Table of Contents

 

 

 

**UNITED STATES**

**SECURITIES AND EXCHANGE**

**COMMISSION**

**WASHINGTON, DC 20549**

 

**FORM 10-Q**

**(MarkOne)**

 

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

 

**For quarterly period ended June 30, 2010**

 

**o****         TRANSITION REPORTPURSUANT TO SECTION 13 OR 15(d) OF THE EXCHANGE ACT**

 

**For the transition periodfrom       to       **

 

**Commission file number: 000-28882**

 

**WORLD HEART CORPORATION**

(Exact name of registrant as specified in its charter)

 

| **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 executiveoffices)

** **

**(801) 355-6255**

(Registrant’s telephonenumber)

 

 

(Former name, former addressand 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 or15(d) of the Securities Exchange Act of 1934 during the preceding 12months (or for such shorter period that the registrant was required to filesuch reports), and (2) has been subject to such filing requirements forthe past 90 days.  Yes x  No o

 

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

 

Indicate by check mark whether the Registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company.  See thedefinitions of “large accelerated filer” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange Act.

 

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

 

Indicate by check mark whether the Registrantis a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

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

 

The number of common shares outstanding as of August 10,2010 was 14,730,991.

 

 

 

----

Table of Contents

 

**TABLE OF CONTENTS**

 
| ** **                              | ** **                                                                                                       | **Page** |
|-----------------------------------------|------------------------------------------------------------------------------------------------------------------|----------|
| **Part I.  Financial Information** | ** **                                                                                                       |
| Item 1.                                 | Financial Statements                                                                                             |     |
|                                    | Condensed  Consolidated Balance Sheets as of June 30, 2010 and December 31,  2009                      | 3        |
|                                    | Condensed Consolidated  Statements of Operations for the three and six months ended June 30,  2010 and 2009 | 4        |
|                                    | Condensed  Consolidated Statements of Cash Flows for the six months ended June 30,  2010 and 2009           | 5        |
|                                    | Notes to Unaudited Condensed Consolidated Financial  Statements                                                  | 6        |
| Item 2.                                 | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                      | 16       |
| Item 3.                                 | Quantitative  and Qualitative Disclosures About Market Risk                                                      | 20       |
| Item 4.                                 | Controls and  Procedures                                                                                         | 20       |
|                                    |                                                                                                             |     |
|                                    |                                                                                                             |     |
| **Part II.  Other Information**    |                                                                                                             |
|                                    |                                                                                                             |     |
| Item 1.                                 | Legal Proceedings                                                                                                | 21       |
| Item 1A.                                | Risk Factors                                                                                                     | 21       |
| Item 2.                                 | Unregistered  Sales of Equity Securities and Use of Proceeds                                                     | 21       |
| Item 3.                                 | Defaults  Upon Senior Securities                                                                                 | 21       |
| Item 4.                                 | (Removed and  Reserved)                                                                                          | 21       |
| Item 5.                                 | Other Information                                                                                                | 21       |
| Item 6.                                 | Exhibits                                                                                                         | 22       |
|                                    | Signatures                                                                                                       | 23       |

 

----

Table ofContents

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**WORLD HEART CORPORATION**

**Condensed Consolidated Balance Sheets**

(UnitedStates Dollars)

 
| ** **                                                                                                                                                                                                                         | ** ** | **June 30, 2010** | ** **    | **December 31, 2009 (1)** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------|---------------|--------------------------------|------------|
| ** **                                                                                                                                                                                                                         | ** ** | **(Unaudited)**        | ** **    | ** **                     | ** ** |
| **ASSETS**                                                                                                                                                                                                                         |       |                   | ** **    | ** **                     | ** ** |
| ** **                                                                                                                                                                                                                         |       |                   | ** **    | ** **                     | ** ** |
| **Current assets**                                                                                                                                                                                                                 |       |                   | ** **    | ** **                     | ** ** |
| Cash and cash equivalents                                                                                                                                                                                                          |       | $                      | 4,833,416     |                           | $          | 5,562,670 |   |
| Marketable investment securities                                                                                                                                                                                                   |       | 1,296,690              |          | 499,417                        |       |
| Trade and other receivables, net of allowance for  doubtful accounts of $0 and $238,854 at June 30, 2010 and  December 31, 2009, respectively                                                                            |       | 440,794                |          | 18,907                         |       |
| Inventory, net of allowance for excess and  obsolete of $298,323 and $0 at June 30, 2010 and December 31, 2009,  respectively                                                                                            |       | 1,804,506              |          | 341,614                        |       |
| Prepaid expenses and other current assets                                                                                                                                                                                          |       | 353,984                |          | 271,966                        |       |
|                                                                                                                                                                                                                               |       | 8,729,390              |          | 6,694,574                      |       |
| **Long-term assets**                                                                                                                                                                                                               |       |                   | * *      | * *                       | * *   |
| Property and equipment, net                                                                                                                                                                                                        |       | 865,588                |          | 879,833                        |       |
| Other long-term assets                                                                                                                                                                                                             |       | 34,756                 |          | 36,360                         |       |
|                                                                                                                                                                                                                               |       | 900,344                |          | 916,193                        |       |
| **Total assets**                                                                                                                                                                                                                   | ** ** | **$**                  | **9,629,734** | ** **                     | **$**      | **7,610,767** | ** ** |
| * *                                                                                                                                                                                                                           | * *   | * *               | * *      | * *                       | * *   |
| **LIABILITIES AND SHAREHOLDERS’  EQUITY**                                                                                                                                                                                     |       |                   | ** **    | ** **                     | ** ** |
| ** **                                                                                                                                                                                                                         |       |                   | ** **    | ** **                     | ** ** |
| **Current liabilities**                                                                                                                                                                                                            |       |                   | ** **    | ** **                     | ** ** |
| Accounts payable and accrued liabilities                                                                                                                                                                                           |       | $                      | 1,520,985     |                           | $          | 1,522,199 |   |
| Accrued compensation                                                                                                                                                                                                               |       | 980,773                |          | 645,306                        |       |
| Note payable - short term, net                                                                                                                                                                                                     |       | 159,535                |          | 110,971                        |       |
| ** **                                                                                                                                                                                                                         |       | 2,661,293              |          | 2,297,443                      |       |
| **Long-term liabilities**                                                                                                                                                                                                          |       |                   |          |                           |       |
| Note payable, net                                                                                                                                                                                                                  |       | 580,123                |          | 580,123                        |       |
| Other long-term liabilities                                                                                                                                                                                                        |       | 83,722                 |          | 93,182                         |       |
|                                                                                                                                                                                                                               |       |                   |          |                           |       |
| **Total liabilities**                                                                                                                                                                                                              |       | 3,325,138              |          | 2,951,781                      |       |
| ** **                                                                                                                                                                                                                         | ** ** | ** **             | ** **    | ** **                     | ** ** |
| **Commitments and Contingencies**                                                                                                                                                                                                  | ** ** | ** **             | ** **    | ** **                     | ** ** |
| ** **                                                                                                                                                                                                                         | ** ** | ** **             | ** **    | ** **                     | ** ** |
| **Shareholders’ equity (deficit)**                                                                                                                                                                                            | ** ** | ** **             | ** **    | ** **                     | ** ** |
| Preferred stock $0.01 par value; 1,000,000 shares  authorized; no shares issued or outstanding                                                                                                                                     |       | **—**             |          | **—**                     |       |
| Common stock $0.001 par value; 50,000,000 shares  authorized; 14,730,991 issued and outstanding at June 30, 2010 and no  par value; unlimited shares authorized; 13,312,265 issued and outstanding at  December 31, 2009 |       | 14,731                 |          | 325,279,751                    |       |
| Additional paid-in-capital                                                                                                                                                                                                         |       | 351,463,383            |          | 18,389,635                     |       |
| Cumulative other comprehensive loss                                                                                                                                                                                                |       | (2,612                 | )             | (6,285,577                     | )          |
| Accumulated deficit                                                                                                                                                                                                                |       | (345,170,906           | )             | (332,724,823                   | )          |
| Total shareholders’ equity                                                                                                                                                                                                    |       | 6,304,596              |          | 4,658,986                      |       |
| **Total liabilities and  shareholders’ equity**                                                                                                                                                                               | ** ** | **$**                  | **9,629,734** | ** **                     | **$**      | **7,610,767** | ** ** |

 

(See accompanying notes to the condensed consolidated financialstatements)

 

----

(1)   Derived from the Company’saudited consolidated financial statements as of December 31, 2009.

 

3

----

Table of Contents

 

**WORLDHEART CORPORATION**

**Condensed Consolidated Statements of Operations**

(UnitedStates Dollars)

(Unaudited)

 
| ** **                                                                  | ** ** | **Three Months Ended June 30,** | ** **     | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|----------------|------------------------------------|------------|
| ** **                                                                  | ** ** | **2010**                             | ** **     | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Revenue**                                                                 |       | $                                    | 467,428        |                               | $          | — |   | $ | 1,023,079 |   | $ | 4,765 |   |
| **Cost of goods sold**                                                      |       | $                                    | (448,565       | )                                  | (25,000    | ) | (865,649 | ) | (53,238 | ) |
| **Gross profit (loss)**                                                     |       | 18,863                               |           | (25,000                            | )          | 157,430 |   | (48,473 | ) |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                 |           |                               |       |   |   |   |   |
| Selling, general and administrative                                         |       | 1,036,667                            |           | 1,476,008                          |       | 2,229,371 |   | 2,918,893 |   |
| Research and development                                                    |       | 1,692,334                            |           | 2,607,879                          |       | 4,014,130 |   | 4,711,810 |   |
| Restructuring costs                                                         |       | —                               |           | 198,194                            |       | — |   | 250,912 |   |
| Amortization of intangibles                                                 |       | —                               |           | 47,856                             |       | — |   | 95,712 |   |
| **Total operating expenses**                                                |       | 2,729,001                            |           | 4,329,937                          |       | 6,243,501 |   | 7,977,327 |   |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Operating loss**                                                          |       | (2,710,138                           | )              | (4,354,937                         | )          | (6,086,071 | ) | (8,025,800 | ) |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Other income (expenses)**                                                 |       |                                 |           |                               |       |   |   |   |   |
| Foreign exchange gain (loss)                                                |       | 215                                  |           | (17,691                            | )          | (12,354 | ) | (6,182 | ) |
| Investment and other income                                                 |       | 4,387                                |           | 6,033                              |       | 8,776 |   | 14,363 |   |
| Loss on liquidation of foreign entity                                       |       | —                               |           | —                             |       | (6,285,574 | ) | — |   |
| Interest expense                                                            |       | (35,798                              | )              | (361                               | )          | (70,861 | ) | (761 | ) |
| **Net loss**                                                                | ** ** | **$**                                | **(2,741,334** | **)**                              | **$**      | **(4,366,956** | **)** | **$** | **(12,446,084** | **)** | **$** | **(8,018,380** | **)** |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Weighted average number of common  shares outstanding basic and diluted** |       | 14,730,991                           |           | 13,253,964                         |       | 14,535,035 |   | 13,253,964 |   |
|                                                                        |       |                                 |           |                               |       |   |   |   |   |
| **Basic and diluted loss per common  share**                                |       | $                                    | (0.19          | )                                  | $          | (0.33 | ) | $ | (0.86 | ) | $ | (0.60 | ) |

 

(See accompanying notes to the condensed consolidated financialstatements)

 

4

----

Table of Contents

 

**WORLD HEART CORPORATION**

**Condensed Consolidated Statements of Cash Flows**

(UnitedStates Dollars)

(Unaudited)

 
| ** **                                                         | ** ** | **Six Months June 30,** | ** **    |
|--------------------------------------------------------------------|------------|------------------------------|---------------|
| ** **                                                         | ** ** | **2010**                     | ** **    | **2009** | ** ** |
|                                                               |       |                         |          |   |   |
| Net loss for the period                                            |       | $                            | (12,446,084   | ) | $ | (8,018,380 | ) |
| Adjustments to reconcile net loss to net cash used  in operations: |       |                         |          |   |   |
| Amortization and depreciation                                      |       | 227,772                      |          | 179,376 |   |
| Non-cash stock compensation expense                                |       | 806,299                      |          | 379,365 |   |
| Non-cash expense on loss on liquidation of foreign  entity         |       | 6,285,574                    |          | — |   |
| Imputed interest on debt                                           |       | 48,567                       |          | — |   |
| Realized foreign exchange (loss) gain                              |       | (372                         | )             | 8,413 |   |
| **Change in operating components of  working capital:**            |       |                         |          |   |   |
| Trade receivables                                                  |       | (421,329                     | )             | 222,617 |   |
| Prepaid expenses and other current assets                          |       | (59,889                      | )             | (43,821 | ) |
| Inventory                                                          |       | (1,462,892                   | )             | — |   |
| Accounts payable and accrued liabilities                           |       | (8,351                       | )             | (301,113 | ) |
| Accrued compensation                                               |       | 335,467                      |          | 380,594 |   |
| **Cash used in operating activities**                              | ** ** | **(6,695,238**               | **)**         | **(7,192,949** | **)** |
|                                                               |       |                         |          |   |   |
| **Investing activities**                                           |       |                         |          |   |   |
| Sale of marketable investments                                     |       | 1,460,388                    |          | — |   |
| Purchase of marketable investment securities                       |       | (2,280,267                   | )             | — |   |
| Purchase of property and equipment                                 |       | (213,532                     | )             | (167,025 | ) |
| **Cash used in investing activities**                              | ** ** | **(1,033,411**               | **)**         | **(167,025** | **)** |
|                                                               |       |                         |          |   |   |
| **Financing activities**                                           |       |                         |          |   |   |
| Issuance of common shares through private  placement, net          |       | 7,002,429                    |          | — |   |
| Capital lease repayments                                           |       | (2,805                       | )             | (3,031 | ) |
| **Cash provided by (used in)  financing activities**               | ** ** | **6,999,624**                | ** **    | **(3,031** | **)** |
| **Effect of exchange rates on cash  and cash equivalents**         | ** ** | **(229**                     | **)**         | **1,382** | ** ** |
| **Decrease in cash and cash  equivalents for the period**          | ** ** | **(729,254**                 | **)**         | **(7,361,623** | **)** |
| **Cash and cash equivalents,  beginning of the period**            | ** ** | **5,562,670**                | ** **    | **20,703,724** | ** ** |
| **Cash and cash equivalents, end of  the period**                  | ** ** | **$**                        | **4,833,416** | ** ** | **$** | **13,342,101** | ** ** |
|                                                               |       |                         |          |   |   |
| **Supplementary cash flow  information:**                          |       |                         |          |   |   |
| Interest paid on financing                                         |       | $                            | 661           |   | $ | 760 |   |
| Income taxes paid                                                  |       | $                            | 800           |   | $ | 800 |   |

 

(See accompanying notes tothe condensed consolidated financial statements)

 

5

----

Table ofContents

 

**WORLD HEART CORPORATION**

**Notesto Unaudited Condensed Consolidated Financial Statements**

 

**1.****                                     ****Nature of Operations ofthe Company**

 

World Heart Corporation, together with itssubsidiaries (collectively referred to as WorldHeart or the Company), isfocused on developing and commercializing implantable ventricular assistdevices (VADs), which are mechanical pumps that allow for the restoration ofnormal 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-generationLevacorTM VAD (Levacor VAD). In January 2010, the Company received anunconditional Investigational Device Exemption from the U.S. Food and DrugAdministration (FDA) for the Levacor VAD in a Bridge-to-Transplant (BTT)clinical study and enrolled the first patient in January 2010. InJuly 2010, the FDA approved the expansion of the BTT clinical study intoten additional centers, making a total of 20 centers that the Company canenroll into the study. The Company expects to realize cost recoveries from theuse of the Levacor VAD in the U.S. clinical studies. Such recoveries areexpected to be an important part of the Company’s overall operating cash flows.The Company is also developing a small, magnetically levitated minimallyinvasive VAD (MiVAD) aimed at providing partial circulatory support to patientsin an earlier stage of heart failure.

 

**2.****                                     ****Summary of SignificantAccounting Policies**

 

**(a)****         ****Basis of Presentation and Principles of Consolidation**

 

The condensed consolidated financial statements havebeen prepared by management in accordance with accounting principles generallyaccepted in the United States (U.S. GAAP), and include all assets, liabilities,revenues, and expenses of the Company and its wholly owned subsidiaries; WorldHeart, Incorporated (WHI) and World Heart B.V. (WHBV). All material intercompanytransactions and balances have been eliminated. These interim unauditedcondensed consolidated financial statements and notes thereto should be read inconjunction with Management’s Discussion and Analysis of Financial Conditionand Results of Operations and the audited financial statements and notesthereto included in the Company’s Annual Report on Form 10-K for the yearended December 31, 2009. Certain information required by U.S. GAAP hasbeen condensed or omitted in accordance with the rules and regulations ofthe SEC. The results for the period ended June 30, 2010 are notnecessarily indicative of the results to be expected for the entire fiscal yearended December 31, 2010 or for any future period.

 

**(b)****         ****Use of Estimates**

 

The preparation of the condensed consolidatedfinancial statements in accordance with U.S. GAAP requires management to makeestimates and assumptions that affect the reported amounts of assets andliabilities and disclosure of contingent assets and liabilities at the dates ofthe financial statements and the reported amounts of revenue and expensesduring the reporting periods. Such management estimates include allowance fordoubtful accounts, inventory reserves, income taxes, realizability of deferredtax assets, stock-based compensation, deferred revenue, warranty,restructuring, legal and clinical reserves. The Company bases their estimateson historical experience and on various other assumptions that the Companybelieves to be reasonable under the circumstances. Actual results could differfrom these estimates.

 

**(c)****         ****Cash Equivalents**

 

Cash equivalents include money market funds, debtinstruments of commercial enterprises, financial institutions and governmententities. The Company has established guidelines relative to credit ratings,diversification and maturities that are intended to mitigate risk and provideliquidity. Cash equivalents include highly liquid and highly rated investmentswith maturity periods of three months or less when purchased. The compositionand maturities are regularly monitored by management.

 

**(d)****         ****Marketable Investment Securities, FinancialInstruments and Fair Value**

 

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

 

6

----

Table ofContents

 

**WORLD HEART CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

The Company’s financial instruments are cash and cashequivalents, marketable investment securities, accounts receivable, accountspayable, accrued liabilities and notes payable. The recorded values of cash and cash equivalents, accounts receivable,accounts payable, and accrued liabilities approximate the fair values based ontheir short-term nature. The fair value of marketable investment securities isestimated based upon quoted market prices. The recorded values of notespayable, net of the discount, approximate the fair value as the interest approximatesmarket rates.

 

The Company measures certain financial marketableinvestment securities at fair value on a recurring basis. The Company’sinvestments in marketable investment securities are classified withinLevel 2 of the fair value hierarchy because they are traded in less activemarkets than public stocks but prices are obtained from readily availablepricing sources for comparable instruments.

 

**(e)****         ****Concentration of Credit Risk**

 

Financial instruments that potentially subject theCompany to significant concentrations of credit risk consist primarily of cashand cash equivalents investments, marketable investment securities and accountsreceivable. Substantially, all of the Company’s liquid cash equivalents areinvested primarily in money market funds. Additionally, the Company has limitedinvestments in marketable investment securities, primarily comprised ofcertificates of deposit. The Company had $427,536 and $0 in trade accountsreceivable as of June 30, 2010 and December 31, 2009, respectively.Beginning in 2010, with the commencement of the BTT clinical trial, theCompany’s trade accounts receivable is derived from five customers all locatedin the United States. The Company performs ongoing credit evaluations of itscustomers and generally will not require collateral. The Company maintainsreserves for potential credit losses. Write-offs during the periods presentedhave been insignificant.

 

**(f)****           ****Inventory**

 

Inventories are stated atthe lower of cost or market. Cost is determined on a first-in, first out (FIFO)method. The Company utilizes a standard costing system, which requiressignificant management judgment and estimates in determining and applyingstandard labor and overhead rates. Labor and overhead rates are estimated basedon the Company’s best estimate of annual production volumes and labor rates andhours per manufacturing process. These estimates are based on historicalexperience and budgeted expenses and production volume. Estimates are set atthe beginning of the year and updated periodically. While the Company believesstandard costs are reliable, actual production costs and volume change mayimpact inventory, costs of sales and the absorption of production overheadexpenses.

 

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

 

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

 

Prior to August 23, 2009, all costs associatedwith manufacturing the Levacor VAD and related surgical and peripheral productswere expensed as research and development costs, therefore, cost of goods soldon sales of the Levacor VAD will be lower until zero cost inventories are fullyconsumed.

 

**(g)****        ****Property and Equipment**

 

Property and equipment assets are recorded at cost.Depreciation and amortization are calculated over estimated useful livesranging from 1 to 7 years. On January 1, 2010, the Company changedits method of depreciation from the double declining method  to the straight line method using the followingrates and bases:

 
| Furniture  and fixtures                    |   | Straight-line  over 7 years              |
|--------------------------------------------|--------|------------------------------------------|
| Computer  equipment and software      |   | Straight-line  over 5 years              |
| Manufacturing  and research equipment |   | Straight-line  over 5 years              |
| Leasehold  improvements                    |   | Straight-line  ranging from 1 to 7 years |

 

The carrying value of property and equipment isassessed when factors indicating a possible impairment are present. The Companyrecords an impairment loss in the period when it is determined that thecarrying amounts may not be recoverable. The impairment loss would becalculated as the amount by which the carrying amount exceeds the undiscountedfuture cash flows from the asset.

 

7

----

Table ofContents

 

**WORLD HEART CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

**(h)****        ****Income Taxes**

 

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

 

The Company adopted the provisions of FinancialAccounting Standards Codification (ASC) 740, *Income Taxes*, on January 1, 2007. As required by ASC740, the Company recognizes the financial statement benefit of a tax positiononly after determining that the relevant tax authority would more likely thannot sustain the position following an audit. For tax positions meeting thisstandard, the amount recognized in the financial statements is the largestbenefit that has a greater than 50 percent likelihood of being realizedupon ultimate settlement with the relevant tax authority. At the adoption date,the Company applied ASC 740 to all tax positions for which the statute oflimitations remained open.

 

**(i)****           ****Revenue Recognition, Trade Receivables and Deferred Revenue**

 

The Company recognizes revenue from product sales inaccordance with ASC 605, *Revenue Recognition*.Pursuant to purchase agreements or orders, the Company ships product tocustomers based on existing agreements or orders. Revenue from product sales isonly recognized when substantially all the risks and rewards of ownership havetransferred to the customer, the selling price is fixed and collection isreasonably assured. Beginning in 2010, a majority of the Company’s productsales are made on a consignment basis and as such, pursuant to the terms of theconsignment arrangements, revenue is generally recognized on the date theconsigned product is implanted or otherwise consumed. Revenue from productsales not sold on a consignment basis is generally recognized upon customerreceipt and acceptance of the product. Beginning in 2010, revenue recognizedrelates to sales of the Levacor VAD in connection with our BTT clinical trial.

 

The significant elements of the Company’smultiple-element offerings are implant kits, peripherals, training and one-timepost-implant support for new centers. For arrangements with multiple elements,the Company recognizes revenue using the residual method as described in ASC985-605, *Revenue Recognition-Software*or ASC 605-25, *Revenue Recognition ofMultiple Element Arrangements*. Under the residual method, revenue isallocated and deferred for the undelivered elements based on relative fairvalue. The determination of fair value of the undelivered elements in multipleelements arrangements is based on the price charged when such elements are soldseparately, which is commonly referred to as vendor-specific objective-evidence(VSOE). Each element’s revenue is recognized when all of the revenuerecognition criteria are met for each of the elements.

 

Trade receivables are recorded for product sales anddo not bear interest. The Company regularly evaluates the collectability oftrade receivables. An allowance for doubtful accounts is maintained forestimated credit losses. When estimating credit losses, the Company considers anumber of factors including the aging of a customer’s account, creditworthiness of specific customers, historical trends and other information. TheCompany reviews its allowance for doubtful accounts monthly. At June 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 periodsagainst defects in material or installation workmanship. Warranty costs are basedon historical experience and estimated and recorded when the related sales arerecognized. Any additional costs are recorded when incurred or when they canreasonably be estimated.

 

The Company provides for a six month warranty relatedto the sale of its Levacor VAD system peripherals. The warranty reserve, whichis included in accounts payable and accrued liabilities, totaled $56,972 and$44,000 at June 30, 2010 and December 31, 2009, respectively.

 

**(k)****       ****Research and Development Costs**

 

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

 

**(l)****           ****Stock-Based Compensation**

 

The Company accounts for stock based compensation inaccordance with ASC 718, *Stock Compensation*,which requires the recognition of the fair value of stock compensation as anexpense in the calculation of net income (loss). The Company recognizes stockcompensation expense in the period in which the employee is required to provideservice, which is generally over the vesting period of the individual equityinstruments. Stock options issued in lieu of cash to non-employees for servicesperformed are recorded at the fair value of the options at the time they areissued and are expensed as service is provided.

 

8

----

Table ofContents

 

**WORLD HEART CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

**(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 andservices and the related freight costs as a cost of sales, product andservices. The Company’s shipping and handling costs are not significant.

 

**(n)****        ****Restructuring Expense**

 

The Company records costs and liabilities associatedwith exit and disposal activities, as defined in ASC 420, *Exit or Disposal Cost Obligations*, basedon estimates of fair value in the period the liabilities are incurred. Inperiods subsequent to initial measurement, changes to the liability aremeasured using the credit-adjusted risk-free discount rate applied in theinitial period.

 

The liability is evaluated and adjusted as appropriatefor changes in circumstances. During the three months ended June 30, 2010and 2009, the Company recorded restructuring expense of $0 and $198,194,respectively, primarily attributable to one-time termination costs relating toworkforce reduction, severance, retention and relocation. During the six monthsended June 30, 2010 and 2009, the Company recorded restructuring expenseof $0 and $250,912, respectively, primarily attributable to one-timetermination costs relating to workforce reduction, severance, retention andrelocation.  As of June 30, 2010,the accrued liability relating to restructuring charges totaled $12,087.

 

**(o)****         ****Foreign Currency Translation and Functional Currency**

 

Since January 1, 2004, the functional currency ofthe Company has been the U.S. dollar. The accumulated other comprehensive losson the balance sheet at December 31, 2009 represents the impact ofconverting to U.S. dollars from Canadian dollars prior to January 1, 2004.Effective January 1, 2010, World Heart Corporation changed itsjurisdiction of incorporation from the federal jurisdiction of Canada to thestate of Delaware in the United States through a planned arrangement andsubstantially terminated a majority of operations outside the United States. Asa result the Company recorded a loss on liquidation of foreign entity of $6.3 millionduring the six months ended June 30, 2010 which represented the othercomprehensive loss on the balance sheet at December 31, 2009. Exchangegains and losses are included in the net loss for the year.

 

**(p)****         ****Earnings per Share**

 

Basic earnings per share are computed by dividing netincome (loss) by the weighted average number of common shares outstandingduring the period presented. Diluted earnings per share are computed using theweighted average number of common shares outstanding during the periods plusthe effect of dilutive securities outstanding during the periods. For the threeand six months ended June 30, 2010 and June 30, 2009, basic earningsper share are the same as diluted earnings per share as a result of theCompany’s common stock equivalents being anti-dilutive.

 

The following reconciliation shows the anti-dilutiveshares excluded from the calculation of basic and diluted earnings (loss) percommon share attributable to the Company as of June 30, 2010 and 2009:

 
| ** **                       | ** ** | **June 30,** | ** ** |
|----------------------------------|------------|-------------------|------------|
| ** **                       | ** ** | **2010**          | ** ** | **2009** | ** ** |
|                             |       |              |       |   |   |
| Gross number of shares excluded: |       |              |       |   |   |
| Warrants                         |       | 2,862,868         |       | 84,395 |   |
| Stock options                    |       | 1,864,177         |       | 1,388,263 |   |
|                             |       | 4,727,045         |       | 1,472,658 |   |

 

9

----

Table of Contents

 

**WORLD HEART CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

**3.****                                     ****Marketable InvestmentSecurities and Fair Value**

 

The Company’s short term investments consist primarilyof investments in certificates of deposit. All investments are classified as available for sale. Marketableinvestment securities available for sale as of June 30, 2010 andDecember 31, 2009 are summarized as follows:

 
| **June 30, 2010**                 | ** ** | **Amortized Cost** | ** ** | **Gross unrealized  holding gains** | ** ** | **Gross unrealized  holding losses** | ** ** | **Fair Value** | ** ** |
|----------------------------------------|------------|--------------------|------------|-------------------------------------|------------|--------------------------------------|------------|----------------|------------|
| Certificates of deposit                |       | $                  | 1,299,302  |                                | —     |                                 | (2,612     | )              | $          | 1,296,690 |   |
| Total marketable investment securities |       | $                  | 1,299,302  |                                | $          | —                               |       | $              | (2,612     | ) | $ | 1,296,690 |   |
|                                        |            |                    |            |                                     |            |                                      |            |                |            |  |  |  |  |

 
| **December 31, 2009**             | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|------------|------------|------------|------------|
|                                   |       |       |       |       |       |       |       |       |       |
| Certificates of deposit                |       | $          | 499,417    |       | —     |       | —     |       | $          | 499,417 |   |
| Total marketable investment securities |       | $          | 499,417    |       | $          | —     |       | $          | —     |   | $ | 499,417 |   |
|                                        |            |            |            |            |            |            |            |            |            |  |  |  |  |

 

Maturitiesof marketable investment securities as of June 30, 2010 and December 31,2009 are as follows:

 
| **June 30, 2010**                 | ** ** | **Amortized Cost** | ** ** | **Fair Value** | ** ** |
|----------------------------------------|------------|--------------------|------------|----------------|------------|
| Due within one year                    |       | $                  | 1,299,302  |           | $          | 1,296,690 |   |
| Total marketable investment securities |       | $                  | 1,299,302  |           | $          | 1,296,690 |   |

 
| **December 31, 2009**             | ** ** | ** ** | ** ** | ** ** | ** ** |
|----------------------------------------|------------|------------|------------|------------|------------|
| Due within one year                    |       | $          | 499,417    |       | $          | 499,417 |   |
| Total marketable investment securities |       | $          | 499,417    |       | $          | 499,417 |   |

 

**4.****                                     ****Property and Equipment**

 

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

 
| ** **                                  | ** ** | **June 30, 2010** | ** ** |
|---------------------------------------------|------------|------------------------|------------|
| ** **                                  | ** ** | **Cost**               | ** ** | **Accumulated  Depreciation/  Amortization** | ** ** | **Net Book  Value** | ** ** |
| Furniture & fixtures               |       | $                      | 78,023     |   | $ | (32,928 | ) | $ | 45,095 |   |
| Computer equipment & software      |       | 161,654                |       | (91,553 | ) | 70,101 |   |
| Manufacturing & research equipment |       | 921,524                |       | (332,424 | ) | 589,100 |   |
| Leasehold improvements                      |       | 347,647                |       | (186,355 | ) | 161,292 |   |
|                                        |       | $                      | 1,508,848  |   | $ | (643,260 | ) | $ | 865,588 |   |

 
|                                        |       | **December 31,  2009** |       |
|---------------------------------------------|------------|-----------------------------|------------|
|                                        | ** ** | **Cost**                    | ** ** | **Accumulated  Depreciation/  Amortization** | ** ** | **Net  Book  Value** | ** ** |
| Furniture & fixtures               |       | $                           | 168,402    |   | $ | (117,552 | ) | $ | 50,850 |   |
| Computer equipment & software      |       | 630,822                     |       | (522,963 | ) | 107,860 |   |
| Manufacturing & research equipment |       | 2,566,844                   |       | (2,009,146 | ) | 557,698 |   |
| Leasehold improvements                      |       | 568,792                     |       | (405,366 | ) | 163,426 |   |
|                                        |       | $                           | 3,934,860  |   | $ | (3,055,027 | ) | $ | 879,833 |   |

 

Depreciationexpense for the three months ended June 30, 2010 and June 30, 2009was $168,839 and $43,263, respectively. Depreciation expense for the six months ended June 30, 2010 and June 30,2009 was $227,772 and $83,665, respectively. On April 1, 2010 the Companyrecorded one-time depreciation expense on assets with remaining net book valuethat had reached their respective useful life totaling $116,725. Additionally,the Company removed the cost basis and corresponding accumulateddepreciation/amortization of assets that were no longer in service.

 

10

----

Table of Contents

 

**WORLD HEART CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

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

 

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

 
| ** **       | ** ** | **June 30, 2010** | ** ** | **December 31, 2009** | ** ** |
|------------------|------------|------------------------|------------|----------------------------|------------|
| Raw materials    |       | $                      | 540,246    |                       | $          | 131,614 |   |
| Work in progress |       | 543,550                |       | 210,000                    |       |
| Finished goods   |       | 720,709                |       | —                     |       |
| Total inventory  |       | $                      | 1,804,506  |                       | $          | 341,614 |   |

 

Finished goods inventory on consignment at customersites was $255,788 and $0 at June 30, 2010 and December 31, 2009,respectively.

 

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

 

*AccountsPayable and Accrued Liabilities*

 

Accounts payable and accrued liabilities consist of the following:

 
| ** **                                     | ** ** | **June 30, 2010** | ** **    | **December 31, 2009** | ** ** |
|------------------------------------------------|------------|------------------------|---------------|----------------------------|------------|
| Accounts payable                               |       | $                      | 815,471       |                       | $          | 349,252 |   |
| Accued liabilities                             |       | 560,426                |          | 971,204                    |       |
| Accrued royalties                              |       | 88,116                 |          | 157,743                    |       |
| Accrued warranty                               |       | 56,972                 |          | 44,000                     |       |
| Total accounts payable and accrued liabilities | ** ** | **$**                  | **1,520,985** | ** **                 | **$**      | **1,522,199** | ** ** |

 

*AccruedCompensation*

 

Accrued compensationincludes 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:

 
| ** **                 | ** ** | **June 30, 2010** | ** **  | **December 31, 2009** | ** ** |
|----------------------------|------------|------------------------|-------------|----------------------------|------------|
| Accrued wages              |       | $                      | 245,685     |                       | $          | 50,090 |   |
| Accrued severance          |       | 12,087                 |        | 77,524                     |       |
| Accrued vacation           |       | 369,938                |        | 326,526                    |       |
| Accrued bonuses            |       | 353,063                |        | 191,166                    |       |
| Total accrued compensation | ** ** | **$**                  | **980,773** | ** **                 | **$**      | **645,306** | ** ** |

 

*PerformanceBonus*

 

Annually, the CompensationCommittee of the Board of Directors, in conjunction with the entire Board ofDirectors, approves the corporate goals and objectives for the year withcorresponding weighting and payout. Subsequent to each year end, typicallybefore the end of the first quarter of the following year, the CompensationCommittee reviews accomplishment of corporate goals and recommends bonuspayout, including executive officers payouts. The Board of Directors reviewsthe Compensation Committee recommendation, modifies as appropriate, andapproves the performance bonus payouts. As of June 30, 2010, accruedbonuses for the 2009 and 2010 Performance Bonus Plan were $7,170 and $345,893,respectively. The accrued bonus as of December 31, 2009 relates to the2009 Performance Bonus Plan.

 

11

----

Table of Contents

 

**WORLD HEART CORPORATION**

**Notes toUnaudited Condensed Consolidated Financial Statements (Continued)**

 

**7.****                                     ****Shareholders’ Equity**

 

Effective January 1, 2010, World HeartCorporation changed its jurisdiction of incorporation from the federaljurisdiction of Canada to the state of Delaware in the United States through aplanned arrangement. The certificate of incorporation in Delaware authorizesthe issuance of a total of 51.0 million shares, consisting of50.0 million shares of common stock and 1.0 million shares ofpreferred stock. Each share of common stock has a par value of $0.001 and eachshare of preferred stock has a par value of $0.01. As a result of this changein jurisdiction, the Company reclassified approximately $325.3 million out ofcommon stock and into additional-paid-in capital.

 

Prior to the reincorporation of the Company fromCanada to Delaware, the Company had recorded $6.3 million cumulativetranslation adjustment related to the conversion of foreign subsidiaries intothe reporting currency. As a result of the reincorporation from Canada toDelaware and subsequent liquidation of the Company’s entity in Canada, theCompany applied ASC 830, *Foreign CurrencyMatters*, and recorded a $6.3 million non-cash loss on theliquidation of foreign subsidiary in the six months ended June 30, 2010 a$6.3 million non-cash loss on the liquidation of foreign subsidiary, and wroteoff the balance of cumulative translation adjustment.

 

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

 

**Common Stock**

 

Authorized common shares of the Company consist of50.0 million shares of common stock with a par value of $0.001 per share.

** **

**Preferred Stock**

 

Authorized preferred shares of the Company consist of1.0 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, the2006 Equity Incentive Plan (Incentive Plan). The exercise price for all equityawards issued under the Incentive Plan is based on the fair market value of thecommon share price which is the closing price quoted on the NASDAQ StockExchange on the last trading day before the date of grant. The stock optionsgenerally vest over a four-year or three-year period, first year cliff vestingwith monthly vesting thereafter on the four-year awards and annually in equalportions on the three-year awards, and have a ten year life.

 

The Incentive Plan allows for the issuance ofrestricted stock awards, restricted stock unit awards, stock appreciationrights, performance shares and other stock-based awards, in addition to stockoptions. An aggregate of 2,166,667 shares are authorized for future issuanceunder the Incentive Plan. As of June 30, 2010, there are 302,490 sharesreserved for future grants under the Incentive Plan.

 

**Stock-based Compensation**

 

The Company accounts for stock based compensation inaccordance with ASC 718, *Stock BasedCompensation*, which requires the recognition of the fair value ofstock compensation as an expense in the calculation of net income. ASC 718requires that stock based compensation expense be based on awards that areultimately expected to vest. Stock based compensation for the three months andsix ended June 30, 2010 and 2009 have been reduced for estimatedforfeitures. When estimating forfeitures, voluntary termination behaviors, aswell as trends of actual option forfeitures are considered. To the extentactual forfeitures differ from the Company’s current estimates, cumulativeadjustments to stock based compensation expense are recorded.

 

Except for transactions with employees and directorsthat are within the scope of ASC 718, all transactions in which goods orservices are the consideration received for the issuance of equity instrumentsare accounted for based on the fair value of the consideration received or thefair value of the equity instruments issued, whichever is more reliablymeasurable.

 

12

----

Table ofContents

 

**WORLDHEART CORPORATION**

**Notesto Unaudited Condensed Consolidated Financial Statements****(Continued)**

 

The Company uses the Black-Scholes valuation model for estimating thefair value of stock compensation. The stock-based compensation expense for thethree and six months ended June 30, 2010 and 2009, respectively were asfollows:

 
| ** **                          | ** ** | **Three Months June 30,** | ** ** | **Six Months June 30,** | ** ** |
|-------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| **(Unaudited)**                     | ** ** | **2010**                       | ** ** | **2009**                     | ** ** | **2010** | ** ** | **2009** | ** ** |
| Selling, general and administrative |       | $                              | 184,397    |                         | $          | 160,432 |   | $ | 424,208 |   | $ | 234,950 |   |
| Research and development            |       | $                              | 153,966    |                         | $          | 115,104 |   | 382,091 |   | 144,415 |   |
| Total                               |       | $                              | 338,363    |                         | $          | 275,536 |   | $ | 806,299 |   | $ | 379,365 |   |

 

As of July 1, 2010, $3,376,113 of total unrecognized compensationcost related to stock options is expected to be recognized over a period ofapproximately 16 quarters.

 

The aggregate intrinsic value is calculated as the difference betweenthe exercise price of all outstanding options and the quoted price of theCompany’s common stock that were in the money at June 30, 2010. At June 30,2010, the aggregate intrinsic value of all outstanding options was $15,530 witha weighted average remaining contractual term of approximately nine years. Ofthe 1,864,177 outstanding options, 505,351 options were vested and exercisable,with a weighted average remaining contractual life of 8.6 years and 1,358,827options were unvested, with a weighted average remaining contractual life of9.1 years. No options were exercised under the Company’s Incentive Plan duringthe three and six months ended June 30, 2010 and 2009.

 

A summary of the status and changes the Company’s non-vested options,subject to ASC 718 calculation for the six months ended June 30, 2010 arepresented below:

 
| ** **                        | ** ** | **Shares**    | ** ** | **Weighted Average  Grant-Date Fair Value** | ** ** |
|-----------------------------------|------------|---------------|------------|---------------------------------------------|------------|
| Nonvested at January 1, 2010 |       | 1,468,948     |       | $                                           | 3.62       |   |
| Granted                           |       | 136,273       |       | 5.41                                        |       |
| Vested                            |       | (284,373      | )          | 3.26                                        |       |
| Forfeited                         |       | (850          | )          | 4.19                                        |       |
| Nonvested at March 31, 2010  |       | 1,319,998     |       | 3.88                                        |       |
| Granted                           |       | 217,800       |       | 2.07                                        |       |
| Vested                            |       | (178,971      | )          | 2.54                                        |       |
| Forfeited                         |       | —        |       | —                                      |       |
| Nonvested at June 30, 2010   | ** ** | **1,358,827** | ** ** | **$**                                       | **3.77**   | ** ** |

 

The following table summarizes stock option andwarrant activity for the six months ended June 30, 2010:

 
| ** **                            | ** ** | **Employees** | ** ** | **Non-Employees**                     | ** ** | ** **  | ** ** | ** **                             | ** ** | ** **   | ** ** |
|---------------------------------------|------------|---------------|------------|---------------------------------------|------------|-------------|------------|----------------------------------------|------------|--------------|------------|
| ** **                            | ** ** | **Options**   | ** ** | **Weighted  average exercise  price** | ** ** | **Options** | ** ** | **Weighted  average  exercise  price** | ** ** | **Warrants** | ** ** | **Weighted  average  exercise price** | ** ** | **Total** | ** ** |
| Outstanding at December 31, 2009 |       | 1,384,687     |       | $                                     | 6.91       |        | 127,801    |                                   | $          | 10.85        |       | 25,416 |   | $ | 19.97 |   | 1,537,904 |   |
| Granted                               |       | 136,273       |       | 6.01                                  |       | —      |       | —                                 |       | 2,837,452    |       | 4.90 |   | 2,973,725 |   |
| Expired                               |       | (297          | )          | 117.51                                |       | —      |       | —                                 |       | —       |       | — |   | (297 | ) |
| Forfeited                             |       | (850          | )          | 4.46                                  |       | —      |       | —                                 |       | —       |       | — |   | (850 | ) |
|                                  |       |          |       |                                  |       |        |       |                                   |       |         |       |   |   |   |   |
| Outstanding at March 31, 2010    |       | 1,519,813     |       | 6.81                                  |       | 127,801     |       | 10.85                                  |       | 2,862,868    |       | 5.03 |   | 4,510,482 |   |
| Granted                               |       | 217,800       |       | 2.30                                  |       | —      |       | —                                 |       | —       |       | — |   | 217,800 |   |
| Expired                               |       | —        |       | —                                |       | (1,237      | )          | 619.00                                 |       | —       |       | — |   | (1,237 | ) |
| Outstanding at June 30, 2010     |       | 1,737,613     |       | $                                     | 6.59       |        | 126,564    |                                   | $          | 4.91         |       | 2,862,868 |   | $ | 5.03 |   | 4,727,045 |   |

 

13

----

Table of Contents

 

**WORLDHEART CORPORATION**

**Notesto Unaudited Condensed Consolidated Financial Statements****(Continued)**

 

*Valuation Assumptions*

 

The Company calculates the fair value of each equity award on the dateof grant using the Black-Scholes option pricing model. During the three monthsended June 30, 2010 and 2009, 217,800 and 329,079 stock options weregranted, respectively. During the six months ended June 30, 2010 and 2009,354,073 and 1,356,248 stock options were granted, respectively. The weightedaverage fair value of the options granted during the three months ended June 30,2010 and 2009 was $2.07 and $2.33, respectively. The weighted average fairvalue of the options granted during the six months ended June 30, 2010 and2009 was $3.35 and $2.40, respectively. For three and six months ended June 30,2010 and 2009, the following weighted average assumptions were utilized:

* *
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|------------------------|------------|------------------------|------------|------------------------|------------|----------------------|------------|
| ** **                      | ** ** | **June 30, 2010** | ** ** | **June 30, 2009** | ** ** |
| Average risk free interest rate |       | 2.6%                   |       | 2.7%                   |       | 2.3%                   |       | 2.2%                 |       |
| Expected life (in years)        |       | 5.8                    |       | 6.2                    |       | 5.5                    |       | 5.5                  |       |
| Expected volatility             |       | 132%                   |       | 130%                   |       | 154%                   |       | 154%                 |       |
| Dividend yield                  |       | 0%                     |       | 0%                     |       | 0.0%                   |       | 0%                   |       |

 

The dividend yield of zero is based on the fact thatthe Company has never paid cash dividends and has no present intention to paycash dividends. Expected volatility is based on the historical volatility ofthe Company’s common shares over the period commensurate with the expected lifeof the options. Expected life in years is based on the “simplified” method aspermitted by ASC 718. The Company believes that all stock options issued underits stock option plans meet the criteria of “plain vanilla” stock options. Forstock options granted during the three months ended June 30, 2010, theCompany used terms of 6.08 years and 5.5 years, based on vesting terms of theindividual stock option grant. The risk free interest rate is based on averagerates for five and seven-year treasury notes as published by the Federal Reserve.

 

**8.****                                     ****Other ComprehensiveIncome (Loss)**

 

For the three and sixmonths ended June 30, 2010, the Company’s other comprehensive loss was $77and $2,535, respectively, higher than the net loss resulting from unrealizedlosses from the Company’s investments on available for sale securities. For thethree and six months ended June 30, 2009, no such losses were recorded andthere were no differences between the Company’s other comprehensive loss andits net loss.

 

**9.****                                     ****Note Payable**

 

On December 2, 2009 (Issuance Date) the Companyissued to LaunchPoint a note (LaunchPoint Note) in the principal amount of$1.0 million, with interest at 4.5% per annum, maturing five years fromthe Issuance Date. Twenty percent of the principal amount of the LaunchPointNote, together with accrued interest, will be converted into restricted sharesof the Company’s common stock, on each anniversary of the Issuance Date forfive years. LaunchPoint’s right of resale for each annual issuance ofrestricted shares will be limited to no more than one-twelfth of such shares ineach of the next 12 months with the restrictions lifted after12 months. The stock price used for determining the conversion rate willbe the publicly traded weighted average closing price of the Company’s commonstock for the three month period preceding the relevant anniversary date. TheCompany will have the right to repurchase, at any time prior toNovember 9, 2011, any outstanding balance of the LaunchPoint Note at a 15%discount. The effective interest rate on the LaunchPoint Note is 20%. As ofJune 30, 2010, the current and long term portions of the note are $159,535and $580,123, respectively, net of a total discount of $260,342.

 

**10.****                              ****Recent Accounting Pronouncements**

 

With the exception of those discussed below, therehave been no recent accounting pronouncements or changes in accountingpronouncements during the six months ended June 30, 2010, as compared tothe recent accounting pronouncements described in the Company’s Annual Reporton Form 10-K for the year ended December 31, 2009, that the Companybelieves are of significance, or potential significance to the Company basedupon current operations.

 

In October 2009, the FASB issued ASUNo. 2009-13, *Multiple-DeliverableRevenue Arrangements a Consensus of the FASB Emerging Issues Task Force*,an update to Accounting Standards Codification (ASC) Topic 605, *Revenue Recognition*.  Thisupdate requires the allocation of consideration among separatelyidentified deliverables contained within an arrangement, based on their relatedselling prices.  This update will be effective for annualreporting periods beginning January 1, 2011.  The Company iscurrently evaluating the impact of this update on its financialposition, results of operations, cash flows, and disclosures.

 

14

----

Table of Contents

 

**WORLDHEART CORPORATION**

**Notesto Unaudited Condensed Consolidated Financial Statements****(Continued)**

 

InJanuary 2010, the FASB issued ASU No. 2010-06, *Improving Disclosures about Fair Value Measurements*, anupdate to ASC Topic 820, *Fair Value Measurementsand Disclosures*. This update requires an entity to: (i) discloseseparately the amounts of significant transfers in and out of Level 1 and Level2 fair value measurements and describe the reasons for the transfers and (ii) presentseparate information for Level 3 activity pertaining to gross purchases, sales,issuances, and settlements.  This update became effective for us in thequarter ended March 31, 2010, except that the disclosure on the rollforward activities for Level 3 fair value measurements will become effectivefor us with the reporting period beginning January 1, 2011. Other thanrequiring additional disclosures, adoption of this new guidance did not have amaterial impact on the Company’s financial statements.

 

15

----

Table ofContents

 

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

 

**INTRODUCTION**

 

WorldHeart Corporation and its subsidiaries are collectively referred to as “WorldHeart”or the “Company.” The following Management Discussion and Analysis of FinancialCondition and Results of Operations (MD&A) discusses material changes inour financial condition and results of operations and cash flows for the threeand six months ended June 30, 2010 and June 30 2009. Such discussionand comments on the liquidity and capital resources should be read inconjunction with the information contained in our audited consolidatedfinancial statements for the year ended December 31, 2009, prepared inaccordance with U.S. GAAP, included in our Annual Report on Form 10-K forthe fiscal year ended December 31, 2009.

 

*The discussion and comments contained hereunderinclude both historical information and forward-looking information. Theforward-looking information, which generally is information stated to beanticipated, expected, or projected by management, involves known and unknownrisks, uncertainties and other factors that may cause the actual results andperformance to be materially different from any future results and performanceexpressed or implied by such forward-looking information. Potential risks anduncertainties include, without limitation: our need for additional significantfinancing in the future; risks involved in the clinical study of the LevacorVAD; timely enrollment of centers and additional patients in the Levacor BTTclinical study; VAD experience and clinical expertise of the participatingcenters; potential product manufacturing issues related to our Levacor VAD,inability to recover costs and generate revenue from our Levacor VAD BTTclinical trial, our ability to manufacture, sell and market our products;decisions, and the timing of decisions made by health regulatory agenciesregarding approval of our products; limitations on third-party reimbursements;  costs and delays associated with research anddevelopment, pre-clinical testing and clinical studies for our next-generationproduct candidates,   competition fromother products and therapies for heart failure; continued slower than anticipateddestination therapy adoption rate for VADs; our ability to obtain and enforcein a timely manner patent and other intellectual property protection for ourtechnology and products; our ability to avoid, either by product design,licensing arrangement or otherwise, infringement of third parties’ intellectualproperty; our ability to enter into corporate alliances or other strategicrelationships relating to the development and commercialization of ourtechnology and products; loss of commercial market share to competitors due toour financial condition; our ability to remain listed on the NASDAQ CapitalMarket; as well as other risks and uncertainties set forth under the heading “RiskFactors” in our Quarterly Report on Form 10-Q for the three months ended March 31,2010 and in our Annual Report on Form 10-K, for the fiscal year endedDecember 31, 2009.*

 

**OVERVIEW**

 

Our business is focused on the development and sale of ventricularassist devices (VADs), particularly our Levacor VAD (Levacor VAD or Levacor).VADs are mechanical assist devices that supplement the circulatory function ofthe heart by re-routing blood flow through a mechanical pump allowing for therestoration of normal blood circulation. In August 2009, we received aconditional Investigational Device Exception (IDE) from the U.S. Food and DrugAdministration (FDA) for the Levacor to begin a Bridge-to-Transplant (BTT)clinical study and in January 2010 we received an unconditional IDE fromthe FDA.  BTT clinical study enrollmentwill involve approximately 160 subjects at ten U.S. centers initially.  The follow-up period for subjects in BTTclinical trial is six months with the end points of the BTT study being hearttransplant, six month survival on device or device removal for recovery andsurvival to 60 days after device removal. To date we have enrolled ten subjectsin the BTT clinical study across four centers and expect to enroll betweenfifteen and eighteen subjects by the end of the third quarter of 2010. Wecurrently have six centers enrolled in the study to date.  In July 2010, the FDA approved theexpansion of the BTT clinical study into ten additional centers, making a totalof 20 centers that we can enroll into the study. We expect to completeenrollment in the BTT study by approximately the third quarter 2011 with a sixmonth follow-up period thereafter. We plan to file an IDE application toinitiate a destination therapy clinical study in the U.S. with the Levacor VADby the first half of 2011, contingent on our ability to obtain future financingand our ability to satisfactorily complete all regulatory requirements.

 

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

 

16

----

Table of Contents

 

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

 

On January 26, 2010, we announced that we completed a privateplacement of common stock and warrants to purchase common stock. Net proceedsfrom the offering were approximately $7.0 million. We issued an aggregateof 1,418,726 newly-issued shares of common stock and warrants to purchase up to2,837,452 additional shares of common stock.

 

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

** **

**RESULTSOF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2010 COMPARED WITHTHE THREE AND SIX MONTHS ENDED JUNE 30, 2009**

**(UnitedStates Dollars and shares in thousands except per share amounts)**

** **
| ** **                                                                  | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(Unaudited)**                                                             | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| **Revenue**                                                                 |       | $                                    | 467        |                               | $          | — |   | $ | 1,023 |   | $ | 5 |   |
| **Cost of goods sold**                                                      |       | (449                                 | )          | (25                                | )          | (866 | ) | (53 | ) |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Gross profit (loss)**                                                     |       | 19                                   |       | (25                                | )          | 157 |   | (48 | ) |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                 |       |                               |       |   |   |   |   |
| Selling, general and administrative                                         |       | 1,037                                |       | 1,476                              |       | 2,229 |   | 2,919 |   |
| Research and development                                                    |       | 1,692                                |       | 2,608                              |       | 4,014 |   | 4,712 |   |
| Restructuring                                                               |       | —                               |       | 198                                |       | — |   | 251 |   |
| Amortization of intangibles                                                 |       | —                               |       | 48                                 |       | — |   | 96 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Total operating expenses**                                                |       | 2,729                                |       | 4,330                              |       | 6,243 |   | 7,978 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Operating loss**                                                          |       | (2,710                               | )          | (4,355                             | )          | (6,086 | ) | (8,026 | ) |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Other income (expense), net**                                             |       | (31                                  | )          | (12                                | )          | (6,360 | ) | 8 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Net loss applicable to common  shareholders**                             |       | $                                    | (2,741     | )                                  | $          | (4,367 | ) | $ | (12,446 | ) | $ | (8,018 | ) |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Weighted average number of common  shares outstanding basic and diluted** |       | 14,731                               |       | 13,254                             |       | 14,535 |   | 13,254 |   |
|                                                                        |       |                                 |       |                               |       |   |   |   |   |
| **Basic and diluted loss per common  share**                                |       | $                                    | (0.19      | )                                  | $          | (0.33 | ) | $ | (0.86 | ) | $ | (0.60 | ) |

 

***Revenue****: *Sales of Levacor VAD implant kits, capitalequipment and related peripheral equipment and services accounted for themajority of our revenue during the three and six months ended June 30,2010.

 

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

 
| ** **                | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|---------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| ** **                | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
| ** **                | ** ** | **$**                                | ** ** | **Units**                          | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
| Levacor product revenues: |       |                                 |       |                               |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Implant kits              |       | $                                    | 413        |                               | 5          |   | $ | — |   | Nil |   | $ | 818 |   | 10 |   | $ | — |   | Nil |   |
| Peripherals and other     |       | 54                                   |       |                               |       | — |   |   |   | 205 |   |   |   | 5 |   |   |   |
| Total revenue             |       | $                                    | 467        | ** **                         | ** ** | ** ** | **$** | **—** | ** ** | ** ** |   | $ | 1,023 | ** ** | ** ** |   | $ | 5 | ** ** | ** ** | ** ** |
|                           |            |                                      |            |                                    |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

17

----

Table of Contents

 

Totalrevenue for the three months ended June 30, 2010 was $467,000 compared tozero for the three months of June 30, 2009. Revenue from Levacor VADimplant kits sold during the three months ended June 30, 2010 was $413,000compared to zero for the three months ended June 30, 2009. Revenue in 2010relates to five Levacor VADs that were sold during the three months ended June 30,2010 in our BTT clinical study.  The BTTclinical study with the Levacor VAD received an unconditional IDE from the FDAin January 2010. Levacor VAD peripherals and other revenue for the threemonths ended June 30, 2010 and June 30, 2009 was $54,000 and zero,respectively. Revenue in 2010 relates to revenue recognized as a result of ourLevacor VAD BTT clinical study.  Totalrevenue for the six months ended June 30, 2010 was $1,023,000 reflectingan increase of $1,018,000 compared with revenue for the six months ended June 30,2009. Revenue from Levacor VAD implant kits sold during the six months ended June 30,2010 was $818,000, an increase of 100% compared with revenue for the six monthsended June 30, 2009. Revenue in 2010 relates to ten Levacor VADs that weresold during the six months ended June 30, 2010 in our BTT clinical study.Levacor VAD peripherals and other revenue for the six months ended June 30,2010 and June 30, 2009 was $205,000 and $5,000, respectively. Revenue in2010 relates to revenue recognized as a result of our Levacor VAD BTT clinicalstudy.

 

***Cost of goodssold:***For the three months ended June 30,2010, cost of goods sold was $448,000 consisting of raw materials, labor,minimum annual royalties payable to several of our collaborative partners andother costs related to the manufacture of our Levacor VAD.  For thethree months ended June 30, 2009, cost of goods sold of $25,000, consistedentirely of royalties payable under minimum annual royalty agreements.For the six months ended June 30, 2010, cost of goods sold was $866,000consisting of raw materials, labor, minimum annual royalties payable to severalof our collaborative partners and other costs related to the manufacture of ourLevacor VAD.  For the six months ended June 30, 2009, cost of goods sold of$53,000 consisted entirely of royalties payable under minimum annual royalty agreements.Cost of goods sold as a percentage of revenue is expected to improve in thefuture as we realize manufacturing efficiencies and are able to negotiatebetter pricing from third party vendors as our sales and production volumeincrease.

 

***Selling******, general and administrative:***Selling, general and administrative expenses consist primarily ofpayroll and related expenses for executives, sales, marketing, accounting andadministrative personnel. Selling expenses primarily relate to marketing andtrade show costs. Our administrative expenses include professional fees,investor communication expenses, insurance premiums, public reporting costs andgeneral corporate expenses.

 

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

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|--------------------------------------|------------|------------------------------------|------------|
| **(Unaudited)**            | ** ** | **2010**                             | ** ** | **2009**                           | ** ** | **2010** | ** ** | **2009** | ** ** |
|                       |       |                                 |       |                               |       |   |   |   |   |
| Selling                    |       | $                                    | 129        |                               | $          | 237 |   | $ | 318 |   | $ | 385 |   |
| General and administrative |       | 908                                  |       | 1,239                              |       | 1,911 |   | 2,534 |   |
| Total                      |       | $                                    | 1,037      |                               | $          | 1,476 |   | $ | 2,229 |   | $ | 2,919 |   |

 

Sellingexpenses for the three months ended June 30, 2010 decreased by $108,000,or 45%, compared with the three months ended June 30, 2009. The decreaseis due to lower personnel costs ($60,000) including related payroll benefitscost, and lower consulting expenses ($15,000). For the three months ended June 30,2010 and June 30, 2009, we recorded $21,000 and $27,000, respectively, instock-based compensation expense. For the six months ended June 30, 2010,selling expenses decreased by $67,000, or 17%, compared with the six monthsended June 30, 2009. The decrease is due to lower personnel costs($75,000) including payroll and benefit costs and lower consulting expenses($15,000), offset by an increase in marketing development expenses due toincreased marketing initiatives ($17,000) and stock based compensation expense($22,000). For the six months ended June 30, 2010 and June 30, 2009,we recorded $54,000 and $32,000 respectively, in stock-based compensationexpense. Selling expenses are expected to increase with ramp up of marketingdevelopment activities.

 

Generaland administrative expenses for the three months ended June 30, 2010decreased by $331,000, or 27%, compared with the three months ended June 30,2009. The decrease is due to a reduction in the number of generaladministration employees between periods which resulted in a decrease inpayroll and related benefits expenses ($100,000) and a decrease in consulting,legal, and other professional expenses ($250,000) primarily related to the 2009consolidation and restructuring, offset by an increase in stock basedcompensation expense ($30,000). For the three months ended June 30, 2010and June 30, 2009, we recorded $164,000 and $134,000, respectively, instock-based compensation expense.

 

Forthe six month period ended June 30, 2010, general and administrativeexpense decreased by $623,000, or 27%, compared with the six month period endedJune 30, 2009. The decrease is primarily due to reduced consulting andlegal expenses ($575,000) mainly related to the 2009 consolidation andrestructuring, and a decrease in general office and insurance expense($220,000), offset by an increase in stock based compensation expense($168,000). For the six months ended June 30, 2010 and 2009, we recorded$371,000 and $203,000 respectively, in stock-based compensation expense.General and administrative expenses are expected to remain at the same levelfor the remaining months in 2010.

 

18

----

Table ofContents

 

***Research and development:***Research anddevelopment expenses consist principally of salaries and related expenses forresearch personnel, consulting, prototype manufacturing, testing, clinicalstudies, material purchases and regulatory affairs incurred at our Salt LakeCity and Oakland facilities.

 

Researchand development expenses for the three months ended June 30, 2010 decreased$916,000 or 35%, compared with the three months ended June 30, 2009. Thedecrease between periods is primarily attributable to capitalized materials,labor and overhead of $1,270,000 as a result of receiving IDE approval from theFDA and thus beginning to produce inventory and a decrease in research expensesrelated to 2009 research and licensing agreements with certain partners($100,000), offset by an increase in payroll related costs ($90,000) resultingfrom hiring of additional clinical and manufacturing personnel, clinicalsupport ($145,000), depreciation expense ($100,000) and stock basedcompensation expense ($39,000). For the three months ended June 30, 2010 andJune 30, 2009, we recorded $154,000 and $115,000, respectively, in stock-basedcompensation expense. For the six months ended June 30, 2010, research anddevelopment expenses decreased by $698,000, or 15%. The decrease is primarilyattributable to capitalized materials, labor and overhead of $1,558,000,decrease in research expense related to the 2009 research and licensing agreementswith certain partners ($70,000), offset by an increase in payroll and relatedbenefits ($365,000), clinical support ($210,000), depreciation expense($120,000) and stock based compensation expense ($238,000). Research anddevelopment expenses are expected to increase during the remainder of 2010 aswe continue to develop our Levacor VAD and continue activities on pre-clinicaltesting and other product development.

 

***Restructuring costs:*** Restructuringcosts for the three months ended June 30, 2010 and 2009 were zero and $198,000,respectively. Restructuring costs for the six months ended June 30, 2010 and2009 were zero and $251,000, respectively. Restructuring costs in 2009consisted primarily of the CEO relocation benefits package and accrued terminationbenefits related to the Company’s phased consolidation plan. There were no suchcharges recorded for the three and six month periods ended June 30, 2010.

 

***Amortization of intangibles:***Amortization ofacquired workforce for the three months ended June 30, 2010 and 2009 was zeroand $48,000, respectively, and zero and $96,000, respectively, for the sixmonths ended June 30, 2010 and 2009. The intangible asset was being amortizedon a straight-line basis over four years and became fully amortized in August 2009.

*** ***

***Other income (expenses), 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 June 30, 2010 was $31,000 compared to $12,000 forthe three months ended June 30, 2009. During the three months ended June 30,2010, we recorded interest expense of $36,000 relating to the $1.0 millionLaunchPoint Note issued by us in December 2010, consisting of $25,000 in imputedinterest expense and $11,000 in stated interest expense on the LaunchPointNote. During the three months ended June 30, 2009, we recorded $400 in interestexpense and $18,000 in unrealized foreign exchange, offset by $6,000 ininvestment income on our available cash and cash equivalents balance. Otherexpense, net, for the six months ended June 30, 2010 was $74,000 compared toother income, net, of $7,000 for the six months ended June 30, 2009. During thesix months ended June 30, 2010, we recorded interest expense of $71,000relating to the $1.0 million LaunchPoint Note, consisting of $50,000 in imputedinterest expense and $21,000 in stated interest expense on the LaunchPoint Noteand 12,000 in unrealized foreign exchange currency loss, offset by $9,000 ininvestment income on our available cash and cash equivalents balance. Duringthe six months ended June 30, 2009, we recorded $800 in interest expense and$6,000 in foreign exchange currency losses, offset by $18,000 in investmentincome on our available cash and cash equivalent balances. Additionally, werecorded a $6.3 million loss on liquidation of foreign entity during the sixmonths ended June 30, 2010 related to World Heart Corporation changing itsjurisdiction of incorporation from the federal jurisdiction of Canada to thestate 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 issuanceof debt instruments. Combined with revenue and investment income, these fundshave provided us with the resources to operate our business, sell and supportour products, attract and retain key personnel, fund our research anddevelopment programs and clinical studies, and apply for and obtain thenecessary regulatory approvals.

 

AtJune 30, 2010, we had cash and cash equivalents of $4.8 million and $1.3million in available for sale investment securities totaling $6.1 millioncompared to a total of $6.1 million as of December 31, 2009. For the sixmonths ended June 30, 2010, cash used in operating activities was $6.7 million,consisting primarily of the net loss for the period of $12.4 million, offset by$6.3 million for non-cash loss on liquidation of foreign entity,  $806,000 for non-cash stock compensationexpense, $49,000 for non-cash imputed interest on debt and $228,000 foramortization and depreciation expense. Additionally, working capital changes consisted of cash decreasesrelated to a $421,000 increase in trade accounts receivable and otherreceivables, $60,000 increase in 

 

19

----

Table of Contents

 

prepaidexpenses and other current assets, a $1.5 million increase in inventory and a$8,000 decrease in accounts payable and accrued liabilities, and cash increasesrelated to a $335,000 increase in accrued compensation.  For the six months ended June 30, 2010, cashused in investing activities was $1.0 million relating primarily to thepurchase of marketable investment securities and cash provided by financingactivities was $7.0 million related to net proceeds from the issuance of commonstock in a private placement.

 

Forthe six months ended June 30, 2009, cash used in operating activities was$7.2  million, consisting primarily ofthe net loss for the period of $8.0 million, offset by $379,000 for non-cashstock compensation expense and $179,000 for amortization and depreciationexpense.  Additionally, working capitalchanges consisted of cash decreases related to a $44,000 increase in prepaidexpenses and other current assets and $301,000 increase in accounts payable andaccrued liabilities, and cash increases related to a $223,000 decrease in tradeaccounts receivable and other receivables, and a $381,000 increase in accruedcompensation. For the six months ended June 30, 2009, cash used in investingactivities was $167,000 related to the purchase of property and equipment andcash used in financing activities was $3,000 related to capital lease payments.

 

Weexpect that our existing capital resources will be sufficient to allow us tomaintain our current and planned operations through at least 2010. However, ouractual needs will depend on numerous factors, primarily the progress and scopeof our internally funded research and development activities and our success inmanufacturing Levacor VAD on a timely basis sufficient to meet the needs of ourclinical study. Our Levacor VAD clinical trial may be modified or terminatedfor many reasons including the risk that our device demonstrates safety issues;the risk that regulatory authorities may not approve our device for furtherdevelopment or may require additional or expanded clinical studies to beperformed; and the risk that we or our suppliers may not be able to supplysufficient quantities of our device, parts, or materials to support clinicaltrial, which could lead to a disruption or cessation of the clinical study. Ifany of the events occur, our actual capital needs may substantially exceed ouranticipated capital needs and we may have to substantially modify or terminatecurrent and planned clinical trial or postpone conducting future clinicalstudies. As a result, our business may be materially harmed, our stock pricemay be adversely affected, and our ability to raise additional capital may beimpaired.

 

Wewill need to raise substantial additional funds to support our long-termresearch, product development and commercialization programs. We regularly considervarious fund raising alternatives, including, for example, debt or equityfinancing and merger and acquisition alternatives. We may also seek additionalfunding through strategic alliances, collaborations, or license agreements andother financing mechanisms. There can be no assurance that additional financingwill be available on acceptable terms, if at all. If adequate funds are notavailable, we may be required to delay, reduce the scope of, or eliminate oneor more of our research and development programs, or to obtain funds througharrangements with licensees or other that may require us to relinquish rightsto certain of our technologies that we by otherwise seek to develop orcommercialize on our own.

 

**CRITICAL ACCOUNTING POLICIES AND ESTIMATES**

 

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

 

**NEW ACCOUNTING STANDARDS**

 

Refer to Note 10, in “Notes to UnauditedCondensed Consolidated Financial Statements” for a discussion of new accountingstandards.

 

**OFF- BALANCE SHEETARRANGEMENTS**

 

None.

 

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

 

Not Applicable.

 

**ITEM 4.  CONTROLS AND PROCEDURES**

 

*Evaluationof disclosure controls and procedures.*    Based on their evaluation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-15(e) underthe Exchange Act) as of June 30, 2010, our President and Chief ExecutiveOfficer (principal executive officer) and our Chief Financial Officer(principal accounting and financial officer) have concluded that our disclosurecontrols and procedures are effective at the reasonable assurance level.

 

20

----

Table of Contents

 

*Change inInternal Control over Financial Reporting*. There were no changes in our internalcontrol over financial reporting during the second quarter of 2010 that materially affected, or arereasonably likely to materially affect our internal control over financialreporting, except for implementation of a new general ledger and enterpriseresource planning (ERP) system, which is expected to have a favourable impacton our controls over a multi-year period. At the implementation,management evaluated the general ledger and ERP system and believes that theyprovide the necessary and appropriate internal controls over financialreporting.

 

**PART II—OTHERINFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

Inthe normal course of business, we may be a party to legal proceedings. We arenot currently a party to any material legal proceedings, except as described inour Annual Report on Form 10-K for the year ended December 31, 2009.

 

**ITEM 1A. RISK FACTORS**

 

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

 

**ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES ANDUSE OF PROCEEDS**

 

None.

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

None.

 

**ITEM 4. (REMOVED AND RESERVED)**

 

**ITEM 5. OTHER INFORMATION**

 

None.

 

21

----

Table of Contents

 

**ITEM 6.  EXHIBITS**

 
| Exhibit 10.1 |   | Letter  of Agreement with John Woodard (incorporated by reference to Exhibit 99.1  to the Corporation’s Form 8-K dated March 3, 2010 (Commission File  No. 000-28882)). |
|-------------------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|              |   |                                                                                                                                                                                             |
| Exhibit 31.1 |   | Certification  of Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                   |
|              |   |                                                                                                                                                                                             |
| Exhibit 31.2 |   | Certification  of Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                   |
|              |   |                                                                                                                                                                                             |
| Exhibit 32.1 |   | Certification  of Principal Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.                                                                   |
|              |   |                                                                                                                                                                                             |
| Exhibit 32.2 |   | Certification  of Principal Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.                                                                   |

 

22

----

Table ofContents

 

**SIGNATURES**

 

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

 
|                           | World Heart Corporation                                                                                              |
|--------------------------------|----------------------------------------------------------------------------------------------------------------------|
|                           | (Registrant)                                                                                                         |
|                           |                                                                                                                 |
|                           |                                                                                                                 |
| Dated:    August 11, 2010 | /s/ J. Alex Martin                                                                                                   |
|                           | J. Alex Martin, President and Chief  Executive Officer  (Principal Executive Officer)                                |
|                           |                                                                                                                 |
|                           |                                                                                                                 |
| Dated:   August 11, 2010  | /s/ Morgan R. Brown                                                                                                  |
|                           | Morgan R. Brown, Executive Vice President  and Chief Financial Officer  (Principal Financial and Accounting Officer) |

 

23

----