporation’s financial statements if theCorporation is involved in a business combination in fiscal year 2009 or lateryears.

 

OnDecember 4, 2007, the FASB issued FAS No. 160, “Non-controllingInterests in Consolidated Financial Statements-an Amendment of ARB No. 51”(“FAS No. 160”). FAS No. 160 establishes new accounting and reportingstandards for a non-controlling interest in a subsidiary and for thedeconsolidation of a subsidiary. Specifically, this statement requires therecognition of a non-controlling interest (minority interest) as equity in theconsolidated financial statements separate from the parent’s equity. The amountof net income attributable to the non-controlling interest will be included inconsolidated net income on the face of the income statement. FAS No. 160clarifies that changes in a parent’s ownership interest in a subsidiary that donot result in deconsolidation are equity transactions if the parent retains itscontrolling financial interest. In addition, this statement requires that aparent recognize a gain or loss in net income when a subsidiary isdeconsolidated. Such gain or loss will be measured using the fair value of thenon-controlling equity investment on the deconsolidation date. FAS No. 160also includes expanded disclosure requirements regarding the interests of theparent and its non-controlling interest. FAS No. 160 is effective forfiscal years, and interim periods within those fiscal years, beginning on orafter December 15, 2008, which for WorldHeart begins with its 2009 fiscalyear. The Corporation is currently evaluating the impact that FAS No. 160will have on its financial statements.

 

InDecember 2007, the FASB ratified the Emerging Issues Task Force consensuson EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” thatdiscusses how parties to a collaborative arrangement (which does not establisha legal entity within such arrangement) should account for various activities.The consensus indicates that costs incurred and revenues generated fromtransactions with third parties (i.e. parties outside of the collaborativearrangement) should be reported by the collaborators on the respective lineitems in their income statements pursuant to EITF Issue No. 99-19, “ReportingRevenue Gross as a Principal Versus Net as an Agent.”  Additionally, theconsensus provides that income statement characterization of payments betweenthe participants in a collaborative arrangement should be based upon existingauthoritative pronouncements; analogy to such pronouncements if not withintheir scope; or a reasonable, rational, and consistently applied accountingpolicy election. EITF Issue No. 07-1 is effective beginning January 1,2009 and is to be applied retrospectively to all periods presented for collaborativearrangements existing as of the date of adoption. The Corporation is currentlyevaluating the impacts and disclosures of this standard, but would not expectEITF Issue No. 07-1 to have a material impact on the Corporation’sconsolidated results of operations or financial condition.

 

**9. Convertible Debentures and Warrants, Beneficial Conversion and Clinicaland Marketing Expenses**

 

On December 11,2007, the Corporation and WHI entered into a note purchase agreement withAbiomed as part of a strategic transaction with Abiomed. Pursuant to thepurchase agreement, Corporation and WHI issued to Abiomed a secured convertiblepromissory note in the principal amount of up to $5 million, funded in twotranches, $1.0 million of which was funded immediately and $4.0 million ofwhich was funded on January 3, 2008. The note is secured by theCorporation and WHI’s assets and contains certain covenants and customaryevents of default, the occurrence of which could result in an acceleration ofthe note. Based upon terms of the note and the Corporation’s financial positionat March 31, 2008, the Corporation has determined that they are intechnical default of the note and has classified the $5.0 million as a currentliability. (See Note 10). The note is convertible into Corporation commonshares at Abiomed’s option, in whole or in part, at approximately $1.75 pershare and is subject to anti-dilution adjustments in the event that theCorporation issues securities at a lower effective price, at any time. Unlessand until shareholder approval for the 

 

11

----

 

Tableof Contents

 

**WORLD HEART CORPORATION**

Notes to UnauditedCondensed Consolidated Financial Statements - continued

 

purposes of compliancewith the shareholder approval rules of the NASDAQ Stock Market and theToronto Stock Exchange has been received, the conversion of the note (includingany accrued interest), together with any exercise of the warrant issued toAbiomed is limited such that Abiomed will not hold more than 19.9% ofCorporation’s common shares outstanding at December 11, 2007. At theCorporation’s Annual and Special Meeting of shareholders held on April 29,2008, the Corporation’s shareholders’ approved the Abiomed transaction and as aresult, as of April 30, 2008, Abiomed may exercise all warrants andconvert the note without any restriction on the percentage of ownership inWorldHeart common shares.

 

The closing prices ofthe Corporation’s common shares on December 11, 2007 and January 3,2008 were $2.59 and $2.39 per share, respectively, thereby creating abeneficial conversion feature in the Convertible Promissory Note. Applying EITF98-5, “Accounting for Convertible Securities with Beneficial ConversionFeatures or Contingently Adjustable Conversion Ratios”, and EITF 00-27, “Applicationof Issue 98-5 to Certain Convertible Instruments”, the Corporation calculatedthe beneficial conversion feature on the first tranche of funding of $1.0million and recognized a discount of $0.5 million, computed as the differencebetween the closing price and exercise price of the warrants. This was recordedas interest expense during the fourth quarter in 2007. Upon the receipt of thesecond tranche of funding of $4.0 million on January 3, 2008, theCorporation recorded an additional $1.4 million in interest expense associatedwith the beneficial conversion feature of the $4.0 million note.

 

On December 11,2007, pursuant to the clinical and marketing support services agreement withAbiomed, the Corporation issued to Abiomed a 5-year warrant to purchase up to3,400,000 common shares of Corporation, exercisable at $0.01 per share. Whenthe second tranche of funding was received on January 3, 2008, 2.7 millionwarrants to purchase the Corporation’s common shares became exercisable, inaddition to the 680,000 warrants that were exercisable on December 11,2007. Until and unless shareholder approval has been received, the exercise ofthe Warrant, together with any conversion of the note, is limited to 19.9% ofthe Corporation’s common shares outstanding on December 11, 2007. At theCorporation’s Annual and Special Meeting of shareholders held on April 29,2008, the Corporation’s shareholders’ approved the Abiomed transaction and as aresult, as of April 30, 2008, Abiomed may exercise all warrants andconvert the note without any restriction on the percentage of ownership inWorldHeart common shares.

 

The Corporation appliedthe provisions of SFAS 123R and EITF 96-18, “Accounting for Equity Instrumentsthat are Issued to Other Than Employees for Acquiring, or in Conjunction withSelling Goods or Services or Combined with Cash “, to account for the expenseassociated with the warrants granted to Abiomed.  The Corporation used the Black-Scholes methodto compute the fair value of the warrants issued as consideration for theclinical and marketing support services agreement. The measurement dates usedwere the dates when the Corporation received both funding or when theperformance commitment occurred as defined by EITF 96-18. In December 2007,WorldHeart recorded a clinical and marketing expense of $1.8 million based onthe fair value of warrants issued to purchase 680,000 common shares. On January 3,2008, the Corporation recorded additional clinical and marketing expense of$6.5 million based on the fair value of warrants issued to purchase 2.7 millionof the Corporation’s common shares. The total expense relating to the warrantsissued to Abiomed has been fully realized and the Corporation does not expectto record additional clinical and marketing expenses in the future.

 

**10. Subsequent Events**

 

On March 31, 2008,in a press release and a report on Form 8-K filed with the SEC, WorldHeartannounced that it received a notice from the NASDAQ Stock Market stating thatit did not comply with Marketplace Rule 4310(c)(3). This rule requiresthe Corporation to have a minimum of $2,500,000 in stockholders’ equity or$35,000,000 market value of listed securities or $500,000 of net income fromcontinuing operations for the most recently completed fiscal year or two of thethree most recently completed fiscal years. The Corporation was given until April 15,2008 to provide a specific plan to achieve and sustain compliance with all theNASDAQ Capital Market listing requirements, including the time frame forcompletion of the plan. On April 15, 2008, WorldHeart submitted its planto the NASDAQ.

 

On April 30, 2008,WorldHeart received a notice from the Listing Qualifications Department of TheNASDAQ Stock Market stating that for the last 30 consecutive business days, thebid price of the Corporation’s common shares has closed below the minimum $1.00per share requirement for continued inclusion under Marketplace Rule 4310(c)(4) (the“Minimum Bid Price Rule”). The notice further states that pursuant toMarketplace Rule 4310(c)(8)(D), the Corporation will be provided 180calendar days (or until October 27, 2008) to regain compliance. If, atanytime before October 27, 2008, the bid price of the Corporation’s commonshares closes at $1.00 per share or more for a minimum of 10 consecutivebusiness days, the Corporation may regain compliance with the Rule.  TheNASDAQ staff may, in its

 

12

----

 

Tableof Contents

 

**WORLD HEART CORPORATION**

Notes to UnauditedCondensed Consolidated Financial Statements - continued

 

discretion, require theCorporation to maintain a bid price of at least $1.00 per share for a period inexcess of ten consecutive business days (but generally no more than 20consecutive business days) before determining that the Corporation hasdemonstrated the ability to maintain long-term compliance.

 

The notice indicatedthat, if compliance with the Rule is not regained by October 27,2008, the NASDAQ staff will determine whether WorldHeart meets the NASDAQCapital Market initial listing criteria as set forth in the Marketplace Rule 4310(c),except for the bid price requirement. If it meets the criteria, the NASDAQstaff will notify the Corporation that it has been granted an additional 180calendar day compliance period. If the Corporation is not eligible for anadditional compliance period, the NASDAQ staff will provide a writtennotification that the Corporation’s common shares will be delisted and at thattime, the Company may appeal the staff’s determination to a ListingQualifications Panel. A press release and a report on Form 8-K were filedin regards to this notice on May 6, 2008.

 

On May 8, 2008, areport on Form 8-K was filed with the SEC and on May 9, 2008, a pressrelease was issued to announce the following events. Reported as Item 2.04 on Form 8-K,the Corporation announced that on May 2, 2008, the Corporation learnedthat its potential primary investor may not be able to give its assurance ofcommitment to allow the Corporation to access capital to meet current financingneeds. This information resulted in the Corporation making the determinationthat its available cash would be insufficient to pay its obligations as theybecome due, which constitutes an event of default under the Corporation’ssecured convertible promissory note in the amount of $5.0 million issued on December 11,2007 to Abiomed, Inc.  (AtApril 30, 2008, the Company had cash and cash equivalents of approximately$0.5 million and current liabilities of approximately $7.9 million). This eventof default under the note results in the outstanding principal balance of thenote, together with accrued but unpaid interest and any other amounts owingunder the Abiomed note documents, becoming immediately due and payable toAbiomed.  The note is secured by securityagreements entered into by the Corporation and the Corporation’s wholly-ownedsubsidiary, World Heart, Inc. (“WHI”), in favor of Abiomed, that grant asecurity interest in all of their respective assets.  Abiomed could exercise its remedies under lawand under the security agreements, including foreclosing on the assets of the Companyand WHI.  An event of default alsopermits Abiomed to terminate the clinical and marketing support servicesagreement.

 

The Corporation has animmediate need for additional capital in order to satisfy its obligations andto continue operations. The Corporation’s efforts to raise additional capitalhave not been successful as of the date of this report. The Corporationestimates that it has cash available to continue operations only through thelatter part of May 2008. If the Corporation is unable to secure additionalfunding, it will be forced to take extraordinary business measures which couldinclude filing for bankruptcy, ceasing operations and liquidating assets.

 

On May 5, 2008,reported as Item 5.02 on Form 8-K filed on May 8, 2008, theCorporation was informed by Robert J. Majteles that he is resigning from theBoard of Directors and all of the committees of the Board, effectiveimmediately.  The Corporation intends toreconstitute all of the committees of the Board, such that Mr. William C.Garriock, Dr. Michael Estes and Mr. Gary Goertz, the three remainingindependent directors, will be members of each of the committees.

 

OnMay 12, 2008, the Corporation announced that the Toronto Stock Exchange (“TSX”)issued a Bulletin advising it is reviewing the eligibility for continuedlisting on the TSX of the common shares of WorldHeart under sections 709 and710(a) of the TSX Company Manual. This review relates to the Corporation’sfinancial condition and operating results, more specifically whether the Corporationcan continue as a going concern. Further to the TSX’s Remedial Review Process,WorldHeart has been granted 30 days in which to demonstrate compliance withthese requirements. The Corporation is also permitted to make submissionsregarding this matter at a hearing scheduled to be held on June 5, 2008. If theCorporation cannot demonstrate that it meets all TSX requirements on or beforeJune 11, 2008, the Corporation’s common shares will be delisted 30 days fromsuch date. 

Thenotice also states that if at anytime, TSX becomes aware of additional negativedevelopments such that the continued trading or listing of a Corporation’ssecurities is contrary to public interest, an expedited review will beinitiated.

On May 12, 2008,WorldHeart received a notice from the TSX that the Corporation improperlydisseminated material information by failing to issue a news releaseimmediately. The news release was circulated on May 9, 2008, when it shouldhave been circulated on May 8, 2008 at the same time the Corporation filed itspublic disclosure with the US and Canadian securities commissions. TheCorporation’s management has made policy changes to ensure timely disclosure ofmaterial events, as required under section 4(b) of the TSX Company Manual.

 

On May 15, 2008, ina press release and on Form 8-K filed with the SEC, the Corporationannounced that the NASDAQ staff has determined that the Corporation did notprovide a definitive plan evidencing its ability to achieve near termcompliance with continued listing requirements. Accordingly, unless theCorporation requests an appeal of this determination, trading of theCorporation’s common shares will be suspended at the opening of business on May 21,2008, and a Form 25-NSE will be filed with the SEC which will remove theCorporation’s securities from listing and registration on The NASDAQ StockMarket.

 

13

----

 

Tableof Contents

 

**ITEM 2.   MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLANOF OPERATION**

 

**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 months ended March 31,2008 and March 31, 2007. Such discussion and comments on the liquidity andcapital resources should be read in conjunction with the information containedin WorldHeart’s audited consolidated financial statements for the year ended December 31,2007, prepared in accordance with U.S. GAAP included in our Annual Report on Form 10–KSBfor the fiscal year ended December 31, 2007.

 

Thediscussion and comments contained hereunder include both historical informationand forward-looking information. The forward-looking information, whichgenerally is information stated to be anticipated, expected, or projected bymanagement, involves known and unknown risks, uncertainties and other factorsthat may cause the actual results and performance to be materially differentfrom any future results and performance expressed or implied by suchforward-looking information. Potential risks and uncertainties include, withoutlimitation: our ability to raise additional funding, numerous uncertainties andtime delays inherent in the development of products, particularly our LevacorRotary VAD; WorldHeart’s need to establish reimbursement mechanisms and productacceptance from third-party payers; extensive government regulation of ourproducts; rapid developments in technology by competitors some of whom havesignificantly greater financial, production and marketing resources; and slowerthan anticipated growth in the Destination Therapy market, as well as otherrisks and uncertainties set forth under the heading “Risk Factors” in ourAnnual Report on Form 10-KSB, for year ended December 31, 2007.

 

**OVERVIEW**

** **

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

 

WorldHeartto date derives most of its revenue from its Novacor LVAS and relatedperipheral equipment, which it sells, directly to medical clinics and hospitalsin the United States, Europe and Canada and through a distributor in certainother countries. The Novacor LVAS is commercially approved for  use as a bridge-to-transplant in the UnitedStates and Canada. In Europe, the Novacor LVAS has unrestricted approval foruse as an alternative to transplantation, Bridge-to-Transplantation and tosupport patients who may be able to recover the use of their natural heart. InJapan, the device is commercially approved for use in cardiac patients at riskof imminent death from non-reversible left ventricular failure for which thereis no alternative except heart transplantation.

 

InJuly 2005, WorldHeart acquired the assets of MedQuest Products, Inc.(MedQuest) including a rotary VAD, now called the LevacorTM Rotary VAD. Inconjunction with the acquisition, WorldHeart raisedapproximately $22.7 million in gross financing proceeds from a privateplacement with Maverick and the exercise of certain warrants and also convertedall of its remaining convertible debentures from an earlier financing. Pre-clinicaltesting of the Levacor VAD was accelerated after the acquisition, withsuccessful initial human feasibility use in Europe in 2006.

 

InNovember 2006, WorldHeart announced a restructuring plan, which included areduction of commercial operations associated with the Novacor LVAS, and arefocusing of its resources on the development of its next generation product,particularly the Levacor Rotary VAD. WorldHeart also reduced its workforce andhas consolidated its Oakland facilities, in an effort to reduce expenses. A bridge-to-transplantpivotal trial is expected to begin in the United States in approximately thesecond half of 2008, subject to available funding and regulatory approval.

 

Researchand development by WorldHeart’s competitors is proceeding on several rotaryflow devices. Certain of these devices have received the CE mark in Europe andare advancing through clinical trials in the United States and Europe, and onedevice has just received US marketing approval. WorldHeart believes that itsLevacor VAD is the most advanced fourth-generation rotary device underdevelopment.

 

Althoughthe Destination Therapy patient population continues to be largely untreated bycardiac assist devices, and the adoption rates have been slower thananticipated, we believe that the Destination Therapy market will evolve morerapidly when devices are evaluated clinically and as experience withnext-generation VADs increases.

 

14

----

 

Tableof Contents

 

**Summary of Quarterly Results**

Inthousands (000’s) except for per share amounts

(Unaudited)

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31,**               | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
| ** **                                 | ** ** | **2008**                         | ** ** | **2007** | ** ** | **2007** | ** ** | **2007** | ** ** |
|                                       |       |                             |       |   |   |   |   |   |   |
| Net revenue                                |       | $                                | 635        |   | $ | 348 |   | $ | 531 |   | $ | 849 |   |
| Net loss for the period                    |       | (11,478                          | )          | (7,639 | ) | (3,018 | ) | (4,477 | ) |
| Net loss applicable to common shareholders |       | (11,478                          | )          | (7,639 | ) | (3,018 | ) | (4,477 | ) |
| Basic and diluted loss per share           |       | $                                | (1.00      | ) | $ | (0.66 | ) | $ | (0.26 | ) | $ | (0.39 | ) |

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **March 31,**               | ** ** | **December 31,** | ** ** | **September 30,** | ** ** | **June 30,** | ** ** |
| ** **                                 | ** ** | **2007**                         | ** ** | **2006** | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                       |       |                             |       |   |   |   |   |   |   |
| Net revenue                                |       | $                                | 848        |   | $ | 956 |   | $ | 1,387 |   | $ | 2,988 |   |
| Net loss for the period                    |       | (3,430                           | )          | (5,136 | ) | (7,619 | ) | (3,888 | ) |
| Net loss applicable to common shareholders |       | (3,430                           | )          | (5,136 | ) | (7,619 | ) | (3,888 | ) |
| Basic and diluted loss per share           |       | $                                | (0.30      | ) | $ | (0.77 | ) | $ | (1.37 | ) | $ | (0.70 | ) |

 

15

----

 

Table of Contents

 

**RESULTS OF OPERATIONS FOR THE THREE MONTH PERIODENDED MARCH 31, 2008 COMPARED WITH THE THREE MONTH PERIOD ENDED MARCH 31,2007**

 
| ** **                                                                  | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|
| **(Unaudited)**                                                             | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **Revenue**                                                                 |       | $                                                    | 636        |   | $ | 848 |   |
| **Cost of goods sold**                                                      |       | (400                                                 | )          | (1,069 | ) |
| **Gross profit**                                                            |       | 236                                                  |       | (221 | ) |
|                                                                        |       |                                                 |       |   |   |
| **Operating expenses**                                                      |       |                                                 |       |   |   |
| Selling, general and administrative                                         |       | 1,200                                                |       | 1,545 |   |
| Research and development                                                    |       | 2,493                                                |       | 1,869 |   |
| Clinical and marketing support                                              |       | 6,479                                                |       | — |   |
| Amortization of intangibles                                                 |       | 48                                                   |       | 48 |   |
| **Total operating expenses**                                                |       | 10,220                                               |       | 3,462 |   |
|                                                                        |       |                                                 |       |   |   |
| **Operating loss**                                                          |       | (9,984                                               | )          | (3,683 | ) |
|                                                                        |       |                                                 |       |   |   |
| **Other income (expense)**                                                  |       | (1,495                                               | )          | 253 |   |
|                                                                        |       |                                                 |       |   |   |
| **Net loss applicable to common shareholders**                              |       | $                                                    | (11,478    | ) | $ | (3,430 | ) |
|                                                                        |       |                                                 |       |   |   |
| **Weighted average number of common shares  outstanding basic and diluted** |       | 11,507                                               |       | 11,507 |   |
|                                                                        |       |                                                 |       |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                                    | (1.00      | ) | $ | (0.30 | ) |

 

***Revenue:*******Thesale of Novacor LVAS implant kits and related peripheral equipment and servicesaccounts for all of WorldHeart’s revenues. We primarily sell our products directly, except for a few countrieswhere we sell through distributors.

 

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

 
| ** **            | ** ** | **Three Months Ended March 31,** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|
| ** **            | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
| **(Unaudited)**       | ** ** | **$**                                                | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
|                  |       |                                                 |       |   |   |   |   |   |   |
| Implant kits          |       | $                                                    | 318        |   | 5 |   | $ | 293 |   | 4 |   |
| Peripherals and other |       | 318                                                  |       |   |   | 555 |   |   |   |
|                  |       |                                                 |       |   |   |   |   |   |   |
| Revenue               |       | $                                                    | 636        |   |   |   | $ | 848 |   |   |   |

 

Net revenue for the first quarter ended March 31,2008 was $636,000 reflecting a decrease of $212,000, or 25%, compared with thefirst quarter ended March 31, 2007. Implant kit revenue in the firstquarter of 2008 increased by $25,000, compared with the first quarter of 2007.During the first quarter of 2008, the average price per kit was $64,000,compared with $73,000 during the first quarter of 2007. Novacor implant kits,recognized as revenue, increased by one unit on a year over year basis. Weexpect Novacor implant kit sales to decrease from the first quarter levelduring the remainder of 2008.

 

Peripherals and other revenues, includingNovacor LVAS hardware and peripheral sales, services and other revenue, for thequarter ended March 31, 2008 were $318,000, a decrease of 43%, comparedwith peripherals and other revenue of $555,000 recorded in the quarter ended March 31,2007.

 

16

----

 

Tableof Contents

 

***Cost of goodssold:***  For the three months ended March 31, 2008,cost of goods sold was 63% of revenue compared with the three months ended March 31,2007, where cost of goods sold exceeded revenue by $221,000. The higher cost ofgoods sold in last year’s first quarter was due, principally, to the write-offof $0.2 million in redundant Novacor LVAS inventories and unfavorablemanufacturing variances.

 

***Selling******, general and administrative:*** Selling, general and administrativeexpenses consist primarily of payroll and related expenses for executives,sales, marketing, accounting and administrative personnel. Our otheradministrative expenses include professional fees, communication expenses,insurance premiums, public reporting costs and general corporate expenses.

 

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

 
| ** **                 | ** ** | **Three Months Ended March 31,** | ** ** |
|----------------------------|------------|------------------------------------------------------|------------|
| **(Unaudited)**            | ** ** | **2008**                                             | ** ** | **2007** | ** ** |
|                       |       |                                                 |       |   |   |
| Selling                    |       | $                                                    | 248        |   | $ | 483 |   |
| General and administrative |       | 952                                                  |       | 1,062 |   |
| Total                      |       | $                                                    | 1,200      |   | $ | 1,545 |   |

 

Selling expenses for the threemonths ended March 31, 2008 decreased by $235,000, or 49%, compared withthe same period in 2007. Selling expenses decreased due to our November 2006restructuring, which eliminated most of our sales force, as well as reducedpersonnel costs in Europe. For the three month period ended March 31, 2008WorldHeart recorded $5,000 in stock-based compensation expense compared withnil in the quarter ended March 31, 2007. Selling expenses are expected toremain at current levels for the next several quarters.

 

General and administrativeexpenses decreased by $110,000, or 10%, in the first quarter of 2008, comparedwith the first quarter of 2007. This reduction is primarily due to a reservereduction of a State Sales & Use tax assessment settled in WorldHeart’sfavor. For the three months ended March 31, 2008, WorldHeart recorded$53,000 in stock-based compensation expense, compared with $32,000 recorded inthe quarter ended March 31, 2007. Administrative expenses are expected toremain at about current levels for the next several quarters.

 

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

 

Research and development expenses for the three months ended March 31,2008 increased by $624,000, or 25%, compared with the three months ended March 31,2007. This increase is primarily due to the expansion of development andrelated expenses on the next-generation Levacor Rotary VAD. Research anddevelopment expenses for our Levacor Rotary VAD are expected to increasethroughout 2008 with additional pre-clinical testing and a human clinicaltrial.

 

***Amortizationof intangibles:*****Amortization of the acquired MedQuest workforce for each of thethree months ended March 31, 2008 and March 31, 2007 was $48,000.This intangible asset is being amortized on a straight-line basis over fouryears.

 

***ForeignExchange:***Foreign exchange transactions resultedin a loss of $6,000 for the three-month period ended March 31, 2008,compared with a gain of $135,000 for the three-month period ended March 31,2007.

 

***Investmentand other Income:*** Investment and other income forthe quarter ended March 31, 2008 was $23,000, compared with $118,000during the three months ended March 31, 2007. The decrease results fromlower average invested cash balances along with lower interest rates in thefirst quarter of 2008.

 

***Interestexpense******.*******In March 2008**,**werecorded interest expense of $1,512,000, of which $1,414,000 related to thebeneficial conversion feature of the $4.0 million convertible note issued toAbiomed on January 3, 2008. $98,000 was accrued interest expensecalculated at 8% of  $5.0 millionconvertible note. There was no such charge in 2007. (See Note 9)

 

***     Clinical and marketing support.  ******In March 2008,*********we recordedwarrant expense of $6.5 million related to the fair value of the 2.7 millionwarrants issued to Abiomed. There was no such charge recorded in 2007. (SeeNote 9)

 

17

----

 

Table of Contents

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Historically, WorldHeart hasfunded losses from operations through the sale of equity and issuance of debtinstruments. Combined with revenues and investment income, these funds haveprovided WorldHeart with the resources to operate our business, sell andsupport our products, fund our research and development program and clinicaltrials, apply for and obtain the necessary regulatory approvals and develop newtechnologies and products.

 

At March 31, 2008, wehad cash and cash equivalents of $1.0.million, an increase of $0.3 million fromDecember 31, 2007. In January 2008 we received $4.0 million inproceeds from the second tranche of the Abiomed note. During the first quarterof 2008, cash used to fund operating activities was $3.7 million, consistingprimarily of the net loss for the period of $11.5 million offset by non-cashcharges of $1.5 million related to the beneficial conversion feature of theAbiomed note and $6.5 million related to the fair value of warrants issued toAbiomed. Working capital changes consisted of a $0.4 million decrease ininventories offset by a $0.4 million decrease in accounts payable and accruedcompensation and an increase of $0.2 million in accounts receivable and prepaidexpenses.

 

Investing activitiesrequiring cash resources consisted of $33,000 in property and equipmentadditions.

 

Weare continuing to aggressively explore all strategic and financingalternatives, including equity financing transactions and corporatecollaborations to meet cash requirements but our efforts have not beensuccessful as of the date of this report. 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 ourproducts, co-funding of our products or potential sale of WorldHeart or oursubsidiaries. If we are not successful in immediately securing additionalfinancing or on implementing strategic alternatives, we will be forced to takeextraordinary business measures which could include filing for bankruptcy,ceasing operations and liquidating assets. (See Note 10).

 

OnMay 2, 2008, we learned that our potential primary investor may not beable to give its assurance of commitment to allow us to access capital to meetcurrent financing needs.  Thisinformation resulted in the Corporation making the determination that ouravailable cash would be insufficient to pay our obligations as they become due,which constitutes an event of default under the our secured convertiblepromissory note in the amount of $5.0 million issued on December 11, 2007to Abiomed, Inc.  (AtApril 30, 2008, we had cash and cash equivalents of approximately $0.5million and current liabilities of approximately $7.9 million). This eventof default under the note results in the outstanding principal balance of thenote, together with accrued but unpaid interest and any other amounts owingunder the Abiomed note documents, becoming immediately due and payable toAbiomed.  The note is secured by securityagreements entered into by us and our wholly owned subsidiary, World Heart, Inc.(“WHI”), in favor of Abiomed, that grant a security interest in all of theirrespective assets.  Abiomed couldexercise its remedies under law and under the security agreements, includingforeclosing on the assets of WorldHeart and WHI.  An event of default also permits Abiomed toterminate the clinical and marketing support services agreement. 

 

Asdescribed in Note 10 to the financial statements, our ability to generateequity capital could be impacted by our ability to maintain our listing on theNASDAQ Capital Market or other Stock Markets.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

As a result of theCorporation’s decision to reduce commercial operations associated with theNovacor LVAS, and refocus its resources on the development of its nextgeneration products, WorldHeart wrote-off $4.6 million of Novacor relatedinventories in 2006 that management estimated were surplus. In 2007 theCorporation wrote off an additional $1.4 million of inventory. Managementestimated future usage of inventory on hand by projecting future sales of itsNovacor product, and used these to predict raw material parts and componentsthat would be consumed in manufacturing product to meet these sales. Futurewrite-downs may be required based on actual sales achieved and will be recordedwhen they can be reasonably determined.

 

**OFF- BALANCE SHEET ARRANGEMENTS**

 

None.

 

**ITEM 3.  CONTROLS AND PROCEDURES**

 

*Evaluation of disclosure controls andprocedures*: Based on their evaluation of ourdisclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of March 31, 2008, our presidentand chief executive officer (principal executive officer) and our chieffinancial officer (principal accounting and financial officer) have concludedthat our disclosure controls and procedures are designed to ensure thatinformation required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms and are operating in an effective manner at the reasonable assuranceslevel.

 

*Changes ininternal controls over financial reporting:* There was nochange in our internal controls over financial reporting that occurred duringthe quarter ended March 31, 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

 

18

----

 

Table of Contents

 

**PART II—OTHERINFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

In the normal course ofbusiness, we may be a party to legal proceedings. We are not currently a partyto any material legal proceedings, except as 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.WorldHeart believes this claim to be without merit and intends to vigorouslydefend it.

 

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

 

(None)

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

See Note 10.

 

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

 

(None)

 

**ITEM 5.OTHER INFORMATION**

 

(None)

 

**ITEM6.  EXHIBITS**

 

(a)               Exhibits

 
| Exhibit 10.19 |   | Summary of Performance  and Shares Bonuses pursuant to the 2007 Bonus Program Awarded to Certain  Executive Officers (incorporated by reference to Exhibit 99.1 to the  Corporation’s Form 8-K filed on February 11, 2008 (Commission File  No. 000-28882)). |
|--------------------|--------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                                  |
| Exhibit 10.20 |   | Summary of 2008 Bonus  Program for Certain Executive Officers (incorporated by reference to  Exhibit 99.1 to the Corporation’s Form 8-K filed on  February 20, 2008 (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.                                                                                                                                                        |

 

19

----

 

Tableof Contents

 

**SIGNATURES**

 

In accordance with the requirements of the Exchange Act, the registrantcaused this report to be signed on its behalf by the undersigned, thereuntoduly authorized.

 
|                            |                                                                 | World Heart  Corporation |
|---------------------------------|----------------------------------------------------------------------|--------------------------|
|                            |                                                                 | (Registrant)             |
|                            |                                                                 |
|                            |                                                                 |
| Dated:  July 16, 2008 | /s/ Jal S.  Jassawalla                                               |
|                            | Jal S. Jassawalla, President and Chief  Executive Officer            |
|                            |                                                                 |
|                            |                                                                 |
| Dated:  July 16, 2008 | /s/ David  Pellone                                                   |
|                            | David Pellone, Vice President, Finance  and  Chief Financial Officer |

 

20

----