UNITED
STATES


SECURITIES
AND EXCHANGE


COMMISSION




WASHINGTON,
DC 20549





FORM 10-Q


(Mark
One)


ý
            QUARTERLY
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
      EXCHANGE ACT OF 1934





For
quarterly period ended September 30, 2010





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





For
the transition period
from       to


Commission
file number:  000-28882





WORLD
HEART CORPORATION


(Exact
name of registrant as specified in its charter)


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


4750
Wiley Post Way, Suite 120, Salt Lake City, UT 84116 USA


(Address
of principal executive offices)


(801)
355-6255


(Registrant’s
telephone number)







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





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





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





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





Large
      accelerated filero
              
              Accelerated
      filer  oNon-accelerated
      filero
              
              Smaller
      reporting companyý


(Do not
check if a smaller reporting company)





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





Yes o No ý


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


The
number of common shares outstanding as of November 12, 2010 was
26,581,050.








TABLE OF
CONTENTS





PagePart I. Financial
    InformationItem
      1.
                                          Financial
      Statements (unaudited)Condensed
      Consolidated Balance Sheets as of September 30, 2010 and December 31,
      2009
                                          
                                          
                                          3Condensed
      Consolidated Statements of Operations for the three and nine months ended
      September 30, 2010 and 2009
                                          
                                          
                                          4Condensed
      Consolidated Statements of Cash Flows for the nine months ended September
      30, 2010 and 2009
                                          
                                          
                                          5Notes
      to Unaudited Condensed Consolidated Financial Statements
                                          
                                          
                                          6Item
      2.
                                          Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                                          
                                          
                                          15Item
      3.
                                          Quantitative
      and Qualitative Disclosures About Market Risk
                                          
                                          
                                          21Item
      4.
                                          Controls
      and Procedures
                                          
                                          
                                          21Part II. Other InformationItem
      1.
                                          Legal
      Proceedings
                                          
                                          
                                          21Item
      1A.
                                          Risk
      Factors
                                          
                                          
                                          21Item
      2.
                                          Unregistered
      Sales of Equity Securities and Use of Proceeds
                                          
                                          
                                          23Item
      3.
                                          Defaults
      Upon Senior Securities
                                          
                                          
                                          23Item
      4.
                                          (Removed
      and Reserved)
                                          
                                          
                                          23Item
      5.
                                          Other
      Information
                                          
                                          
                                          23Item
      6.
                                          Exhibits
                                          
                                          
                                          24Signatures
                                          
                                          
                                          25








PART I—FINANCIAL
INFORMATION





ITEM 1.  FINANCIAL
STATEMENTS.





WORLD
HEART CORPORATION


Condensed
Consolidated Balance Sheets


(United
States Dollars)


(Unaudited)


September 30, 2010
                
                
                December 31, 2009(1)ASSETSCurrent
      assetsCash
      and cash equivalents
                
                $
                1,246,252
                
                
                $
                5,562,670Marketable
      investment securities
                
                
                1,056,506
                
                
                
                499,417Trade
      and other receivables, net of allowance for doubtful accounts of $0 and
      $238,854 at September 30, 2010 and December 31, 2009,
      respectively
                
                
                461,013
                
                
                
                18,907Inventory,
      net of allowance for excess and obsolete of $466,287 and $0 at September
      30, 2010 and December 31, 2009, respectively
                
                
                2,855,507
                
                
                
                341,614Prepaid
      expenses and other current assets
                
                
                315,651
                
                
                
                271,9665,934,929
                
                
                
                6,694,574Long-term
      assetsProperty
      and equipment, net
                
                
                925,899
                
                
                
                879,833Other
      long-term assets
                
                
                34,756
                
                
                
                36,360960,655
                
                
                
                916,193Total
      assets
                
                $
                6,895,584
                
                
                $
                7,610,767LIABILITIES
      AND SHAREHOLDERS' EQUITYCurrent
      liabilitiesAccounts
      payable and accrued liabilities
                
                $
                1,694,913
                
                
                $
                1,522,199Accrued
      compensation
                
                
                981,253
                
                
                
                645,306Note
      payable - short term, net
                
                
                183,817
                
                
                
                110,9712,859,983
                
                
                
                2,278,476Long-term
      liabilitiesNote
      payable - long term, net
                
                
                580,123
                
                
                
                580,123Other
      long term liabilities
                
                
                77,113
                
                
                
                93,182Total
      liabilities
                
                
                3,517,219
                
                
                
                2,951,781Commitments
      and ContingenciesShareholders'
      equity (deficit)Preferred
      stock $0.01 par value; 1,000,000 shares authorized; no shares issued or
      outstanding
                
                
                -
                
                
                
                -Common
      stock $0.001 par value; 50,000,000 shares authorized; 14,730,991 issued
      and outstanding at September 30, 2010 and no par value; unlimited shares
      authorized; 13,312,265 issued and outstanding at December 31,
      2009
                
                
                14,731
                
                
                
                325,279,751Additional
      paid-in-capital
                
                
                351,795,438
                
                
                
                18,389,635Cumulative
      other comprehensive loss
                
                
                (1,960
                )
                
                
                (6,285,577
                )Accumulated
      deficit
                
                
                (348,429,843
                )
                
                
                (332,724,823
                )Total
      shareholders' equity
                
                
                3,378,365
                
                
                
                4,658,986Total
      liabilities and shareholders' equity
                
                $
                6,895,584
                
                
                $
                7,610,767





(See
accompanying notes to the unaudited condensed consolidated financial
statements)


(1)
Derived from the Company's audited consolidated financial statements as of
December 31, 2009.


3





WORLD
HEART CORPORATION


Condensed
Consolidated Statements of Operations


(United
States Dollars)


(Unaudited)




Three Months Ended September 30,
                
                
                Nine Months Ended September 30,2010
                
                
                2009
                
                
                2010
                
                
                2009Revenue
                
                $
                724,002
                
                
                $
                -
                
                
                $
                1,747,080
                
                
                $
                4,765Cost
      of goods sold
                
                
                (883,700
                )
                
                
                (25,000
                )
                
                
                (1,749,349
                )
                
                
                (78,238
                )Gross
      profit (loss)
                
                
                (159,698
                )
                
                
                (25,000
                )
                
                
                (2,269
                )
                
                
                (73,473
                )Operating
      expensesSelling,
      general and administrative
                
                
                1,112,219
                
                
                
                1,314,857
                
                
                
                3,341,591
                
                
                
                4,233,750Research
      and development
                
                
                1,955,394
                
                
                
                2,557,053
                
                
                
                5,969,523
                
                
                
                7,268,863Restructuring
      costs
                
                
                -
                
                
                
                98,124
                
                
                
                -
                
                
                
                349,036Amortization
      of intangibles
                
                
                -
                
                
                
                12,204
                
                
                
                -
                
                
                
                107,916Total
      operating expenses
                
                
                3,067,613
                
                
                
                3,982,238
                
                
                
                9,311,114
                
                
                
                11,959,565Operating
      loss
                
                
                (3,227,311
                )
                
                
                (4,007,238
                )
                
                
                (9,313,383
                )
                
                
                (12,033,038
                )Other
      income (expenses)Foreign
      exchange loss
                
                
                (95
                )
                
                
                (13,324
                )
                
                
                (12,449
                )
                
                
                (19,506
                )Investment
      and other income
                
                
                4,629
                
                
                
                4,922
                
                
                
                13,405
                
                
                
                19,285Loss
      on liquidation of foreign entity
                
                
                -
                
                
                
                -
                
                
                
                (6,285,577
                )
                
                
                -Interest
      expense
                
                
                (36,159
                )
                
                
                (338
                )
                
                
                (107,016
                )
                
                
                (1,099
                )Net
      loss
                
                $
                (3,258,936
                )
                
                $
                (4,015,978
                )
                
                $
                (15,705,020
                )
                
                $
                (12,034,358
                )Weighted
      average number of common shares outstanding basic and
    diluted
                
                
                14,730,991
                
                
                
                13,272,781
                
                
                
                14,601,071
                
                
                
                13,260,374Basic
      and diluted loss per common share
                
                $
                (0.22
                )
                
                $
                (0.30
                )
                
                $
                (1.08
                )
                
                $
                (0.91
                )




(See
accompanying notes to the unaudited condensed consolidated financial
statements)


4





WORLD
HEART CORPORATION


Condensed
Consolidated Statements of Cash Flows


(United
States Dollars)


(Unaudited)


Nine Months September 30,2010
                
                
                2009Net
      loss for the period
                
                $
                (15,705,020
                )
                
                $
                (12,034,358
                )Adjustments
      to reconcile net loss to net cash used in operations:Amortization
      and depreciation
                
                
                294,131
                
                
                
                249,636Gain
      on sale of property and equipment
                
                
                -
                
                
                
                (1,309
                )Non-cash
      stock compensation expense
                
                
                1,165,878
                
                
                
                668,587Non-cash
      expense on loss on liquidation of foreign entity
                
                
                6,285,577
                
                
                
                -Imputed
      interest on debt
                
                
                72,849
                
                
                
                -Realized
      foreign exchange (loss) gain
                
                
                -
                
                
                
                18,716Change
      in operating components of working capital:Trade
      receivables
                
                
                (442,106
                )
                
                
                210,846Prepaid
      expenses and other current assets
                
                
                (22,083
                )
                
                
                272,359Inventory
                
                
                (2,513,893
                )
                
                
                (134,801
                )Accounts
      payable and accrued liabilities
                
                
                136,986
                
                
                
                (12,304
                )Accrued
      compensation
                
                
                335,947
                
                
                
                196,270Cash
      used in operating activities
                
                
                (10,391,734
                )
                
                
                (10,566,358
                )Investing
      activitiesSale
      of marketable investment securities
                
                
                1,700,560
                
                
                
                -Purchase
      of marketable investment securities
                
                
                (2,279,607
                )
                
                
                -Purchase
      of property and equipment
                
                
                (313,362
                )
                
                
                (372,110
                )Cash
      used in investing activities
                
                
                (892,409
                )
                
                
                (372,110
                )Financing
      activitiesIssuance
      of common shares through private placement, net
                
                
                6,974,906
                
                
                
                -Capital
      lease repayments
                
                
                (7,180
                )
                
                
                (4,814
                )Proceeds
      from sale of property and equipment
                
                
                -
                
                
                
                1,500Gross
      proceeds from exercise of warrants
                
                
                -
                
                
                
                192,499Cash
      provided by financing activities
                
                
                6,967,726
                
                
                
                189,185Effect
      of exchange rates on cash and cash equivalents
                
                
                -
                
                
                
                5,522Decrease
      in cash and cash equivalents for the period
                
                
                (4,316,418
                )
                
                
                (10,743,761
                )Cash
      and cash equivalents, beginning of the period
                
                
                5,562,670
                
                
                
                20,703,724Cash
      and cash equivalents, end of the period
                
                $
                1,246,252
                
                
                $
                9,959,963Supplementary
      cash flow information:Interest
      paid on financing
                
                $
                755
                
                
                $
                760Income
      taxes paid
                
                $
                800
                
                
                $
                800





(See
accompanying notes to the unaudited condensed consolidated financial
statements)


5





WORLD
HEART CORPORATION


Notes
to Unaudited Condensed Consolidated Financial Statements





1.
            Nature
      of Operations of the Company





World Heart
Corporation, together with its subsidiaries (collectively referred to as
WorldHeart or the Company), is focused on developing and commercializing
implantable ventricular assist devices (VADs), which are mechanical pumps that
allow for the restoration of normal blood circulation to patients suffering from
advanced heart failure. World Heart has facilities in Salt Lake City, Utah,
and Oakland, California. The Company is currently focusing on the development of
its next-generation LevacorTM VAD (Levacor VAD). In January 2010, the Company
received an unconditional Investigational Device Exemption from the U.S. Food
and Drug Administration (FDA) for the Levacor VAD in a Bridge-to-Transplant
(BTT) clinical study and enrolled the first patient in January 2010. In
July 2010, the FDA approved the expansion of the BTT clinical study into ten
additional centers, making a total of 20 centers that the Company can enroll
into the study. The Company expects to realize cost recoveries from the use of
the Levacor VAD in the U.S. clinical studies. Such recoveries are expected to be
an important part of the Company’s overall operating cash flows. The Company is
also developing a small, magnetically levitated minimally invasive VAD aimed at
providing partial circulatory support to patients in an earlier stage of heart
failure.




2.
            Summary
      of Significant Accounting Policies





(a)
            Basis
      of Presentation and Principles of
Consolidation


The
unaudited condensed consolidated financial statements have been prepared by
management in accordance with accounting principles generally accepted in the
United States (U.S. GAAP), and include all assets, liabilities, revenues, and
expenses of the Company and its wholly owned subsidiaries; World Hearts Inc.
(WHI) and World Heart B.V. (WHBV). All material intercompany transactions
and balances have been eliminated. These interim unaudited condensed
consolidated financial statements and notes thereto should be read in
conjunction with Management’s Discussion and Analysis of Financial Condition and
Results of Operations and the audited financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2009. Certain information required by U.S. GAAP has been
condensed or omitted in accordance with the rules and regulations of the
SEC. The results for the period ended September 30, 2010 are not necessarily
indicative of the results to be expected for the entire fiscal year ended
December 31, 2010 or for any future period.





(b)
            Use
      of Estimates


The
preparation of the condensed consolidated financial statements in accordance
with U.S. GAAP requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of contingent
assets and liabilities at the dates of the financial statements and the reported
amounts of revenue and expenses during the reporting periods. Such management
estimates include allowance for doubtful accounts, inventory reserves, income
taxes, realizability of deferred tax assets, stock-based compensation, deferred
revenue, warranty, restructuring, legal and clinical reserves. The Company bases
their estimates on historical experience and on various other assumptions that
the Company believes to be reasonable under the circumstances. Actual results
could differ from these estimates.





(c)
            Cash
      Equivalents


Cash
equivalents can include money market funds, debt instruments of commercial
enterprises, financial institutions and government entities. The Company has
established guidelines relative to credit ratings, diversification and
maturities that are intended to mitigate risk and provide liquidity. Cash
equivalents include highly liquid and highly rated investments with maturity
periods of three months or less when purchased. The composition and maturities
are regularly monitored by management.





(d)
            Marketable
      Investment Securities, Financial Instruments and Fair
  Value


The
Company classifies its marketable investment securities as available for sale.
Available for sale securities are recorded at fair value. Unrealized
holding gains and losses, net of the related tax effect, are excluded from
earnings and are reported as a separate component of stockholder’s equity until
realized. A decline in the market value below cost that is deemed other than
temporary is charged to other income (expense) resulting in the establishment of
a new cost basis for the security. Premiums and discounts are amortized or
accreted into the cost basis over the life of the related security as
adjustments to yield using the effective-interest method. Interest income is
recognized when earned. Realized gains and losses from the sale of marketable
investment securities are based on the specific identification method and are
included in results of operations.


6




The
Company’s financial instruments are cash and cash equivalents, marketable
investment securities, accounts receivable, accounts payable, accrued
liabilities and notes payable.  The recorded values of cash and cash
equivalents, accounts receivable, accounts payable, and accrued liabilities
approximate their fair values based on their short-term nature. The fair value
of marketable investment securities is estimated based upon quoted market
prices. The recorded values of notes payable, net of the discount, approximate
the fair value as the interest approximates market rates.





The
Company measures certain financial marketable investment securities at fair
value on a recurring basis. The Company’s investments in marketable investment
securities are classified within Level 2 of the fair value hierarchy
because they are traded in less active markets than public stocks but prices are
obtained from readily available pricing sources for comparable
instruments.





(e)
            Concentration
      of Credit Risk


Financial
instruments that potentially subject the Company to significant concentrations
of credit risk consist primarily of cash and cash equivalents investments,
marketable investment securities and accounts receivable. Substantially, all of
the Company's liquid cash equivalents are invested primarily in money market
funds. Additionally, the Company has limited investments in marketable
investment securities, primarily comprised of certificates of deposit. The
Company had $461,013 and $0 in trade and other receivables as of September
30, 2010 and December 31, 2009, respectively. Beginning in 2010, with the
commencement of the BTT clinical trial, the Company’s trade accounts receivable
is derived from six customers all located in the United States. The Company
performs ongoing credit evaluations of its customers and currently does not
require collateral. The Company maintains reserves for potential credit losses
when necessary. There were no write-offs during the periods
presented.




(f)
            Inventory


Inventories
are stated at the lower of cost or market. Cost is determined on a first-in,
first out (FIFO) method. The Company utilizes a standard costing system, which
requires significant management judgment and estimates in determining and
applying standard labor and overhead rates.Labor and overhead rates
are estimated based on the Company's best estimate of annual production volumes
and labor rates and hours per manufacturing process. These estimates are
based on historical experience and budgeted expenses and production volume.
Estimates are set at the beginning of the year and updated periodically. While
the Company believes standard costs are reliable, actual production costs and
volume change may impact inventory, costs of sales and the absorption of
production overhead expenses.




The
Company reviews inventory for excess or obsolete inventory and writes down
obsolete or otherwise unmarketable inventory to its estimated net realizable
value.




The
Company included in inventory, materials and finished goods that can be held for
sale or used in non-revenue clinical studies. Products consumed in non-revenue
clinical studies are expensed as part of research and development when
consumed.




Prior to
August 23, 2009, all costs associated with manufacturing the Levacor VAD
and related surgical and peripheral products were expensed as research and
development costs, therefore, cost of goods sold on sales of the Levacor VAD
will be lower until zero cost inventories are fully consumed.




(g)
            Property
      and Equipment


Property
and equipment assets are recorded at cost. Depreciation and amortization are
calculated over estimated useful lives ranging from 1 to 7 years. On
January 1, 2010, the Company changed its method of depreciation for property and
equipment from the double declining method to the straight line method
using the following rates and bases:





Furniture
      and fixtures
                    
                    Straight-line
      over 7 yearsComputer
      equipment and software
                    
                    Straight-line
      over 5 yearsManufacturing
      and research equipment
                    
                    Straight-line
      over 5 yearsLeasehold
      improvements
                    
                    Straight-line
      ranging from 1 to 7
years





The
change in depreciation method was done to better match expected use of the
equipment with the company’s future business plans and did not result in a
material impact on depreciation expense. The carrying value of property and
equipment is assessed when factors indicating a possible impairment are present.
The Company records an impairment loss in the period when it is determined that
the carrying amounts may not be recoverable. The impairment loss would be
calculated as the amount by which the carrying amount exceeds the undiscounted
future cash flows from the asset.


7





(h)
            Income
      Taxes


Income
taxes are provided for using the asset and liability method whereby deferred tax
assets and liabilities are recognized using current tax rates on the difference
between the financial statement carrying amounts and the respective tax basis of
the assets and liabilities. The Company provides a valuation allowance on
deferred tax assets when it is more likely than not that such assets will not be
realized.





The
Company adopted the provisions of Financial Accounting Standards Codification
(ASC) 740, Income
Taxes, on January 1, 2007. As required by ASC 740, the Company
recognizes the financial statement benefit of a tax position only after
determining that the relevant tax authority would more likely than not sustain
the position following an audit. For tax positions meeting this standard, the
amount recognized in the financial statements is the largest benefit that has a
greater than 50 percent likelihood of being realized upon ultimate
settlement with the relevant tax authority. At the adoption date, the Company
applied ASC 740 to all tax positions for which the statute of limitations
remained open.





(i)
            Revenue
      Recognition, Trade Receivables and Deferred
  Revenue


The
Company recognizes revenue from product sales in accordance with ASC 605, Revenue Recognition. Pursuant
to purchase agreements or orders, the Company ships product to customers based
on existing agreements or orders. Revenue from product sales is only recognized
when substantially all the risks and rewards of ownership have transferred to
the customer, the selling price is fixed and collection is reasonably assured.
Beginning in 2010, a majority of the Company’s product sales are made on a
consignment basis and as such, pursuant to the terms of the consignment
arrangements, revenue is recognized on the date the consigned product is
implanted or otherwise consumed. Revenue from product sales not sold on a
consignment basis is recognized upon customer receipt and acceptance of the
product. Beginning in 2010, revenue recognized relates to sales of the Levacor
VAD in connection with our BTT clinical trial.





The
significant elements of the Company's multiple-element offerings are implant
kits, peripherals, training and one-time post-implant support for new
centers. For arrangements with multiple elements, the Company recognizes revenue
using the residual method as described in ASC 985-605, Revenue
Recognition-Software, or ASC 605-25, Revenue Recognition of Multiple
Element Arrangements. Under the residual method, revenue is allocated and
deferred for the undelivered elements based on relative fair value. The
determination of fair value of the undelivered elements in multiple elements
arrangements is based on the price charged when such elements are sold
separately, which is commonly referred to as vendor-specific objective-evidence
(VSOE). Each element's revenue is recognized when all of the revenue recognition
criteria are met for each of the elements.





Trade
receivables are recorded for product sales and do not bear interest. The Company
regularly evaluates the collectability of trade receivables. An allowance for
doubtful accounts is maintained for estimated credit losses. When estimating
credit losses, the Company considers a number of factors including the aging of
a customer's account, credit worthiness of specific customers, historical trends
and other information. The Company reviews its allowance for doubtful accounts
monthly. At September 30, 2010 and December 31, 2009, the allowance for doubtful
accounts was $0 and $238,854, respectively.





(j)
            Warranty


The
Company warrants its products for various periods against defects in material or
installation workmanship. Warranty costs are based on historical experience and
estimated and recorded when the related sales are recognized. Any additional
costs are recorded when incurred or when they can reasonably be
estimated.





The
Company provides for a six month warranty related to the sale of its Levacor VAD
system peripherals. The warranty reserve, which is included in accounts payable
and accrued liabilities, totaled $56,793 and $44,000 at September 30, 2010
and December 31, 2009, respectively.





(k)
            Research
      and Development Costs


Research
and development (R&D) costs, including research performed under contract by
third parties, are expensed as incurred. For the purchase of research and
development technology under an assignment or license agreement, the Company
records R&D expense in accordance with ASC 730, Research and
Development.





(l)
            Stock-Based
      Compensation


The
Company accounts for stock based compensation in accordance with ASC 718, Stock Compensation, which
requires the recognition of the fair value of stock compensation as an expense
in the calculation of net income (loss). The Company recognizes stock
compensation expense in the period in which the employee is required to provide
service, which is generally over the vesting period of the individual equity
instruments. Stock options issued in lieu of cash to non-employees for services
performed are recorded at the fair value of the options at the time they are
issued and are expensed as service is provided.


8





(m)
            Shipping
      and Handling Costs


In
accordance with ASC 605-45-20, Revenue Recognition: Principal Agent
Considerations, the Company records freight billed to its customers as
sales of product and services and the related freight costs as a cost of sales,
product and services. The Company's shipping and handling costs are not
significant.





(n)
            Restructuring
      Expense


The Company records costs and
liabilities associated with exit and disposal activities, as defined in ASC
420, Exit or Disposal
Cost Obligations, based on estimates of fair value in the period the
liabilities are incurred. In periods subsequent to initial measurement, changes
to the liability are measured using the credit-adjusted risk-free discount rate
applied in the initial period. The liability is evaluated and adjusted as
appropriate for changes in circumstances.





(o)
            Foreign
      Currency Translation and Functional
Currency


Since
January 1, 2004, the functional currency of the Company has been the U.S.
dollar. The accumulated other comprehensive loss on the balance sheet at
December 31, 2009 represents the impact of converting to U.S. dollars from
Canadian dollars prior to January 1, 2004. Effective January 1, 2010, World
Heart Corporation changed its jurisdiction of incorporation from the federal
jurisdiction of Canada to the state of Delaware in the United States through a
planned arrangement and substantially terminated a majority of operations
outside the United States. As a result the Company recorded a loss on
liquidation of foreign entity of $6.3 million during the nine months ended
September 30, 2010 which represented the other comprehensive loss on the balance
sheet at December 31, 2009. Exchange gains and losses are included in the net
loss for the year.





(p)
            Earnings
      per Share


Basic
earnings per share are computed by dividing net income (loss) by the weighted
average number of common shares outstanding during the period presented. Diluted
earnings per share are computed using the weighted average number of common
shares outstanding during the periods plus the effect of dilutive securities
outstanding during the periods. For the three and nine months ended September
30, 2010 and  September 30, 2009, basic earnings per share are the
same as diluted earnings per share as a result of the Company’s common stock
equivalents being anti-dilutive.





The
following reconciliation shows the anti-dilutive shares excluded from the
calculation of basic and diluted earnings (loss) per common share attributable
to the Company as of September 30, 2010 and 2009:




September
      30,2010
                      
                      
                      2009Gross
      number of shares excluded:Warrants
                      
                      
                      2,862,868
                      
                      
                      
                      25,416Stock
      options
                      
                      
                      1,873,761
                      
                      
                      
                      1,509,0634,736,629
                      
                      
                      
                      1,534,479




3.
            Marketable
      Investment Securities and Fair
Value




The
Company’s short term investments consist primarily of investments in
certificates of deposit.  All investments are classified as available
for sale. Marketable investment securities available for sale as of September
30, 2010 and December 31, 2009 are summarized as follows:





Gross
      unrealized
                      
                      
                      Gross
      unrealizedSeptember 30, 2010
                      
                      Amortized Cost
                      
                      
                      holding gains
                      
                      
                      holding losses
                      
                      
                      Fair ValueCertificates
      of deposit
                      
                      $
                      1,058,466
                      
                      
                      $
                      -
                      
                      
                      $
                      (1,960
                      )
                      
                      $
                      1,056,506Total
      marketable investment securities
                      
                      $
                      1,058,466
                      
                      
                      $
                      -
                      
                      
                      $
                      (1,960
                      )
                      
                      $
                      1,056,506December 31, 2009Certificates
      of deposit
                      
                      $
                      499,417
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      499,417Total
      marketable investment securities
                      
                      $
                      499,417
                      
                      
                      $
                      -
                      
                      
                      $
                      -
                      
                      
                      $
                      499,417




9





Maturities
of marketable investment securities as of September 30, 2010 and December 31,
2009 are as follows:





September 30, 2010
                    
                    Amortized Cost
                    
                    
                    Fair ValueDue
      within one year
                    
                    $
                    1,058,466
                    
                    
                    $
                    1,056,506Total
      marketable investment securities
                    
                    $
                    1,058,466
                    
                    
                    $
                    1,056,506December 31, 2009Due
      within one year
                    
                    $
                    499,417
                    
                    
                    $
                    499,417Total
      marketable investment securities
                    
                    $
                    499,417
                    
                    
                    $
                    499,417





4.
            Property
      and Equipment




As of
September 30, 2010 and December 31, 2009, property and equipment consisted of
the following:





September 30, 2010AccumulatedDepreciation/
                        
                        
                        Net
      BookCost
                        
                        
                        Amortization
                        
                        
                        ValueFurniture
      & fixtures
                        
                        $
                        86,200
                        
                        
                        $
                        (38,116
                        )
                        
                        $
                        48,084Computer
      equipment & software
                        
                        
                        261,176
                        
                        
                        
                        (99,909
                        )
                        
                        
                        161,267Manufacturing
      & research equipment
                        
                        
                        878,337
                        
                        
                        
                        (367,978
                        )
                        
                        
                        510,359Leasehold
      improvements
                        
                        
                        409,468
                        
                        
                        
                        (203,279
                        )
                        
                        
                        206,189$
                        1,635,181
                        
                        
                        $
                        (709,282
                        )
                        
                        $
                        925,899December 31, 2009AccumulatedDepreciation/
                        
                        
                        Net
      BookCost
                        
                        
                        Amortization
                        
                        
                        ValueFurniture
      & fixtures
                        
                        $
                        168,402
                        
                        
                        $
                        (117,552
                        )
                        
                        $
                        50,850Computer
      equipment & software
                        
                        
                        630,822
                        
                        
                        
                        (522,963
                        )
                        
                        
                        107,859Manufacturing
      & research equipment
                        
                        
                        2,566,844
                        
                        
                        
                        (2,009,146
                        )
                        
                        
                        557,698Leasehold
      improvements
                        
                        
                        568,792
                        
                        
                        
                        (405,366
                        )
                        
                        
                        163,426$
                        3,934,860
                        
                        
                        $
                        (3,055,027
                        )
                        
                        $
                        879,833





Depreciation
expense for the three months ended September 30, 2010 and September 30, 2009 was
$66,131 and $58,056, respectively.  Depreciation expense for the nine
months ended September 30, 2010 and September 30, 2009 was $294,131 and
$141,720, respectively. On April 1, 2010, the Company recorded one-time
depreciation expense on assets with remaining net book value that had reached
their respective useful life totaling $116,725. Additionally, the Company
removed the cost basis and corresponding accumulated depreciation/amortization
of assets that were no longer in service.





5.
            Inventory





Inventories
are stated at the lower of cost or market, with cost determined on a first-in,
first-out basis. As of September 30, 2010 and December 31, 2009, net inventory
balances were as follows:





September 30, 2010
                  
                  
                  December 31, 2009Raw
      materials
                  
                  $
                  1,376,163
                  
                  
                  $
                  131,614Work
      in progress
                  
                  
                  703,417
                  
                  
                  
                  210,000Finished
      goods
                  
                  
                  775,927
                  
                  
                  
                  -Total
      inventory
                  
                  $
                  2,855,507
                  
                  
                  $
                  341,614





10





Finished
goods inventory on consignment at customer sites was $383,682 and $0 at
September 30, 2010 and December 31, 2009, respectively.





6.
            Current
      Liabilities





Accounts
Payable and Accrued Liabilities




Accounts
payable and accrued liabilities consist of the following:





September 30, 2010
                  
                  
                  December 31, 2009Accounts
      payable
                  
                  $
                  794,172
                  
                  
                  $
                  349,252Accued
      liabilities
                  
                  
                  709,645
                  
                  
                  
                  971,204Accrued
      royalties
                  
                  
                  134,303
                  
                  
                  
                  157,743Accrued
      warranty
                  
                  
                  56,793
                  
                  
                  
                  44,000Total
      accounts payable and accrued liabilities
                  
                  $
                  1,694,913
                  
                  
                  $
                  1,522,199





Accrued
Compensation




Accrued
compensation includes accruals for employee wages, Board of Director fees,
severance, vacation, and performance bonus. The components of accrued
compensation, inclusive of payroll taxes, are as follows:





September 30, 2010
                  
                  
                  December 31, 2009Accrued
      wages
                  
                  $
                  200,665
                  
                  
                  $
                  50,090Accrued
      severance
                  
                  
                  5,000
                  
                  
                  
                  77,524Accrued
      vacation
                  
                  
                  382,785
                  
                  
                  
                  326,526Accrued
      bonuses
                  
                  
                  392,803
                  
                  
                  
                  191,166Total
      accrued compensation
                  
                  $
                  981,253
                  
                  
                  $
                  645,306





Performance
Bonus




Annually,
the Compensation Committee of the Board of Directors, in conjunction with the
entire Board of Directors, approves the corporate goals and objectives for the
year with corresponding weighting and payout. Subsequent to each year end,
typically before the end of the first quarter of the following year, the
Compensation Committee reviews accomplishment of corporate goals and recommends
bonus payout, including executive officers payouts. As of September 30, 2010,
accrued bonuses for the 2009 and 2010 Performance Bonus Plan were $7,170 and
$385,633, respectively. The accrued bonus as of December 31, 2009 relates to the
2009 Performance Bonus Plan.




Restructuring




Accrued
restructuring costs of $43,360 and $296,457 as of September 30, 2010 and
December 31, 2009, respectively, are included in accrued liabilities and accrued
severance balance. On August 21, 2008, the Company announced a phased
consolidation into its location in Salt Lake City, Utah (2008 Restructuring
Plan). Included in the consolidation plan was the elimination of certain
positions in its Oakland, California facility, the relocation of certain
positions to Salt Lake City, Utah, the appointment of a President and Chief
Executive Officer (CEO) and Chief Financial Officer based in its Salt Lake
facility and the transition of the former CEO to Chief Technology Officer. As a
result of this restructuring and phased consolidation plan, the Company has
recorded cumulative restructuring charges of $577,666, including $0 and $349,036
in the nine months ended September 30, 2010 and 2009, primarily associated with
workforce reduction, severance and retention payments and relocation and
facility lease costs. The remaining restructuring liability as of September 30,
2010 relates to accrued severance of $5,000 on an eliminated position in
Oakland, California and $38,366 relating to the liability for the fair value of
the remaining lease payments at the Oakland facility. The fair value of the
lease liability is based on a net present value model using a credit-adjusted
risk-free interest rate. The associated severance payment is anticipated to be
paid by December 31, 2010 and the lease liability will be paid over the
remaining lease term which expires November 30, 2010. There has been no material
change in the restructuring liability as initially measured.


11




December 31, 2009
                  
                  
                  Charges
                  
                  
                  Cash
                  
                  
                  Non-cash
                  
                  
                  September 30, 20102008
      Restructuring Plan
                  
                  $
                  296,457
                  
                  
                  $
                  -
                  
                  
                  $
                  253,091
                  
                  
                  $
                  -
                  
                  
                  $
                  43,366





7.
            Shareholders’
      Equity





Effective
January 1, 2010, World Heart Corporation changed its jurisdiction of
incorporation from the federal jurisdiction of Canada to the state of Delaware
in the United States through a planned arrangement. The certificate of
incorporation in Delaware authorizes the issuance of a total of
51.0 million shares, consisting of 50.0 million shares of common stock
and 1.0 million shares of preferred stock. Each share of common stock has a
par value of $0.001 and each share of preferred stock has a par value of $0.01.
As a result of this change in jurisdiction, the Company reclassified
approximately $325.3 million out of common stock and into additional-paid-in
capital.




Prior to
the reincorporation of the Company from Canada to Delaware, the Company had
recorded $6.3 million cumulative translation adjustment related to the
conversion of foreign subsidiaries into the reporting currency. As a result
of the reincorporation from Canada to Delaware and subsequent liquidation of the
Company’s entity in Canada, the Company applied ASC 830, Foreign Currency Matters, and
recorded a $6.3 million non-cash loss on the liquidation of foreign subsidiary
in the nine months ended September 30, 2010 and wrote off the balance of
cumulative translation adjustment.




On
January 26, 2010, the Company completed a private placement of common stock
and warrants to purchase common stock. Gross proceeds from the offering were
approximately $7.3 million. The Company issued an aggregate of 1,418,726
newly issued shares of common stock at an issue price of $5.15 per share.
Additionally, the Company issued warrants to purchase up to 2,837,452 additional
shares of common stock at an exercise price of $4.90 per share. The placement
agent for the transaction received a placement fee of approximately $60,000 and
the Company incurred other related professional fees of approximately $243,000.
In connection with the private placement, the Company filed a registration
statement under the Securities Act on Form S-3 covering the registration of the
common stock and warrants in March 2010 which was declared effective in April
2010.




Common
Stock




Authorized
common shares of the Company consist of 50.0 million shares of common stock with
a par value of $0.001 per share.




Preferred
Stock




Authorized
preferred shares of the Company consist of 1.0 million shares of preferred stock
with a par value of $0.01 per share.




Employee Stock Option
Plan




The
Company has an employee stock option plan, the 2006 Equity Incentive Plan
(Incentive Plan). The exercise price for all equity awards issued under the
Incentive Plan is based on the fair market value of the common share price which
is the closing price quoted on the NASDAQ Stock Exchange on the last trading day
before the date of grant. The stock options generally vest over a four-year or
three-year period, first year cliff vesting with monthly vesting thereafter on
the four-year awards and annually in equal portions on the three-year awards,
and have a ten year life.




The
Incentive Plan allows for the issuance of restricted stock awards, restricted
stock unit awards, stock appreciation rights, performance shares and other
stock-based awards, in addition to stock options. An aggregate of 2,166,667
shares are authorized for future issuance under the Incentive Plan. As of
September 30, 2010, there are 292,406 shares available for future grants under
the Incentive Plan.




Stock-based
Compensation




The
Company accounts for stock based compensation in accordance with ASC 718, Stock Based Compensation,
which requires the recognition of the fair value of stock compensation as an
expense in the calculation of net income. ASC 718 requires that stock based
compensation expense be based on awards that are ultimately expected to vest.
Stock based compensation for the three and nine months ended September 30, 2010
and 2009 have been reduced for estimated forfeitures. When estimating
forfeitures, voluntary termination behaviors, as well as trends of actual option
forfeitures are considered. To the extent actual forfeitures differ from the
Company’s current estimates, cumulative adjustments to stock based compensation
expense are recorded.


12


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





The
Company uses the Black-Scholes valuation model for estimating the fair value of
stock compensation. The stock-based compensation expense for the three and nine
months ended September 30, 2010 and 2009 were as follows:




Three Months September 30,
                  
                  
                  Nine Months September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Selling,
      general and administrative
                  
                  $
                  195,873
                  
                  
                  $
                  168,129
                  
                  
                  $
                  620,081
                  
                  
                  $
                  403,079Research
      and development
                  
                  
                  163,706
                  
                  
                  
                  121,093
                  
                  
                  
                  545,797
                  
                  
                  
                  265,508Total
                  
                  $
                  359,579
                  
                  
                  $
                  289,222
                  
                  
                  $
                  1,165,878
                  
                  
                  $
                  668,587




As of
September 30, 2010, $3,086,716 of total unrecognized compensation cost related
to stock options is expected to be recognized over a period of approximately 16
quarters.




The
aggregate intrinsic value is calculated as the difference between the exercise
price of all outstanding options and the quoted price of the Company’s common
stock  that were in the money at September 30, 2010. At September 30,
2010, the aggregate intrinsic value of all outstanding options was $1,065 with a
weighted average remaining contractual term of approximately 8.5 years. Of the
1,873,761 outstanding options, 589, 852 options were vested and exercisable,
with a weighted average remaining contractual life of 8.0 years and 1,283,909
options were unvested, with a weighted average remaining contractual life of 8.9
years. No options were exercised under the Company’s Incentive Plan during the
three and nine months ended September 30, 2010 and 2009.




The
following table summarizes stock option and warrant activity for the nine months
ended September 30, 2010:




Employees
                    
                    
                    Non-EmployeesWeightedWeighted
                    
                    
                    
                    
                    
                    average
                    
                    
                    
                    
                    
                    Weightedaverage
      exercise
                    
                    
                    
                    
                    
                    exercise
                    
                    
                    
                    
                    
                    averageOptions
                    
                    
                    price
                    
                    
                    Options
                    
                    
                    price
                    
                    
                    Warrants
                    
                    
                    exercise
      price
                    
                    
                    TotalOutstanding
      atDecember
      31, 2009
                    
                    
                    1,384,687
                    
                    
                    $
                    6.91
                    
                    
                    
                    127,801
                    
                    
                    $
                    10.85
                    
                    
                    
                    25,416
                    
                    
                    $
                    19.97
                    
                    
                    
                    1,537,904Granted
                    
                    
                    136,273
                    
                    
                    
                    6.01
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    2,837,452
                    
                    
                    
                    4.90
                    
                    
                    
                    2,973,725Expired
                    
                    
                    (297
                    )
                    
                    
                    117.51
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (297
                    )Forfeited
                    
                    
                    (850
                    )
                    
                    
                    4.46
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (850
                    )Outstanding
      atMarch
      31, 2010
                    
                    
                    1,519,813
                    
                    
                    $
                    6.81
                    
                    
                    
                    127,801
                    
                    
                    $
                    10.85
                    
                    
                    
                    2,862,868
                    
                    
                    $
                    5.03
                    
                    
                    
                    4,510,482Granted
                    
                    
                    217,800
                    
                    
                    
                    2.30
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    217,800Expired
                    
                    
                    
                    
                    
                    
                    -
                    
                    
                    
                    (1,237
                    )
                    
                    
                    619.00
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,237
                    )Forfeited
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -Outstanding
      atJune
      30, 2010
                    
                    
                    1,737,613
                    
                    
                    $
                    6.59
                    
                    
                    
                    126,564
                    
                    
                    $
                    10.85
                    
                    
                    
                    2,862,868
                    
                    
                    $
                    5.03
                    
                    
                    
                    4,727,045Granted
                    
                    
                    81,500
                    
                    
                    
                    2.92
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    81,500Expired
                    
                    
                    (1,916
                    )
                    
                    
                    44.00
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (1,916
                    )Forfeited
                    
                    
                    (70,000
                    )
                    
                    
                    3.23
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    -
                    
                    
                    
                    (70,000
                    )Outstanding
      atSeptember
      30, 2010
                    
                    
                    1,747,197
                    
                    
                    $
                    6.17
                    
                    
                    
                    126,564
                    
                    
                    $
                    10.85
                    
                    
                    
                    2,862,868
                    
                    
                    $
                    5.03
                    
                    
                    
                    4,736,629




Valuation
Assumptions




The
Company calculates the fair value of each equity award on the date of grant
using the Black-Scholes option pricing model. During the three months ended
September 30, 2010 and 2009, 81,500 and 131,000 stock options were granted,
respectively. During the nine months ended September 30, 2010 and 2009, 435,573
and 1,487,248 stock options were granted, respectively. The weighted average
fair value of the options granted during the three months ended September 30,
2010 and 2009 was $2.59 and $4.41, respectively. The weighted average fair value
of the options granted during the nine months ended September 30, 2010 and 2009
was $3.37 and $2.58, respectively. For three and nine months ended September 30,
2010 and 2009, the following weighted average assumptions were
utilized:


13




Three
      Months Ended
                    
                    
                    Nine
      Months Ended
                    
                    
                    Three
      Months Ended
                    
                    
                    Nine
      Months EndedSeptember
      30, 2010
                    
                    
                    September
      30, 2009Average
      risk free interest rate
                    
                    
                    2.1
                    %
                    
                    
                    2.5
                    %
                    
                    
                    2.8
                    %
                    
                    
                    2.4
                    %Expected
      life (in years)
                    
                    
                    6.1
                    
                    
                    
                    6.0
                    
                    
                    
                    5.5
                    
                    
                    
                    5.5Expected
      volatility
                    
                    
                    130
                    %
                    
                    
                    130
                    %
                    
                    
                    156
                    %
                    
                    
                    155
                    %Dividend
      yield
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %
                    
                    
                    0
                    %




The
dividend yield of zero is based on the fact that the Company has never paid cash
dividends and has no present intention to pay cash dividends. Expected
volatility is based on the historical volatility of the Company’s common shares
over the period commensurate with the expected life of the options. Expected
life in years is based on the “simplified” method as permitted by ASC 718. The
Company believes that all stock options issued under its stock option plans meet
the criteria of “plain vanilla” stock options. The risk free interest rate is
based on average rates for five and seven-year treasury notes as published by
the Federal Reserve.




8.
            Other
      Comprehensive Income (Loss)




For the
three and nine months ended September 30, 2010, the Company’s other
comprehensive loss was higher than the net loss by $650 and $1,960,
respectively, resulting from unrealized losses from the Company’s investments on
available for sale securities. For the three and nine months ended September 30,
2009, no such losses were recorded and there were no differences between the
Company’s other comprehensive loss and its net loss.




9.
            Note
      Payable




On
December 2, 2009 (Issuance Date) the Company issued to LaunchPoint a note
(LaunchPoint Note) in the principal amount of $1.0 million, with interest
at 4.5% per annum, maturing five years from the Issuance Date. Twenty percent of
the principal amount of the LaunchPoint Note, together with accrued interest,
will be converted into restricted shares of the Company’s common stock, on each
anniversary of the Issuance Date for five years. LaunchPoint’s right of
resale for each annual issuance of restricted shares will be limited to no more
than one-twelfth of such shares in each of the next 12 months with the
restrictions lifted after 12 months. The stock price used for determining
the conversion rate will be the publicly traded weighted average closing price
of the Company’s common stock for the three month period preceding the relevant
anniversary date. The Company will have the right to repurchase, at any time
prior to November 9, 2011, any outstanding balance of the LaunchPoint Note at a
15% discount. The effective interest rate on the LaunchPoint Note is 20%. As of
September 30, 2010, the current and long term portions of the note are $183,817
and $580,123, respectively, net of a total discount of $236,060.




10.
            Subsequent
      Events




The
Company has evaluated events and transactions that occurred subsequent to
September 30, 2010 through the date the financial statements were issued for
potential recognition or disclosure. We did not identify any events or
transactions that should be recognized or disclosed in the accompanying
condensed, consolidated financial statements other than the items noted
below.




On
October 19, 2010, the Company completed a private placement of common stock and
warrants to purchase common stock. Gross proceeds from the offering were
approximately $25.3 million. The Company issued an aggregate of 11,850,118
newly-issued shares of common stock at an issue price of $2.135 per share.
Additionally the Company issued warrants to purchase up to 11,850,118 additional
shares of common stock at an exercise price of $2.31 per share. The placement
agent for the transaction received a placement fee of approximately $1.0
million. In connection with the private placement, the Company agreed, subject
to certain terms and conditions, to file a registration statement under the
Securities Act covering the registration of the common stock and warrants within
30 days after the closing.




14


On
October 29, 2010 the Company received notification from the Department of
the Treasury that the application submitted by the Company requesting
certification for qualified investments under the Qualifying Therapeutic
Discovery Project Program section 48D of the Internal Revenue
Code were approved. Under this program the Company has been approved to receive
$244,479 in grant proceeds, expected to be received during the three months
ended December 31, 2010.




11.
            Recent
      Accounting Pronouncements




We have
reviewed recent accounting pronouncement for the nine months ended September 30,
2010, as compared to the recent accounting pronouncements described in the
Company’s Annual Report on Form 10-K for the year ended December 31,
2009, and have adopted or plan to adopt those that are applicable to us. We do
not expect the adoption of these pronouncements to have a material impact on our
financial position, results of operations or cash flows.




In April
2010, the FASB issued ASU 2010-17, Revenue Recognition - Milestone Method (Topic
605): Milestone Method of Revenue Recognition ("ASU 2010-17"). ASU 2010-17
provides guidance on applying the milestone method to milestone payments for
achieving specified performance measures when those payments are related to
uncertain future events. Under the consensus, entities can make an accounting
policy election to recognize arrangement consideration received for achieving
specified performance measures during the period in which the milestones are
achieved, provided certain criteria are met for the milestones to be considered
substantive. This ASU is effective on a prospective basis for research and
development milestones achieved in fiscal years, beginning on or after June 15,
2010. Early adoption is permitted; however, adoption of this guidance as of a
date other than January 1, 2011 will require the Company to apply this guidance
retrospectively effective as of January 1, 2010 and will require disclosure of
the effect of this guidance as applied to all previously reported interim
periods in the fiscal year of adoption. As the Company plans to implement ASU
No. 2010-17 prospectively, the effect of this guidance will be limited to future
transactions. The impact of this ASU is not expected to be material to the
consolidated financial statements of the Company.




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




INTRODUCTION





World
Heart Corporation and its subsidiaries are collectively referred to as
“WorldHeart” or the “Company.” The following Management Discussion and Analysis
of Financial Condition and Results of Operations (MD&A) discusses material
changes in our financial condition and results of operations and cash flows for
the three and nine months ended September 30, 2010 and September 30, 2009. Such
discussion and comments on the liquidity and capital resources should be read in
conjunction with the information contained in our audited consolidated financial
statements for the year ended December 31, 2009, prepared in accordance
with U.S. GAAP, included in our Annual Report on Form 10-K for the fiscal
year ended December 31, 2009.





The discussion and comments
contained hereunder include both historical information and forward-looking
information. The forward-looking information, which generally is information
stated to be anticipated, expected, or projected by management, involves known
and unknown risks, uncertainties and other factors that may cause the actual
results and performance to be materially different from any future results and
performance expressed or implied by such forward-looking information. Potential
risks and uncertainties include, without limitation: our need for additional
significant financing in the future;risks involved in the clinical study
of the Levacor VAD; timely enrollment of centers and additional patients in the
Levacor BTT clinical study; VAD experience and clinical expertise of the
participating centers;potential product manufacturing
issues related to our Levacor VAD, inability to recover costs and generate
revenue from our Levacor VAD BTT clinical trial,our ability to manufacture, sell and
market our products; decisions, and the timing of decisions made by health
regulatory agencies regarding approval of our products;limitations on third-party
reimbursements;costs and delays associated with
research and development, pre-clinical testing and clinicalstudiesfor our next-generation product
candidates,competition from other products and
therapies for heart failure; continued slower than anticipated destination
therapy adoption rate for VADs; our ability to obtain and enforce in a timely
manner patent and other intellectual property protection for our technology and
products; our ability to avoid, either by product design, licensing arrangement
or otherwise, infringement of third parties’ intellectual property; our ability
to enter into corporate alliances or other strategic relationships relating to
the development and commercialization of our technology and products; loss of
commercial market share to competitors due to our financial condition; our
ability to remain listed on the NASDAQ Capital Market; as well as other risks
and uncertainties set forth under the heading “Risk Factors” in ourQuarterly Reports on Form 10-Q for
the three months ended March 31, 2010 and for the three and six months ended
June 30, 2010 and in ourAnnual Report on Form 10-K for
the fiscal year ended December 31, 2009.


15


OVERVIEW




Our
business is focused on the development and sale of ventricular assist devices
(VADs), particularly our Levacor VAD (Levacor VAD or Levacor). VADs are
mechanical assist devices that supplement the circulatory function of the heart
by re-routing blood flow through a mechanical pump allowing for the restoration
of normal blood circulation. In August 2009, we received conditional approval of
our Investigational Device Exemption (IDE) submission from the U.S. Food and
Drug Administration (FDA) for the Levacor VAD to begin a Bridge-to-Transplant
(BTT) clinical study.  In January 2010, we received unconditional IDE
approval from the FDA.  The BTT study enrollment will involve
approximately 160 subjects.  The follow-up period for subjects in BTT
study is six months with the end points of heart transplant, six-month survival
on device or device removal for recovery and survival to 60 days after device
removal. To date we have enrolled fourteen subjects in the BTT study and we have
activated nine clinical centers.  In July 2010, the FDA approved the
expansion of the BTT clinical study to ten additional centers, for a total of 20
centers. We expect to complete subject enrollment in the BTT study by
approximately the first quarter 2012 with a six-month follow-up period
thereafter. Recently, technical issues have impacted availability of devices for
implant (for instance, the controller experienced a random false alarm related
to the controller reserve battery. This false alarm does not affect the
functionality of the device but did require a software revision). In addition,
funding uncertainties prior to the completion of our financing in October 2010
also slowed centers’ willingness to enroll patients in the BTT study. The
funding uncertainty is now resolved and we expect to resolve the technical
issues by the end of December 2010 which will allow us to expand the enrollment
in the BTT study. Additionally, in conjunction with continued development of the
Levacor VAD, we are sponsoring and participating in an independently ledbiocompatibility
assessment of mechanical circulatory support devices sub-study (Biomarker
Study).  We anticipate that preliminary data results related to the
Biomarker Study will be released by the investigator by mid-year
2011.  We plan to submit an IDE application to initiate a destination
therapy clinical study in the U.S. with the Levacor VAD by the second half of
2011, contingent on our ability to satisfactorily complete all regulatory
requirements.




In
addition, we, in conjunction with a consortium consisting of the University of
Pittsburgh, Children’s Hospital of Pittsburgh, Carnegie Mellon University and
LaunchPoint Technologies, Inc. (LaunchPoint) have been developing a small,
magnetically levitated, rotary pediatric VAD (PediaFlowTM). The PediaFlow is
intended for use in newborns and infants and has been primarily funded by the
National Institutes of Health (NIH). The technology embodied in the PediaFlow is
also intended to form the basis for a small, minimally invasive VAD. The
minimally invasive VAD is aimed at providing partial to full circulatory support
in an early-stage heart failure patient. We expect to be in a clinical trial
with the minimally invasive VAD by the first half of 2014.




On
October 19, 2010, we completed a private placement of common stock and warrants
to purchase common stock. Gross proceeds from the offering were approximately
$25.3 million. The Company issued an aggregate of 11,850,118 newly-issued
shares of common stock at an issue price of $2.135 per share. Additionally, the
Company issued warrants to purchase up to 11,850,118 additional shares of common
stock at an exercise price of $2.31 per share. The placement agent for the
transaction received a placement fee of approximately $1.0 million. In
connection with the private placement, the Company agreed, subject to certain
terms and conditions, to file a registration statement under the Securities
Act covering the registration of the common stock and warrants within
30 days after the closing.




On
February 4, 2010, we announced that we were part of a consortium awarded a $5.6
million, 4-year contract by the NIH to further develop the PediaFlow VAD to
clinical trial readiness.  The PediaFlow has evolved through design
and development with funding from a previous NIH contract, and supplemental
funding and technology contributions from WorldHeart. This device is now
approximately the size of an AA battery and was evaluated in a multi-month
animal experiment in 2009.




On
January 26, 2010, we completed a private placement of common stock and
warrants to purchase common stock. Net proceeds from the offering were
approximately $7.0 million. We issued an aggregate of 1,418,726
newly-issued shares of common stock and warrants to purchase up to 2,837,452
additional shares of common stock.




On
January 4, 2010, we announced that effective January 1, 2010, World
Heart Corporation changed its jurisdiction of incorporation from the federal
jurisdiction of Canada to the state of Delaware in the United States through a
planned arrangement.


16





RESULTS
OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2010
COMPAREDWITH THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2009


(United
States Dollars and shares in thousands except per share amounts)




Three
      Months Ended
                  
                  
                  Nine
      Months Ended(Unaudited)
                  
                  September 30,
                  
                  
                  September 30,2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Revenue
                  
                  $
                  724
                  
                  
                  $
                  -
                  
                  
                  $
                  1,747
                  
                  
                  $
                  5Cost
      of goods sold
                  
                  
                  (884
                  )
                  
                  
                  (25
                  )
                  
                  
                  (1,749
                  )
                  
                  
                  (78
                  )Gross
      profit (loss)
                  
                  
                  (160
                  )
                  
                  
                  (25
                  )
                  
                  
                  (2
                  )
                  
                  
                  (73
                  )Operating
      expensesSelling,
      general and administrative
                  
                  
                  1,112
                  
                  
                  
                  1,315
                  
                  
                  
                  3,341
                  
                  
                  
                  4,234Research
      and development
                  
                  
                  1,955
                  
                  
                  
                  2,557
                  
                  
                  
                  5,970
                  
                  
                  
                  7,269Restructuring
                  
                  
                  -
                  
                  
                  
                  98
                  
                  
                  
                  -
                  
                  
                  
                  349Amortization
      of intangibles
                  
                  
                  -
                  
                  
                  
                  12
                  
                  
                  
                  -
                  
                  
                  
                  108Total
      operating expenses
                  
                  
                  3,067
                  
                  
                  
                  3,982
                  
                  
                  
                  9,311
                  
                  
                  
                  11,960Operating
      loss
                  
                  
                  (3,227
                  )
                  
                  
                  (4,007
                  )
                  
                  
                  (9,313
                  )
                  
                  
                  (12,033
                  )Other
      income (expense), net
                  
                  
                  (32
                  )
                  
                  
                  (10
                  )
                  
                  
                  (6,392
                  )
                  
                  
                  (1
                  )Net
      loss applicable to common shareholders
                  
                  $
                  (3,259
                  )
                  
                  $
                  (4,016
                  )
                  
                  $
                  (15,705
                  )
                  
                  $
                  (12,034
                  )Weighted
      average number of common shares outstanding basic and
    diluted
                  
                  
                  14,731
                  
                  
                  
                  13,273
                  
                  
                  
                  14,601
                  
                  
                  
                  13,260Basic
      and diluted loss per common share
                  
                  $
                  (0.22
                  )
                  
                  $
                  (0.30
                  )
                  
                  $
                  (1.08
                  )
                  
                  $
                  (0.91
                  )





Revenue:Sales of Levacor VAD
implant kits, capital equipment and related peripheral equipment and services
accounted for the majority of our revenue during the three and nine months ended
September 30, 2010.





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





Three Months Ended September
      30,
                          
                          Nine Months Ended September
    30,2010
                          
                          
                          2009
                          
                          2010
                          
                          
                          2009$
                          
                          
                          Units
                          
                          
                          $
                          
                          Units
                          
                          $
                          
                          
                          Units
                          
                          
                          $
                          
                          UnitsLevacor
      product revenues:Implant
      kits
                          
                          $
                          650
                          
                          
                          
                          8
                          
                          
                          $
                          -
                          
                          Nil
                          
                          $
                          1,467
                          
                          
                          
                          18
                          
                          
                          $
                          -
                          
                          NilPeripherals
      and other
                          
                          
                          74
                          
                          
                          
                          
                          
                          
                          
                          -
                          
                          
                          
                          
                          280
                          
                          
                          
                          
                          
                          
                          
                          5Total
      revenue
                          
                          $
                          724
                          
                          
                          
                          
                          
                          
                          $
                          -
                          
                          
                          
                          $
                          1,747
                          
                          
                          
                          
                          
                          
                          $
                          5




17





Total
revenue for the three months ended September 30, 2010 was $724,000 compared
to zero for the three months of September 30, 2009. Revenue from Levacor
VAD implant kits sold during the three months ended September 30, 2010 was
$650,000 compared to zero for the three months ended September 30, 2009. Implant
kit revenue for the three months ended September 30, 2010 relates to eight
Levacor VADs that were sold in our BTT clinical study.  The BTT
clinical study with the Levacor VAD received an unconditional IDE from the FDA
in January 2010. Total revenue for the nine months ended September 30, 2010 was
$1,747,000 reflecting an increase of $1,742,000 compared with revenue for the
nine months ended September 30, 2009. Revenue from Levacor VAD implant kits sold
during the nine months ended September 30, 2010 was $1,467,000, an increase of
100% compared with revenue for the nine months ended September 30, 2009. Implant
kit revenue for the nine months ended September 30, 2010 relates to eighteen
VADs that were sold in our BTT clinical study.  Levacor VAD
peripherals and other revenue for the nine months ended September 30, 2010
and September 30, 2009 was $280,000 and $5,000, respectively. Revenue in 2010
relates to revenue recognized as a result of our Levacor VAD BTT clinical
study.





Cost of goods
sold: For the three months ended September 30, 2010, cost of goods sold
was $884,000 consisting of raw materials, labor, minimum annual royalties
payable to several of our collaborative partners and other costs related to the
manufacture of our Levacor VAD.  For the three months ended September
30, 2009, cost of goods sold of $25,000 consisted entirely of royalties payable
under minimum annual royalty agreements. For the nine months ended September 30,
2010, cost of goods sold was $1,749,000 consisting of raw materials, labor,
minimum annual royalties payable to several of our collaborative partners and
other costs related to the manufacture of our Levacor VAD.  For the
nine months ended September 30, 2009, cost of goods sold of $78,000 consisted
entirely of royalties payable under minimum annual royalty agreements. Cost of
goods sold as a percentage of revenue is expected to improve in the future as we
realize manufacturing efficiencies and are able to negotiate better pricing from
third party vendors as our sales and production volume increase.





Selling, general and
administrative: Selling, general and administrative expenses consist
primarily of payroll and related expenses for executives, sales, marketing,
accounting and administrative personnel. Selling expenses primarily relate to
marketing and trade show costs. Our administrative expenses include professional
fees, investor 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 September
      30,
                  
                  
                  Nine Months Ended September
    30,(Unaudited)
                  
                  2010
                  
                  
                  2009
                  
                  
                  2010
                  
                  
                  2009Selling
                  
                  $
                  176
                  
                  
                  $
                  169
                  
                  
                  $
                  494
                  
                  
                  $
                  554General
      and administrative
                  
                  
                  936
                  
                  
                  
                  1,146
                  
                  
                  
                  2,848
                  
                  
                  
                  3,680Total
                  
                  $
                  1,112
                  
                  
                  $
                  1,315
                  
                  
                  $
                  3,342
                  
                  
                  $
                  4,234





Selling
expenses for the three months ended September 30, 2010 increased by $7,000, or
4%, compared with the three months ended September 30, 2009. The increase is due
to higher personnel and severance costs ($56,000) offset by lower marketing
expenses ($21,000), office expenses ($22, 000) and stock-based compensation
expense ($6,000). For the three months ended September 30, 2010 and September
30, 2009, we recorded $15,000 and $22,000, respectively, in stock-based
compensation expense. For the nine months ended September 30, 2010, selling
expenses decreased by $60,000, or 11%, compared with the nine months ended
September 30, 2009. The decrease is due to lower personnel, office expenses and
travel and entertainment expenses ($85,000) offset by an increase in stock based
compensation ($14,000) and legal fees and professional services ($11,000). For
the nine months ended September 30, 2010 and September 30, 2009, we recorded
$69,000 and $55,000 respectively, in stock-based compensation expense. Selling
expenses are expected to increase as we ramp up of marketing
activities.




General
and administrative expenses for the three months ended September 30, 2010
decreased by $210,000, or 18%, compared with the three months ended September
30, 2009. The decrease is due to a number of factors including the reduction in
the number of general administration employees between periods which resulted in
a decrease in payroll and related benefits expenses ($60,000), a decrease in
consulting and other professional expenses ($25,000), decrease in legal fees
primarily related to the 2010 reincorporation into Delaware and restructuring
($100,000), and decrease in general office and insurance expenses ($90,000)
offset by an increase in travel ($30,000) and stock based compensation expense
($35,000). For the three months ended September 30, 2010 and September 30, 2009,
we recorded $181,000 and $146,000, respectively, in stock-based compensation
expense.





For the
nine month period ended September 30, 2010, general and administrative expense
decreased by $832,000, or 23%, compared with the nine month period ended
September 30, 2009. The decrease is primarily due to number of factors including
the reduction in the number of general administration employees between periods
which resulted in a decrease in payroll and related benefits expenses
($115,000), reduced consulting and other professional expenses ($402,000),
decrease in legal expenses related mainly to the 2010 reincorporation into
Delaware and restructuring ($400,000) and general office and insurance expenses
($160,000), offset by an increase in travel ($43,000) and an increase in stock
based compensation expense ($202,000). For the nine months ended September 30,
2010 and 2009, we recorded $551,000 and $349,000 respectively, in stock-based
compensation expense. General and administrative expenses are expected to remain
at the same level for the remaining months in 2010.


18





Research and
development:Research and development expenses consist principally of
salaries and related expenses for research personnel, consulting, prototype
manufacturing, testing, clinical studies, material purchases and regulatory
affairs incurred at our Salt Lake City and Oakland facilities.


Research
and development expenses for the three months ended September 30, 2010 decreased
by $602,000 or 24%, compared with the three months ended September 30, 2009. The
decrease between periods is primarily attributable to capitalized materials,
labor and overhead ($1,096,000) as a result of receiving IDE approval from the
FDA in August 2009 and thus beginning to produce inventory and a decrease in
research and development expenses as a result of the cost reimbursement NIH
subcontract with the University of Pittsburgh ($67,000). This decrease was
offset by an increase in payroll related costs ($321,000) resulting from
increase in clinical and manufacturing personnel, an increase in clinical
training and monitoring activities ($145,000) related to our Levacor BTT
clinical study, stock based compensation expense ($43,000) and other office
related expenses ($52,000). For the three months ended September 30, 2010 and
September 30, 2009, we recorded $164,000 and $121,000, respectively, in
stock-based compensation expense. For the nine months ended September 30, 2010,
research and development expenses decreased $1,299,000 or 18%. The decrease is
primarily attributable to capitalized materials, labor and overhead
($2,563,000), and a decrease in general office expenses in our Oakland facility
($169,000) and a decrease in research and development expenses as a result of
the cost reimbursement NIH subcontract with the University of Pittsburgh
($67,000), offset by an increase in payroll and related benefits ($700,000),
clinical training and monitoring activities ($400,000) related to our Levacor
BTT clinical study,  depreciation expense ($120,000) and stock based
compensation expense ($280,000). Research and development expenses are expected
to increase during the remainder of 2010 as we continue to develop our Levacor
VAD and continue activities on pre-clinical testing and other product
development. For the nine months ended September 30, 2010 and September 30,
2009, we recorded $546,000 and $266,000, respectively, in stock based
compensation.





Restructuring
costs: Restructuring costs for the three months ended September 30, 2010
and 2009 were zero and $98,000, respectively. Restructuring costs for the nine
months ended September 30, 2010 and 2009 were zero and $349,000
respectively. Restructuring costs in 2009 consisted primarily of the CEO
relocation benefits package and accrued termination benefits related to the
Company’s phased consolidation plan. There were no such charges recorded for the
three and nine months ended September 30, 2010.





Amortization of
intangibles:Amortization
of acquired workforce for the three months ended September 30, 2010 and 2009 was
zero and $12,000, respectively, and zero and $108,000, respectively, for the
nine months ended September 30, 2010 and 2009. The intangible asset was being
amortized on a straight-line basis over four years and became fully amortized in
August 2009.




Other income
(expense), net:Other income (expense), net, consists primarily of
interest expense, investment income, other income and loss on liquidation of a
foreign entity. Other expense, net, for the three months ended September 30,
2010 was $32,000 compared to $9,000 for the three months ended September 30,
2009. During the three months ended September 30, 2010, we recorded interest
expense of $36,000 relating to the $1.0 million LaunchPoint Note issued by us in
December 2010, consisting of $25,000 in imputed interest expense and $11,000 in
stated interest expense on the LaunchPoint Note, offset by $5,000 in investment
income on our available cash and cash equivalent and marketable security
holding. During the three months ended September 30, 2009, we recorded $300 in
interest expense and $13,000 in foreign currency exchange loss, offset by $5,000
in investment income on our available cash and cash equivalents balance. Other
expense, net, for the nine months ended September 30, 2010 was $6,392,000
compared to $1,000 for the nine months ended September 30, 2009. During the nine
months ended September 30, 2010, we recorded interest expense of $107,000
relating to the $1.0 million LaunchPoint Note, consisting of $73,000 in imputed
interest expense and $34,000 in stated interest expense on the LaunchPoint Note,
$12,000 in foreign exchange currency loss, offset by $13,000 in investment
income on our available cash, cash equivalent and marketable security balances.
During the nine months ended September 30, 2009, we recorded $1,000 in interest
expense and $20,000 in foreign exchange currency losses, offset by $19,000 in
investment income on our available cash and cash equivalent balances.
Additionally, we recorded a $6.3 million loss on liquidation of foreign entity
during the nine months ended September 30, 2010 related to World Heart
Corporation changing its jurisdiction of incorporation from the federal
jurisdiction of Canada to the state of Delaware and terminating a majority of
operations in Canada.





LIQUIDITY
AND CAPITAL RESOURCES





Historically,
we have funded losses from operations through the sale of equity and issuance of
debt instruments. Combined with revenue and investment income, these funds have
provided us with the resources to operate our business, sell and support our
products, attract and retain key personnel, fund our research and development
programs and clinical studies, and apply for and obtain the necessary regulatory
approvals.


19





At
September 30, 2010, we had cash and cash equivalents of $1.2 million and $1.1
million in available for sale investment securities totaling $2.3 million,
compared to a total of $6.1 million as of December 31, 2009. For the nine
months ended September 30, 2010, cash used in operating activities was $10.4
million, consisting primarily of the net loss for the period of $15.7 million,
offset by $6.3 million for the non-cash loss on the liquidation of foreign
entity, $1.2 million for non-cash stock compensation expense, $73,000 for
non-cash imputed interest on debt and $294,000 for amortization and
depreciation expense.  Additionally, working capital changes consisted
of cash decreases related to a $442,000 increase in trade accounts receivable
and other receivables, $22,000 increase in prepaid expenses and other current
assets, a $2.5 million increase in inventory and cash increases related to a
$336,000 increase in accrued compensation and $137,000 increase in accounts
payable and accrued liabilities. For the nine months ended September 30, 2010,
cash used in investing activities was $892,000 relating primarily to the net
purchase of marketable investment securities for $579,000 and purchase of
property and equipment for $313,000. For the nine months ended September 30,
2010, cash provided by financing activities was $7.0 million related primarily
to net proceeds from the issuance of common stock in a private placement in
January 2010.





For
the nine months ended September 30, 2009, cash used in operating activities was
$10.6  million, consisting primarily of the net loss for the
period of $12.0 million and $1,000 for realized gain or sale of property and
equipment, offset by $669,000 for non-cash stock compensation expense and
$250,000 for amortization and depreciation expense.  Additionally,
working capital changes consisted of cash decreases related to a $135,000
increase in inventory, $12,000 decrease in accounts payable and accrued
liabilities and cash increases related to a $211,000 decrease in trade accounts
receivable and other receivables, $196,000 increase in accrued
compensation, and $272,000 decrease in prepaid expenses. For the nine months
ended September 30, 2009, cash used in investing activities was $372,000 related
to the purchase of property and equipment primarily related to Levacor tooling
and manufacturing equipment. Cash provided by financing activities totaled
$189,000 and included proceeds of $192,000 from the exercise of warrants and
$2,000 from the sale of property and equipment offset by $5,000 related to
capital lease payments.





With the
addition of $24.2 million, net, raised from our private placement on October 19,
2010, we expect that our existing capital resources will be sufficient to allow
us to maintain our current and planned operations through at least 2011.
However, our actual needs will depend on numerous factors, including the
progress of our Levacor VAD clinical trial, the progress and scope of our
internally funded research and development activities and our success in
manufacturing Levacor VAD on a timely basis sufficient to meet the needs of our
clinical study. Our Levacor VAD clinical trial may be modified or
terminated for many reasons including the risk that our device demonstrates
safety issues; the risk that regulatory authorities may not approve our device
for further development or may require additional or expanded clinical studies
to be performed; and the risk that we or our suppliers may not be able to supply
sufficient quantities of our device, parts, or materials to support clinical
trial, which could lead to a disruption or cessation of the clinical
study. If any of the events occur, our actual capital needs may
substantially exceed our anticipated capital needs and we may have to
substantially modify or terminate current and planned clinical trial or postpone
conducting future clinical studies. As a result, our business may be
materially harmed, our stock price may be adversely affected, and our ability to
raise additional capital may be impaired.





We will
need to raise substantial additional funds to support our long-term research,
product development and commercialization programs. We regularly consider
various fund raising alternatives, including, for example, debt or equity
financing and merger and acquisition alternatives. We may also seek additional
funding through strategic alliances, collaborations, or license agreements and
other financing mechanisms. There can be no assurance that additional financing
will be available on acceptable terms, if at all. If adequate funds are not
available, we may be required to delay, reduce the scope of, or eliminate one or
more of our research and development programs, or to obtain funds through
arrangements with licensees or other that may require us to relinquish rights to
certain of our technologies that we by otherwise seek to develop or
commercialize on our own.





CRITICAL
ACCOUNTING POLICIES AND ESTIMATES





For a
discussion of our critical accounting polices, see “Item 7. Management’s
Discussion and Analysis of Financial Condition and Results of Operations” in our
2009 Form 10-K.





NEW
ACCOUNTING STANDARDS





Refer to
Note 11, in “Notes to Unaudited Condensed Consolidated Financial Statements” for
a discussion of new accounting standards.





OFF-
BALANCE SHEET ARRANGEMENTS





None.


20


ITEM
3.   QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





Not
Applicable.





ITEM
4.  CONTROLS AND PROCEDURES





Evaluation of disclosure controls
and procedures.    Based on their evaluation of our
disclosure controls and procedures (as defined in Rules 13a-15(e) and
15d-15(e) under the Exchange Act) as of September 30, 2010, our President and
Chief Executive Officer (principal executive officer) and our Chief Financial
Officer (principal accounting and financial officer) have concluded that our
disclosure controls and procedures are effective.





Change in Internal Control over
Financial Reporting. There were no changes in our internal control over
financial reporting during the third quarter of 2010 that materially affected,
or are reasonably likely to materially affect our internal control over
financial reporting.





PART II—OTHER INFORMATION




ITEM
1. LEGAL PROCEEDINGS




In the
normal course of business, we may be a party to legal proceedings. We are not
currently a party to any material legal proceedings, except as described in our
Annual Report on Form 10-K for the year ended December 31,
2009.




ITEM
1A. RISK FACTORS





In
addition to the information set forth in this report you should carefully
consider the risk factors discussed in Item 1A — Risk Factors in our Annual
Report on Form 10-K and risk factors discussed in Item IA-Risk Factors in our
Quarterly Report on Form 10-Q for the three months ended March 31, 2010.





We
may be unable to obtain regulatory approvals, which will prevent us from selling
our products and generating revenue.




Most
countries, including the United States, Canada and countries in Europe require
regulatory approval prior to the commercial distribution of medical devices. In
particular, implanted medical devices generally are subject to rigorous clinical
testing as a condition of approval by the FDA and by similar authorities in
Canada, Europe and other countries. The approval process is expensive and time
consuming. Non-compliance with applicable regulatory requirements can result in,
among other things, fines, injunctions, civil penalties, recall or seizure of
products, total or partial suspension of production, government refusal to grant
marketing approval for devices, withdrawal of marketing approvals and criminal
prosecution. The inability to obtain the appropriate regulatory approvals for
our products in the United States and the rest of the world will prevent us from
selling our products, which would have a material adverse effect on our
business, financial condition and results of operations.




We are
currently conducting a clinical trial under an IDE.  During the clinical
trial, we may experience unanticipated device issues or clinical outcomes,
either of which may cause us to delay or stop our clinical trial.  For
example, we are currently experiencing technical issues which have caused
enrollment in our BTT study to be slower than anticipated.  If we were
to experience device issues or unanticipated clinical outcomes, the FDA might
impose additional conditions or restrictions that could also delay or stop our
clinical trial.  Any such delays or additional restrictions could impact
our ability to receive Pre-Market Approval (PMA) approval or could cause
material delay in the time to approval, which in turn would have a material
adverse impact on our business.




The FDA
or any other regulatory authority may not act favorably or quickly in its review
of our applications, if and when made, and we may face significant difficulties
and costs obtaining such approvals that could delay or preclude us from selling
our products in the United States, Europe, Canada and elsewhere. Failure to
receive, or delays in receiving, such approvals, including the need for extended
clinical trials or additional data as a prerequisite to approval, limitations on
the intended use of our products, the restriction, suspension or revocation of
any approvals obtained or any failure to comply with approvals obtained could
have a material adverse effect on our business, financial condition and results
of operations.


21


Our
clinical trials may be subject to costly delays.




In order
to conduct clinical studies, we must generally receive an IDE approval for each
indication from the FDA. We are currently conducting a BTT clinical study for
the Levacor VAD under an IDE. During this clinical study we may experience
unanticipated device issues or clinical outcomes, either of which may cause us
to delay or stop our clinical study. The completion of any of our clinical
studies  may be delayed or halted for numerous reasons,
including:




o
            subjects may not enroll in
      clinical trials at the rate we expect and/or subjects may be lost to
      follow-up;


o
            subjects may experience adverse
      side effects or events related or unrelated to our
      products;


o
            third-party clinical
      investigators may not perform our clinical trials on our anticipated
      schedule or consistent with the clinical trial protocol and good clinical
      practices or other third-party organizations may not perform data
      collection and analysis in a timely or accurate
    manner;


o
            defects
      in our devices, product recalls, safety alerts or advisory
      notices;


o
            vendor
      supply issues, manufacturing delays, or technical challenges in the
      production of devices;


o
            the interim results of any of our
      clinical studies may be inconclusive or negative;
    and


o
            regulatory inspections of our
      clinical study centers or manufacturing facilities may require us to
      undertake corrective action or suspend or terminate our clinical trials if
      investigators find us non-compliant with regulatory
      requirements;




For
example in May 2010, we initiated a voluntary field corrective action
associated with the external in-line connector used in our Levacor VAD pump
kits. We had discovered two vendor-related issues with the connector. 
While these issues were unlikely to represent serious safety concerns and no
adverse patient consequences were reported, they, nonetheless, did not provide
the intended optimum design.  Therefore, we undertook the corrective field
action to replace the percutaneous cables and pump cable extensions for five
patients and Levacor VAD pump kits on the shelf.




If we
were to experience other device issues or unanticipated clinical outcomes, the
FDA might impose additional conditions or restrictions that could also delay or
stop our clinical trial. Any such delays or additional restrictions could impact
our ability to get our products approved or could cause material delay in the
time period for approval which, in turn, would have a material adverse impact on
our business.




We
face risks associated with our manufacturing operations, risks resulting from
dependence on third-party vendors, and risks related to dependence on sole
suppliers.




The
manufacture of our products is a complex operation involving a number of
separate processes and components. Material costs are high and certain of the
manufacturing processes involved are labor-intensive. The conduct of
manufacturing operations is subject to numerous risks, including reliance on
third-party vendors, unanticipated technological problems and delays. From time
to time, we have experienced manufacturing challenges and delays, and we may
experience manufacturing challenges and delays in the future. For example, we
are currently experiencing technical issues which have caused enrollment in our
BTT study to be slower than anticipated. Any such challenges or delays, if
significant, could negatively affect our ability to develop and deliver our
products in a timely manner, which could have a material adverse effect on our
business, including clinical trial enrollment, financial condition and results
of operations. In addition, we, or any entity manufacturing products or
components on our behalf, may not be able to comply with applicable governmental
regulations or satisfy regulatory inspections in connection with the manufacture
of our products, which would have a material or adverse effect on our business,
financial condition and results of operation. Furthermore, any of our own
manufacturing problems or those of the third-party vendors we rely on could
result in potential defects in our products, exposing us to product liability,
claims and product recalls, safety alerts or advisory notices.




We often
depend on single-source third-party vendors for several of the components used
in our products. We do not have agreements with many of such single-source
vendors and purchase these components pursuant to purchase orders placed from
time to time in the ordinary course of business. We are substantially dependent
on the ability of these vendors to provide adequate inventories of these
components on a timely basis and on favorable terms. These vendors also produce
components for certain of our competitors, as well as other large customers, and
there can be no assurance that such companies will have sufficient production
capacity to satisfy our inventory or scheduling requirements during any period
of sustained demand, or that we will not be subject to the risk of price
fluctuations and periodic delays. Although we believe that our relationships
with our vendors are satisfactory and that alternative sources for the
components we currently purchase from single-source suppliers are currently
available, the loss of the services of such vendors or substantial price
increases imposed by these vendors, in the absence of readily available
alternative sources of supply, would have a material adverse effect on us.
Failure or delay by such vendors in supplying components to us on favorable
terms could also adversely affect our operating margins and our ability to
develop and deliver our products on a timely and competitive basis, which could
have a material adverse effect on our business, financial condition and results
of operations.





22


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




None.




ITEM
3. DEFAULTS UPON SENIOR SECURITIES




None.




ITEM
4. (REMOVED AND RESERVED)







ITEM
5. OTHER INFORMATION





None.


23


ITEM
6.  EXHIBITS




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.




24




SIGNATURES




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




World Heart Corporation(Registrant)Dated:
        November 12, 2010
                /s/
      J. Alex MartinJ.
      Alex Martin, President and Chief
                  Executive
      Officer
                  (Principal
      Executive Officer)Dated:
       November 12, 2010
                /s/
      Morgan R. BrownMorgan
      R. Brown, Executive Vice President
                  and
      Chief Financial Officer
                  (Principal
      Financial and Accounting
Officer)




25