**Table of Contents**

** **

 

** **

**UNITED STATESSECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,DC 20549**

** **

**FORM 10-Q**

** **

**(Mark One)**

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

 

**For quarterly period ended June 30****,2008**

 

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

 

**For the transition periodfrom       to**

 

**Commission filenumber:  000-28882**

 

**WORLD HEART CORPORATION**

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

 

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

 

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

(Addressof principal executive offices)

 

**(510)563-5000**

(Issuer’stelephone number)

 

 (Former name, former address andformer fiscal year, if changed since last report) **N/A**

 

Check whether the issuer (1) filedall reports required to be filed by Section 13 or 15(d) of theExchange Act during the past 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.      Yesx    Noo

 

Indicate by check markwhether the Registrant is a large accelerated filer, an accelerated filer, anon-accelerated filer, or a smaller reporting company.  See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act.  (Check one):

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

 

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

Yes o No x

 

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

The number of common shares outstanding as of August 13,2008 was 397,530,124.

 

Transitional Small Business Disclosure Format(Check one):      Yes o    No x

 

 

 

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Table of Contents

 

**TABLE OF CONTENTS**

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

 

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Table ofContents

 

**PART I—FINANCIAL INFORMATION**

 

**ITEM 1.  FINANCIAL STATEMENTS.**

 

**WORLD HEART CORPORATION**

## **Condensed Consolidated Balance Sheets**

(United States Dollars)

(Unaudited)

 
| ** **                                                                                                                                                          | ** ** | **June 30, 2008** | ** **    | **December 31, 2007(1)** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------|---------------|------------------------------------|------------|
| **ASSETS**                                                                                                                                                          | ** ** | ** **                  | ** **    | ** **                         | ** ** |
| **Current assets**                                                                                                                                                  | ** ** | ** **                  | ** **    | ** **                         | ** ** |
| Cash and cash equivalents                                                                                                                                           |       | $                           | 548,767       |                               | $          | 664,504 |   |
| Trade and other receivables, net                                                                                                                                    |       | 198,610                     |          | 175,170                            |       |
| Inventory, net                                                                                                                                                      |       | 266,702                     |          | 864,314                            |       |
| Prepaid expenses                                                                                                                                                    |       | 309,284                     |          | 191,464                            |       |
|                                                                                                                                                                |       | 1,323,363                   |          | 1,895,452                          |       |
| **Long-term assets**                                                                                                                                                | * *   | * *                    | * *      | * *                           | * *   |
| Property and equipment, net                                                                                                                                         |       | 710,380                     |          | 808,383                            |       |
| Intangible assets, net                                                                                                                                              |       | 203,628                     |          | 299,340                            |       |
| Other long-term assets                                                                                                                                              |       | 156,889                     |          | 244,420                            |       |
|                                                                                                                                                                |       | 1,070,897                   |          | 1,352,143                          |       |
| **Total assets**                                                                                                                                                    | ** ** | **$**                       | **2,394,260** | ** **                         | **$**      | **3,247,595** | ** ** |
| * *                                                                                                                                                            | * *   | * *                    | * *      | * *                           | * *   |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                                                                                       | ** ** | ** **                  | ** **    | ** **                         | ** ** |
| **Current liabilities**                                                                                                                                             | ** ** | ** **                  | ** **    | ** **                         | ** ** |
| Accounts payable and accrued liabilities                                                                                                                            |       | $                           | 2,448,869     |                               | $          | 1,938,531 |   |
| Accrued site restoration                                                                                                                                            |       | 11,395                      |          | 31,000                             |       |
| Accrued compensation                                                                                                                                                |       | 1,357,901                   |          | 1,318,091                          |       |
| Deferred revenue                                                                                                                                                    |       | 1,582                       |          | 50,618                             |       |
|                                                                                                                                                                |       | 3,819,747                   |          | 3,338,240                          |       |
| **Non-current liabilities**                                                                                                                                         |       |                        |          |                               |       |
| Convertible bridge notes payable                                                                                                                                    |       | 1,000,000                   |          | —                             |       |
| Convertible debenture                                                                                                                                               |       | 5,000,000                   |          | 1,000,000                          |       |
|                                                                                                                                                                |       | 6,000,000                   |          | 1,000,000                          |       |
|                                                                                                                                                                |       |                        |          |                               |       |
| **Total liabilities**                                                                                                                                               | ** ** | **$**                       | **9,819,747** | ** **                         | **$**      | **4,338,240** | ** ** |
| ** **                                                                                                                                                          | ** ** | ** **                  | ** **    | ** **                         | ** ** |
| **Shareholders’ equity (deficit)**                                                                                                                             | ** ** | ** **                  | ** **    | ** **                         | ** ** |
| Common stock, no par value, 11,530,124 shares issued and outstanding  at June 30, 2008 and 11,507,275 shares issued and outstanding at  December 31, 2007 |       | 290,769,095                 |          | 290,750,131                        |       |
| Additional paid-in-capital                                                                                                                                          |       | 13,315,904                  |          | 5,142,339                          |       |
| Cumulative other comprehensive income                                                                                                                               |       | (6,285,577                  | )             | (6,285,577                         | )          |
| Accumulated deficit                                                                                                                                                 |       | (305,224,909                | )             | (290,697,538                       | )          |
| Total shareholders’ equity (deficit)                                                                                                                           |       | (7,425,487                  | )             | (1,090,645                         | )          |
| **Total liabilities and shareholders’ equity  (deficit)**                                                                                                      | ** ** | **$**                       | **2,394,260** | ** **                         | **$**      | **3,247,595** | ** ** |

 

----

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

 

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

 

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## **Table of Contents**

 

## **WORLD HEART CORPORATION**

## **Condensed Consolidated Statements of Operations**

(United States Dollars)

(Unaudited)

 
| ** **                                                                  | ** ** | **Three Months Ended June 30,** | ** **     | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|-----------------------------------------------------|----------------|---------------------------------------------------|------------|
| ** **                                                                  | ** ** | **2008**                                            | ** **     | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                                        |       |                                                |           |                                              |       |   |   |   |   |
| **Revenue**                                                                 |       | $                                                   | 535,534        |                                              | $          | 848,594 |   | $ | 1,171,530 |   | $ | 1,696,309 |   |
| **Cost of goods sold**                                                      |       | (286,312                                            | )              | (823,068                                          | )          | (686,431 | ) | (1,891,832 | ) |
| **Gross profit**                                                            |       | 249,222                                             |           | 25,526                                            |       | 485,099 |   | (195,523 | ) |
|                                                                        |       |                                                |           |                                              |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                                |           |                                              |       |   |   |   |   |
| Selling, general and administrative                                         |       | 1,204,899                                           |           | 1,457,173                                         |       | 2,405,191 |   | 3,002,644 |   |
| Research and development                                                    |       | 1,932,738                                           |           | 3,135,944                                         |       | 4,425,185 |   | 5,004,966 |   |
| Clinical and marketing support                                              |       | —                                              |           | —                                            |       | 6,478,619 |   | — |   |
| Amortization of intangibles                                                 |       | 47,856                                              |           | 47,856                                            |       | 95,712 |   | 95,712 |   |
| **Total operating expenses**                                                |       | 3,185,493                                           |           | 4,640,973                                         |       | 13,404,707 |   | 8,103,322 |   |
|                                                                        |       |                                                |           |                                              |       |   |   |   |   |
| **Operating loss**                                                          |       | (2,936,271                                          | )              | (4,615,447                                        | )          | (12,919,608 | ) | (8,298,845 | ) |
|                                                                        |       |                                                |           |                                              |       |   |   |   |   |
| **Other income (expenses)**                                                 |       |                                                |           |                                              |       |   |   |   |   |
| Unrealized foreign exchange gain (loss)                                     |       | (4,921                                              | )              | (4,021                                            | )          | (10,516 | ) | 131,005 |   |
| Investment and other income (loss)                                          |       | (5,465                                              | )              | 139,814                                           |       | 17,831 |   | 258,198 |   |
| Gain on disposal of property and equipment                                  |       | —                                              |           | 2,973                                             |       | — |   | 2,973 |   |
| Interest expense                                                            |       | (103,016                                            | )              | —                                            |       | (1,615,078 | ) | — |   |
| **Net loss**                                                                | ** ** | **$**                                               | **(3,049,673** | **)**                                             | **$**      | **(4,476,681** | **)** | **$** | **(14,527,371** | **)** | **$** | **(7,906,669** | **)** |
|                                                                        |       |                                                |           |                                              |       |   |   |   |   |
| **Weighted average number of common shares  outstanding basic and diluted** |       | 11,529,130                                          |           | 11,507,275                                        |       | 11,518,323 |   | 11,507,275 |   |
|                                                                        |       |                                                |           |                                              |       |   |   |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                                   | (0.26          | )                                                 | $          | (0.39 | ) | $ | (1.26 | ) | $ | (0.69 | ) |

 

(The accompanying notes arean integral part of these condensed consolidated financial statements.)

 

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**WORLD HEART CORPORATION**

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

(United States Dollars)

(Unaudited)

 
| ** **                                                           | ** ** | **Six Months Ended June 30,** | ** **  |
|----------------------------------------------------------------------|------------|---------------------------------------------------|-------------|
| ** **                                                           | ** ** | **2008**                                          | ** **  | **2007** | ** ** |
| **CASH FLOWS FROM (USED IN)**                    |       |                                              |        |   |   |
| **Operating activities**                                             |       |                                              |        |   |   |
| Net loss for the period                                              |       | $                                                 | (14,527,371 | ) | $ | (7,906,669 | ) |
| Adjustments to reconcile net loss to net cash used in operations:    |       |                                              |        |   |   |
| Amortization and depreciation                                        |       | 239,175                                           |        | 205,614 |   |
| (Gain) loss on disposal of property and equipment                    |       | —                                            |        | (2,973 | ) |
| Write down of property and equipment                                 |       | —                                            |        | 213,593 |   |
| Write down of inventory                                              |       | 256,172                                           |        | 425,000 |   |
| Non-cash expense on stock options                                    |       | 154,086                                           |        | 169,177 |   |
| Non-cash interest on debt                                            |       | 1,466,143                                         |        | — |   |
| Non-cash expense on warrants                                         |       | 6,478,619                                         |        | — |   |
| Unrealized foreign exchange gain (loss)                              |       | (23,864                                           | )           | 47,318 |   |
| Change in operating components of working capital                    |       | 889,313                                           |        | 1,378,859 |   |
| **Cash used in operating activities**                                | ** ** | **(5,067,727**                                    | **)**       | **(5,470,081** | **)** |
|                                                                 |       |                                              |        |   |   |
| **Investing activities**                                             |       |                                              |        |   |   |
| Purchase of property and equipment                                   |       | (45,460                                           | )           | (163,007 | ) |
| **Cash used in investing activities**                                | ** ** | **(45,460**                                       | **)**       | **(163,007** | **)** |
|                                                                 |       |                                              |        |   |   |
| **Financing activities**                                             |       |                                              |        |   |   |
| Convertible bridge notes payable                                     |       | 1,000,000                                         |        | — |   |
| Convertible debenture proceeds                                       |       | 4,000,000                                         |        | — |   |
| **Cash provided by financing activities**                            | ** ** | **5,000,000**                                     | ** **  | **—** | ** ** |
| **Effect of exchange rates on cash and cash  equivalents**           | ** ** | **(2,550**                                        | **)**       | **(8,373** | **)** |
| **Increase (decrease) in cash and cash equivalents  for the period** | ** ** | **(115,737**                                      | **)**       | **(5,641,461** | **)** |
| **Cash and cash equivalents, beginning of the  period**              | ** ** | **664,504**                                       | ** **  | **12,216,671** | ** ** |
| **Cash and cash equivalents, end of the period**                     | ** ** | **$**                                             | **548,767** | ** ** | **$** | **6,575,210** | ** ** |

 

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

 

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**WORLDHEART CORPORATION**

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

**1.****             Nature of Operationsof the Corporation**

 

WorldHeart is developing mechanical circulatory support systems focusedon developing and commercializing implantable ventricular assist devices(VADs), which are mechanical pumps that allow for the restoration of normalblood circulation to patients suffering from advanced heart failure. WorldHearthas facilities in Oakland, California, Salt Lake City, Utah and Herkenbosch,Netherlands. WorldHeart currently derives its revenue from its Novacor LVAS(left ventricular assist system) and related peripheral equipment which itsells directly to medical clinics and hospitals in the United States, Europeand Canada and through distributors in other countries.  The Corporation is focusing on thedevelopment of its next-generation LevacorTM Rotary VAD and expects to realizecost recoveries from the use of Levacor in a US clinical trial expected to startin the first half of 2009.  Such recoveriesare expected to be an important part of our overall operating cash flows in thefuture.

 

On July 31, 2008, WorldHeart completed a $30.0 million privateplacement transaction and recapitalization under the terms of theRecapitalization Agreement dated June 20, 2008 and amended on July 31,2008 (See Note 9).  With the completion of the privateplacement and recapitalizaton, the Corporation believes it has sufficient cashto fund operations for at least twelve months and that it will be able to realizeits assets and discharge its liabilities in the normal course ofoperations.  TheCorporation also believes that with the issuance of 386.0 million common sharesto its investors and to Abiomed as part of the private placement transactionand recapitalizaton, it has achieved compliance with the NASDAQ Marketplace Rule 4310(c)(3),which requires a minimum of $2,500,000 in stockholders’ equity and believesthat it can sustain such compliance.

 

**2.****             Summary ofSignificant Accounting Policies**

 

### *Basis of presentation*

### * *

The accompanying interimunaudited consolidated financial statements have been prepared by management inaccordance with accounting principles generally accepted in the United States (“GAAP”)and with the instructions to Form 10-Q and Article 10 of RegulationS-X. Accordingly, these consolidated financial statements include all assets,liabilities, revenues and expenses of the Corporation and its wholly ownedsubsidiaries: World Heart Inc. and World Heart B.V. All material inter-companytransactions and balances have been eliminated. These interim unauditedconsolidated financial statements and notes thereto should be read inconjunction with Management’s Discussion and the audited financial statementsand notes thereto included in the Corporation’s Annual Report on Form 10-KSB/A,for the year ended December 31, 2007. In the opinion of management, thecondensed balance sheet at December 31, 2007 which has been derived fromaudited financial statements and these interim unaudited consolidated financialstatements reflect all normal and recurring adjustments considered necessary tostate fairly the results for the periods presented. The results for the periodended June 30, 2008 are not necessarily indicative of the results to beexpected for the entire fiscal year ended December 31, 2008 or for anyfuture period.

 

##### *Use ofestimates*

##### * *

Thepreparation of these consolidated financial statements in accordance withaccounting principles generally accepted in the United States of America,requires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the dates of the financial statements and the reported amountsof revenues and expenses during the reporting periods. Such managementestimates include allowance for doubtful accounts, sales and other allowances,inventory reserves, income taxes, realizability of deferred tax assets,stock-based compensation, deferred revenue, warranty reserves and legalreserves. Actual results could differ from these estimates.

 

##### *Revenue recognition*

##### * *

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

 

##### *Thesignificant elements of our multiple-element offerings are Implant Kits,Peripherals and Other. For arrangements with multiple elements, the Corporationrecognizes revenue using the residual method as described in SOP 98-9. Underthe residual method, revenue is allocated and deferred for the undeliveredelements based on relative fair value. The determination of fair value of theundelivered elements in multiple elements arrangements is based on the pricecharged when such elements are sold separately, which is commonly referred toas vendor-specific objective-evidence, or VSOE. Each element’s revenue isrecognized when the revenue recognition criteria are met for each of theelements.*

 

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**WORLDHEART CORPORATION**

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

 

##### *Shipping and Handling Costs*

##### * *

##### *In accordance with EITF 00-10, “Accounting for Shipping and HandlingFees and Costs,” we record freight billed to our customers as sales of productand services and the related freight costs as a cost of sales, product andservices. The Corporation’s shipping and handling costs are not significant.*

##### * *

**3.****             Stock-basedCompensation**

 

On January 1, 2006,WorldHeart adopted FAS 123(R) using the modified prospective transitionmethod. Under this method, the provisions of FAS 123(R) apply to allstock-based awards granted after the effective date. The unrecognized expenseof awards not yet vested as of January 1, 2006 is recognized as an expensein the calculation of net income. As FAS 123(R) requires that stock-basedcompensation expense be based on awards that are ultimately expected to vest,stock-based compensation for the second quarter 2008 has been reduced forestimated forfeitures. When estimating forfeitures, voluntary terminationbehaviors, as well as trends of actual option forfeitures are considered. Tothe extent actual forfeitures differ from our current estimates, cumulativeadjustments to stock-based compensation expense are recorded.

 

Except fortransactions with employees and directors that are within the scope of FAS 123(R),all transactions in which goods or services are the consideration received forthe issuance of equity instruments are accounted for based on the fair value ofthe consideration received or the fair value of the equity instruments issued,whichever is more reliably measurable.  Additionally, in accordance withEmerging Issues Task Force (EITF) 96-18, the Corporation has determined thatthe dates used to value the transaction are either: (1) the date at whicha commitment for performance by the counter party to earn the equityinstruments is established; or (2) the date at which the counter party’sperformance is complete.

 

WorldHeart uses theBlack-Scholes valuation model for estimating the fair value of stockcompensation. The stock-based compensation expense for the quarters ended June 30,2008 and 2007 was as follows:

 
| ** **                          | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-------------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Unaudited)**                     | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| Selling, general and administrative |       | $                                                   | 48,481     |                                              | $          | 110,315 |   | $ | 107,127 |   | $ | 141,856 |   |
| Research and development            |       | 24,857                                              |       | 21,030                                            |       | 46,959 |   | 27,321 |   |
| Total                               |       | $                                                   | 73,338     |                                              | $          | 131,345 |   | $ | 154,086 |   | $ | 169,177 |   |

 

As of June 30,2008, approximately $614,434 of total unrecognized compensation cost related tostock options is expected to be recognized over a period of approximatelyeleven quarters.

 

The aggregate intrinsicvalue is calculated as the difference between the exercise price of alloutstanding options and the quoted price of our common shares that were in themoney at June 30, 2008. At June 30, 2008, the aggregate intrinsicvalue of all outstanding options was nil with a weighted average remainingcontractual term of approximately 5.7 years. Of the 1,030,106 outstandingoptions, exercisable options were 777,639 with a weighted average remainingcontractual life of 5.0 years and 252,467 were unvested with a weighted averageremaining contractual life of 8.0 years. No options were exercised under ourstock option plan during the second quarter in 2008.

 

A summary of the status and changes of our non-vested options, subjectto FAS123(R) calculation as of the quarter ended June 30, 2008 ispresented below:

 
| ** **                          | ** ** | **Shares** | ** ** | **Weighted Average  Grant-Date Fair Value** | ** ** |
|-------------------------------------|------------|------------|------------|------------------------------------------------------------|------------|
| Nonvested at December 31, 2007 |       | 371,191    |       | $                                                          | 3.00       |   |
| Granted                             |       | 13,100     |       | 1.42                                                       |       |
| Vested                              |       | (111,824   | )          | 1.52                                                       |       |
| Forfeited                           |       | (4,800     | )          | 2.83                                                       |       |
| Nonvested at March 31, 2008    |       | 267,667    |       | $                                                          | 3.55       |   |
| Granted                             |       | —     |       | —                                                     |       |
| Vested                              |       | (8,867     | )          | 2.66                                                       |       |
| Forfeited                           |       | (6,333     | )          | 2.76                                                       |       |
| Nonvested at June 30, 2008     |       | 252,467    |       | $                                                          | 3.59       |   |

 

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**WORLDHEART CORPORATION**

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

 

*Valuation Assumptions*

 

WorldHeart calculatesthe fair value of each option award on the date of grant using theBlack-Scholes option pricing model. There were no option grants for the three-month period ended June 30,2008. For the six month period ended June 30, 2008 and June 30, 2007,the weighted average fair value of the options granted was $1.42 and $1.50,respectively. The following weighted average assumptions were utilized:

 
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **June 30, 2008**      | ** ** | **June 30, 2007**    | ** ** |
| Average risk free interest rate |       | —                           |       | 3.4                            | %          | 4.5                              | %          | 4.5                            | %          |
| Expected life (in years)        |       | —                           |       | 5.5                            |       | 5.5                              |       | 5.6                            |       |
| Expected volatility             |       | —                           |       | 133                            | %          | 97                               | %          | 98                             | %          |
| Dividend yield                  |       | —                           |       | 0                              | %          | 0                                | %          | 0                              | %          |

 

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

 

The following table summarizes stock option andwarrant activity for the quarter ended June 30, 2008:

 
| ** **             | ** ** | **Employees** | ** ** | **Non-Employees**                          | ** ** | ** **  | ** ** | ** **                                 | ** ** | ** **   | ** ** |
|------------------------|------------|---------------|------------|--------------------------------------------|------------|-------------|------------|--------------------------------------------|------------|--------------|------------|
| ** **             | ** ** | **Options**   | ** ** | **Weighted  average  exercise price** | ** ** | **Options** | ** ** | **Weighted  average  exercise price** | ** ** | **Warrants** | ** ** | **Weighted  average  exercise price** | ** ** | **Total** | ** ** |
| Outstanding at         |       |          |       |                                       |       |        |       |                                       |       |         |       |   |   |   |   |
| December 31, 2007 |       | 943,541       |       | $                                          | 11.71      |        | 97,103     |                                       | $          | 10.57        |       | 1,909,876 |   | $ | 4.84 |   | 2,950,520 |   |
| Granted                |       | 13,100        |       | $                                          | 1.59       |        | —     |                                       | $          | 0.00         |       | 2,720,000 |   | $ | 1.75 |   | 2,733,100 |   |
| Expired                |       | (3,395        | )          | $                                          | 165.40     |        | (325       | )                                          | $          | 134.22       |       | (42,857 | ) | $ | 10.90 |   | (46,577 | ) |
| Forfeited              |       | (4,633        | )          | $                                          | 1.74       |        | —     |                                       | $          | 0.00         |       | — |   | $ | 0.00 |   | (4,633 | ) |
| Outstanding at         |       |          |       |                                       |       |        |       |                                       |       |         |       |   |   |   |   |
| March 31, 2008    |       | 948,613       |       | $                                          | 11.07      |        | 96,778     |                                       | $          | 10.15        |       | 4,587,019 |   | $ | 2.90 |   | 5,632,410 |   |
| Granted                |       | —        |       | $                                          | 0.00       |        | —     |                                       | $          | 0.00         |       | — |   | $ | 0.00 |   | — |   |
| Expired                |       | (8,916        | )          | $                                          | 22.26      |        | (36        | )                                          | $          | 53.20        |       | (25,143 | ) | $ | 11.00 |   | (34,094 | ) |
| Forfeited              |       | (6,333        | )          | $                                          | 2.93       |        | —     |                                       | $          | 0.00         |       | — |   | $ | 0.00 |   | (6,333 | ) |
| Outstanding at         |       |          |       |                                       |       |        |       |                                       |       |         |       |   |   |   |   |
| June 30, 2008     |       | 933,364       |       | $                                          | 11.04      |        | 96,742     |                                       | $          | 10.41        |       | 4,561,876 |   | $ | 2.86 |   | 5,591,982 |   |

 

**4.****             Inventory**

 

The components of netinventory are as follows:

 
| ** **       | ** ** | **June 30, 2008** | ** ** | **December 31, 2007** | ** ** |
|------------------|------------|-----------------------------|------------|---------------------------------|------------|
| Raw materials    |       | $                           | 99,201     |                            | $          | 231,850 |   |
| Work in progress |       | 66,691                      |       | 280,363                         |       |
| Finished goods   |       | 100,810                     |       | 352,101                         |       |
| Total inventory  |       | $                           | 266,702    |                            | $          | 864,314 |   |

 

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**WORLDHEART CORPORATION**

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

 

**5.****             Current Liabilities**

 

**AccruedCompensation**

 

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

 
| ** **                 | ** ** | **June 30, 2008** | ** **    | **December 31, 2007** | ** ** |
|----------------------------|------------|-----------------------------|---------------|---------------------------------|------------|
| Wages                      |       | $                           | 252,152       |                            | $          | 254,216 |   |
| Deferred salaries          |       | 184,720                     |          | —                          |       |
| Vacation                   |       | 440,891                     |          | 432,006                         |       |
| Bonus                      |       | 480,138                     |          | 631,869                         |       |
| Total accrued compensation | ** ** | **$**                       | **1,357,901** | ** **                      | **$**      | **1,318,091** | ** ** |

 

Deferred salaries for theperiod ended June 30, 2008 consist of salaries owed to 6 executives andofficers of the Corporation from pay period ended April 11, 2008 to June 16,2008. Subsequent to June 16, 2008, WorldHeart executives were paid theirfull salaries. The Corporation expects to make payments on these deferred wagesduring the third quarter of this year.

 

**Performance Bonus**

 

On February 15, 2008, the Compensation Committee of the Board ofDirectors approved the 2008 cash performance bonus program. Performance bonusesare for all employees, including the executive officers, and they are earnedupon the achievement of certain performance milestones relevant to theCorporation’s business. For the period ended June 30, 2008, the accruedbonus of $480,138 consists completely of unpaid bonus for certain performancegoals that had been met during the 2007 fiscal year. No accrual for the 2008performance plan has been made as the performance milestones through June 30,2008 have not been achieved. During the second quarter, the Corporation made apayment of $35,000 and issued 22,850 common shares. The payment of unpaid bonusbalance of $480,138 will be approximately $125,000 in cash and the remainder instock that for plan purposes was originally valued at $4.10 per share on 88,836total shares pursuant to the terms and conditions of the 2007 Performance BonusPlan and the Corporation’s 2006 Equity Incentive Plan (the “Plan”).

 

**AccountsPayable and Accrued Liabilities**

 

Accounts payable andaccrued liabilities consist of the following:

 
| ** **                                      | ** ** | **June 30, 2008** | ** **    | **December 31, 2007** | ** ** |
|-------------------------------------------------|------------|-----------------------------|---------------|---------------------------------|------------|
| Accounts payable                                |       | $                           | 1,477,818     |                            | $          | 847,460 |   |
| Accued liabilities                              |       | 661,018                     |          | 909,860                         |       |
| Sales taxes payable                             |       | 8,429                       |          | 45,719                          |       |
| Accrued warranty                                |       | 96,048                      |          | 131,048                         |       |
| Interest payable                                |       | 205,556                     |          | 4,444                           | ** ** |
| Total accounts payable and accrued  liabilities | ** ** | **$**                       | **2,448,869** | ** **                      | **$**      | **1,938,531** | ** ** |

 

**6****              Comprehensive Income**

 

For the three months ended June 30, 2008 and June 30,2007, there were no significant differences between the Corporation’scomprehensive loss and its net loss.

 

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**WORLDHEART CORPORATION**

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

 

**7.****             Recent AccountingPronouncements**

 

InMarch 2008, the FASB issued FAS No. 161, “Disclosures aboutDerivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133”(“FAS No. 161”). FAS No. 161 requires enhanced disclosure related toderivatives and hedging activities and thereby seeks to improve thetransparency of financial reporting. Under FAS No. 161, entities arerequired to provide enhanced disclosures relating to: (a) how and why anentity uses derivative instruments; (b) how derivative instruments andrelated hedge items are accounted for under FAS No. 133, “Accounting forDerivative Instruments and Hedging Activities” (“FAS No. 133”), and itsrelated interpretations; and (c) how derivative instruments and relatedhedged items affect an entity’s financial position, financial performance, andcash flows. FAS No. 161 must be applied prospectively to all derivativeinstruments and non-derivative instruments that are designated and qualify ashedging instruments and related hedged items accounted for under FAS No. 133for all financial statements issued for fiscal years and interim periodsbeginning after November 15, 2008, which for WorldHeart begins with the2009 fiscal year, with early application encouraged. The Corporation iscurrently evaluating the impact that FAS No. 161 will have on itsfinancial statements.

 

OnDecember 4, 2007, the FASB issued FAS No. 141 (Revised 2007), “BusinessCombinations” (“FAS No. 141(R)”).FAS No. 141(R) will significantly change the accounting forbusiness combinations. Under FAS No. 141(R), an acquiring entity will berequired to recognize all the assets acquired and liabilities assumed in atransaction at the acquisition-date fair value with limited exceptions. FAS No. 141(R) alsoincludes a substantial number of new disclosure requirements. FAS No. 141(R) appliesprospectively to business combinations for which the acquisition date is on orafter the beginning of the first annual reporting period beginning on or after December 15,2008, which for WorldHeart  begins withits 2009 fiscal year. FAS No. 141(R) will only have an impact on theCorporation’s financial statements if the Corporation is involved in a businesscombination in fiscal year 2009 or later years.

 

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

 

InDecember 2007, the FASB ratified the Emerging Issues Task Force consensuson EITF Issue No. 07-1, “Accounting for Collaborative Arrangements” thatdiscusses how parties to a collaborative arrangement (which does not establisha legal entity within such arrangement) should account for various activities.The consensus indicates that costs incurred and revenues generated fromtransactions with third parties (i.e. parties outside of the collaborativearrangement) should be reported by the collaborators on the respective lineitems in their income statements pursuant to EITF Issue No. 99-19,“Reporting Revenue Gross as a Principal Versus Net as an Agent.” Additionally, the consensus provides that income statement characterization ofpayments between the participants in a collaborative arrangement should bebased upon existing authoritative pronouncements; analogy to suchpronouncements if not within their scope; or a reasonable, rational, andconsistently applied accounting policy election. EITF Issue No. 07-1 iseffective beginning January 1, 2009 and is to be applied retrospectivelyto all periods presented for collaborative arrangements existing as of the dateof adoption. The Corporation is currently evaluating the impacts anddisclosures of this standard, but would not expect EITF Issue No. 07-1 tohave a material impact on the Corporation’s consolidated results of operationsor financial condition.

 

**8.****             ConvertibleDebentures and Warrants, Beneficial Conversion and Clinical and MarketingExpenses**

 

On December 11,2007, the Corporation and WHI entered into a note purchase agreement withAbiomed as part of a strategic transaction with Abiomed. Pursuant to thepurchase agreement, Corporation and WHI issued to Abiomed a secured convertiblepromissory note in the principal amount of up to $5.0 million, funded in twotranches, $1.0 million of which was funded immediately and $4.0 million ofwhich was funded on January 3, 2008. The note is secured by theCorporation and WHI’s assets and contains certain covenants and customaryevents of default, the occurrence of which could result in an acceleration ofthe note. On July 31, 2008, upon closing of the $30.0 million privateplacement transaction and recapitalization previouslyannounced under the terms of the Recapitalization Agreement (the “RecapitalizationAgreement”) dated June 20, 2008 and amended on July 31, 

 

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**WORLDHEART CORPORATION**

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

 

2008,Abiomedentered into a Termination and Release Letter Agreement dated July 31,2008 with WorldHeart and WHI and converted the full amount of principal andinterest owed on the $5.0 million 8% Secured Convertible Promissory Note (the “Note”)previously issued to Abiomed by WorldHeart and WHI into 86.0 million commonshares of WorldHeart (the “Conversion”), released the security interest in allof the assets of WorldHeart and WHI that secured the Note, terminated thewarrant Abiomed held to purchase 3.4 million common shares of WorldHeart,forgave other amounts owed to Abiomed by WorldHeart and terminated allpreviously existing agreements, arrangements and understandings withWorldHeart.

 

On December 11,2007, pursuant to the clinical and marketing support services agreement withAbiomed, the Corporation issued to Abiomed a 5-year warrant to purchase up to3.4 million common shares of Corporation, exercisable at $0.01 per share. TheCorporation applied the provisions of SFAS 123R and  EITF 96-18, “Accountingfor Equity Instruments that are Issued to Other Than Employees for Acquiring,or in Conjunction with Selling Goods or Services or Combined with Cash “, toaccount for the expense associated with the warrants granted to Abiomed.  The Corporation used the Black-Scholes methodto compute the fair value of the warrants issued as consideration for theclinical and marketing support services agreement. The measurement dates usedwere the dates when the Corporation received both funding or when theperformance commitment occurred as defined by EITF 96-18. In December 2007,WorldHeart recorded a clinical and marketing expense of $1.8 million based onthe fair value of warrants issued to purchase 680,000 common shares. On January 3,2008, the Corporation recorded additional clinical and marketing expense of$6.5 million based on the fair value of warrants issued to purchase 2.7 millionof the Corporation’s common shares. The total expense relating to the warrantsissued to Abiomed has been fully realized and the Corporation does not expectto record additional clinical and marketing expenses in the future.

 

Based upon the July 31,2008 private placement transaction and recapitalization, the Corporation hasclassified the convertible bridge debenture and convertible bridge notespayable as long-term liabilities since such amounts were subsequently convertedto common stock (See Note 9).

 

**9.****             Subsequent Events**

 

On July 31, 2008, WorldHeart completed a$30,000,000 private placement transaction and recapitalization previouslyannounced under the terms of the Recapitalization Agreement dated June 20,2008 and amended on July 31, 2008, among WorldHeart, WorldHeart’s whollyowned subsidiary World Heart Inc. (“WHI”), Abiomed, Inc. (“Abiomed”),Venrock Partners V, L.P., Venrock Associates V, L.P. and Venrock EntrepreneursFund V, L.P. (collectively “Venrock”), Special Situations Fund III QP, L.P.,Special Situations Cayman Fund, L.P., Special Situations Private Equity Fund,L.P., Special Situations Life Sciences Fund, L.P. and Austin W. Marxe(collectively “SSF”) and New Leaf Ventures II, L.P (“New Leaf”). Under theterms of the Recapitalization Agreement, WorldHeart issued 300,000,000 commonshares for an aggregate purchase price of $30,000,000 (the “Issuance”), ofwhich Venrock invested $11,000,000, SSF invested $9,000,000 and New Leafinvested $10,000,000. The purchase price delivered by Venrock and SSF at theclosing was offset by the principal and interest owed on the bridge loanfacility of $1,400,000 (the “Bridge Facility”) provided by Venrock and SSFprior to closing, of which $1,000,000 million was outstanding at June 30,2008. Simultaneously with the closing of the Issuance, Abiomed entered into aTermination and Release Letter Agreement dated July 31, 2008 withWorldHeart and WHI and converted the full amount of principal and interest owedon the $5,000,000 8% Secured Convertible Promissory Note previously issued toAbiomed by WorldHeart and WHI into 86,000,000 common shares of WorldHeart, releasedthe security interest in all of the assets of WorldHeart and WHI that securedthe Note, terminated the warrant Abiomed held to purchase 3,400,000 commonshares of WorldHeart, forgave other amounts owed to Abiomed by WorldHeart andterminated all previously existing agreements, arrangements and understandingswith WorldHeart. In connection with the Issuance, the parties to theRecapitalization Agreement entered into a Registration Rights Agreement dated July 31,2008 to register the common shares issued in connection with the Issuance andthe Conversion.

 

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**WORLDHEART CORPORATION**

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

 

WorldHeart will pay an aggregate cashcommission of $750,000 and issue warrants to purchase an aggregate of 2,500,000common shares to its advisors, Pacific Growth Equities, LLC (“PGE”) and Stifel,Nicolaus and Company (“Stifel”). The warrants are subject to shareholderapproval and will have an exercise price of US$0.11 per share.

 

The Recapitalization Agreement further provides that:

 

(i)            WorldHeart will call a special meeting of itsshareholders to vote on, among other things, the approval of a reverse split ofits common shares (the “Reverse Split”) for the purpose of seeking to complywith the US$1.00 minimum bid price requirement of the NASDAQ Capital Market;

 

(ii)           Each of Abiomed, Venrock, SSF and New Leaf willhave the right to designate one person for election to the Board of Directorsof WorldHeart, so long as each remains the beneficial owner of at least 5% ofthe outstanding common shares of WorldHeart;

 

(iii)          Abiomed’s current distribution rights with WorldHeartbe terminated and replaced with revised distribution rights, under whichWorldHeart is required to negotiate in good faith with Abiomed regardingdistribution arrangements for certain of the Corporation’s products beforeengaging a third-party distributor; and

 

(iv)          Promptly following the closing, WorldHeartwill establish an equity incentive program for the benefit of its independentdirectors, officers, employees and consultants covering, together with itsexisting plans, a maximum of 44,000,000 common shares of WorldHeart (to beadjusted for the reverse share split and any other recapitalization) on suchterms and conditions as shall be approved by WorldHeart’s Board of Directors,including the designees, if any, of Abiomed, Venrock, SSF and New Leaf.  WorldHeart will seek approval of the equityincentive plan at the special meeting of shareholders.

 

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

 

**INTRODUCTION**

 

World Heart Corporation and its subsidiaries arecollectively referred to as WorldHeart or the Corporation. The followingManagement Discussion and Analysis of Financial Condition and Results ofOperations (MD&A) discusses material changes in WorldHeart’s financialcondition and results of operations and cash flows for the three and six monthsended June 30, 2008 and June 30, 2007. Such discussion and commentson the liquidity and capital resources should be read in conjunction with theinformation contained in WorldHeart’s audited consolidated financial statementsfor the year ended December 31, 2007, prepared in accordance with U.S.GAAP included in our Annual Report on Form 10–KSB/A for the fiscal yearended December 31, 2007.

 

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

 

**OVERVIEW**

 

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

 

WorldHeartto date derives most of its revenue from its Novacor LVAS and relatedperipheral equipment, which it sells, directly to medical clinics and hospitalsin the United States, Europe and Canada and through a distributor in certainother countries. The Novacor LVAS is commercially approved for use as abridge-to-transplant in the United States and Canada. In Europe, the NovacorLVAS has unrestricted approval for use as an alternative to transplantation,Bridge-to-Transplantation and to support patients who may be able to recoverthe use of their natural heart. In Japan, the device is commercially approvedfor use in cardiac patients at risk of imminent death from non-reversible leftventricular failure for which there is no alternative except hearttransplantation.

 

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

 

InNovember 2006, WorldHeart announced a restructuring plan, which included areduction of commercial operations associated with the Novacor LVAS, and arefocusing of its resources on the development of its next generation product,particularly the Levacor Rotary VAD. WorldHeart also reduced its workforce andhas consolidated its Oakland facilities, in an effort to reduce expenses. Abridge-to-transplant pivotal trial is expected to begin in the United States inapproximately the first half of 2009, subject to regulatory approval.

 

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

 

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

 

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**Summary of Quarterly Results**

Inthousands (000’s) except for per share amounts

(Unaudited)

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
| ** **                                 | ** ** | **2008**                         | ** ** | **2008** | ** ** | **2007** | ** ** | **2007** | ** ** |
|                                       |       |                             |       |   |   |   |   |   |   |
| Net revenue                                |       | $                                | 536        |   | $ | 636 |   | $ | 348 |   | $ | 531 |   |
| Net loss for the period                    |       | (3,049                           | )          | (11,478 | ) | (7,639 | ) | (3,018 | ) |
| Net loss applicable to common shareholders |       | (3,049                           | )          | (11,478 | ) | (7,639 | ) | (3,018 | ) |
| Basic and diluted loss per share           |       | $                                | (0.26      | ) | $ | (1.00 | ) | $ | (0.66 | ) | $ | (0.26 | ) |

 
| ** **                                 | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------------|------------|----------------------------------|------------|
| ** **                                 | ** ** | **June 30,**                | ** ** | **March 31,** | ** ** | **December 31,** | ** ** | **September 30,** | ** ** |
| ** **                                 | ** ** | **2007**                         | ** ** | **2007** | ** ** | **2006** | ** ** | **2006** | ** ** |
|                                       |       |                             |       |   |   |   |   |   |   |
| Net revenue                                |       | $                                | 849        |   | $ | 848 |   | $ | 956 |   | $ | 1,387 |   |
| Net loss for the period                    |       | (4,477                           | )          | (3,430 | ) | (5,136 | ) | (7,619 | ) |
| Net loss applicable to common shareholders |       | (4,477                           | )          | (3,430 | ) | (5,136 | ) | (7,619 | ) |
| Basic and diluted loss per share           |       | $                                | (0.39      | ) | $ | (0.30 | ) | $ | (0.77 | ) | $ | (1.37 | ) |

 

**RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHPERIODS ENDED JUNE 30, 2008 COMPARED WITH THE THREE AND SIX MONTH PERIODSENDED JUNE 30, 2007**

 
| ** **                                                                  | ** ** | **Three Months Ended June` 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Unaudited)**                                                             | ** ** | **2008**                                             | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenue**                                                                 |       | $                                                    |  536  |                                              | $          |  849 |   | $ |  1,172 |   | $ |  1,696 |   |
| **Cost of goods sold**                                                      |       | (287                                                 | )          | (823                                              | )          | (687 | ) | (1,892 | ) |
|                                                                        |       |                                                 |       |                                              |       |   |   |   |   |
| **Gross profit**                                                            |       | 249                                                  |       | 26                                                |       | 485 |   | (196 | ) |
|                                                                        |       |                                                 |       |                                              |       |   |   |   |   |
| **Operating expenses**                                                      |       |                                                 |       |                                              |       |   |   |   |   |
| Selling, general and administrative                                         |       | 1,205                                                |       | 1,457                                             |       | 2,405 |   | 3,003 |   |
| Research and development                                                    |       | 1,932                                                |       | 3,136                                             |       | 4,425 |   | 5,005 |   |
| Clinical and marketing support                                              |       | —                                               |       | —                                            |       | 6,479 |   | — |   |
| Amortization of intangibles                                                 |       | 48                                                   |       | 48                                                |       | 96 |   | 96 |   |
|                                                                        |       |                                                 |       |                                              |       |   |   |   |   |
| **Total operating expenses**                                                |       | 3,185                                                |       | 4,641                                             |       | 13,405 |   | 8,104 |   |
|                                                                        |       |                                                 |       |                                              |       |   |   |   |   |
| **Operating loss**                                                          |       | (2,936                                               | )          | (4,615                                            | )          | (12,920 | ) | (8,300 | ) |
|                                                                        |       |                                                 |       |                                              |       |   |   |   |   |
| **Other income (expense)**                                                  |       | (113                                                 | )          | 138                                               |       | (1,607 | ) | 393 |   |
|                                                                        |       |                                                 |       |                                              |       |   |   |   |   |
| **Net loss applicable to common shareholders**                              |       | $                                                    | (3,049     | )                                                 | $          | (4,477 | ) | $ | (14,527 | ) | $ | (7,907 | ) |
|                                                                        |       |                                                 |       |                                              |       |   |   |   |   |
| **Weighted average number of common shares  outstanding basic and diluted** |       | 11,529                                               |       | 11,507                                            |       | 11,518 |   | 11,507 |   |
|                                                                        |       |                                                 |       |                                              |       |   |   |   |   |
| **Basic and diluted loss per common share**                                 |       | $                                                    | (0.26      | )                                                 | $          | (0.39 | ) | $ | (1.26 | ) | $ | (0.69 | ) |

 

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***Revenue:*******In the past,****sales of Novacor LVAS implant kits and related peripheral equipmentand services accounted for the majority of WorldHeart’s revenues. In addition,and to a greater percentage of overall revenues in recent quarters, WorldHeartgenerates revenue from sales of SPUS (Segmented Poly Urethane Solution) used byother medical device manufacturers. We primarily sell our products directly,except for a few countries where we sell through distributors.

 

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

 
| ** **                   | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|------------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| ** **                   | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
| **(Unaudited)**              | ** ** | **$**                                               | ** ** | **Units**                                         | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | ** ** | **Units** | ** ** |
| **Novacor Product Revenues** |       |                                                |       |                                              |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Implant kits                 |       | $                                                   | —     |                                              | —     |   | $ | 391 |   | 6 |   | $ | 318 |   | 5 |   | $ | 684 |   | 10 |   |
| Peripherals and other        |       | 111                                                 |       |                                              |       | 338 |   |   |   | 339 |   |   |   | 802 |   |   |   |
|                         |       | 111                                                 |       |                                              |       | 729 |   |   |   | 657 |   |   |   | 1,486 |   |   |   |
| **SPUS Revenues**            |       | 425                                                 |       |                                              |       | 120 |   |   |   | 515 |   |   |   | 210 |   |   |   |
| **Total Revenue**            |       | $                                                   | 536        |                                              |       |   | $ | 849 |   |   |   | $ | 1,172 |   |   |   | $ | 1,696 |   |   |   |

 

Net revenue for the quarter ended June 30, 2008 was $536,000reflecting a decrease of $313,000, or 37%, compared with the quarter ended June 30,2007. There were no implant kits sold in the quarter ended June 30, 2008compared to 6 implant kits sold in the quarter ended June 30, 2007.Novacor peripherals and other revenues, including Novacor LVAS hardware,peripherals, and services for the quarter ended June 30, 2008 were$111,000, a decrease of 67%, compared with Novacor peripherals and services of$338,000 recorded in the quarter ended June 30, 2007. The Corporation doesnot expect to sell any additional Novacor implant kits in the future as theproduct has been phased out.

 

SPUS revenues increased by $305,000 or 254%in the quarter ended June 30, 2008 when compared to SPUS revenues of$120,000 in the quarter ended June 30,2007. The increase was due to a pushby the Corporation to start a phase-out of this product in 2009. We expect thistrend to continue throughout the remainder of 2008.

 

Revenue for the first six months of 2008 was $1,172,000, a decrease of$524,000, or 31%, compared with $1,696,000 recorded in the same period of 2007.Novacor implant kits recognized as revenue for the six months ended June 30,2008 totaled 5 compared with 10 during the same period of 2007. Revenuegenerated from Novacor products was $657,000 for the first six months of 2008compared to $1,486,000 for the same six-month period in 2007. We anticipate noimplant kit sales and continued declining Novacor peripheral revenuesthroughout the remainder of 2008.

 

SPUS revenues, on the other hand, increasedfrom $210,000 in the first six months of 2007 to $515,000 for the 2008six-month period.

 

***Cost of goodssold:***  For the threemonths ended June 30, 2008, cost of goods sold was 54% of revenue comparedwith the three months ended June 30, 2007, where cost of goods sold was97% of revenue. Cost of goods sold as a percent of revenue was 59% and 112% forthe six month periods ended June 30, 2008 and June 30, 2007,respectively. The higher cost of goods sold in last year’s second quarter andthe six months ended June 30, 2007 was due, principally, to the write-offof excess Novacor LVAS inventories and expensing of manufacturing variances.Gross profit for the second quarter and six-month period of 2008 when comparedto the same periods in 2007 has improved resulting from the shift in revenuesfrom lower margin Novacor products to higher margin SPUS product

 

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

 

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

 
| ** **                 | ** ** | **Three Months Ended June 30,** | ** ** | **Six Months Ended June 30,** | ** ** |
|----------------------------|------------|-----------------------------------------------------|------------|---------------------------------------------------|------------|
| **(Unaudited)**            | ** ** | **2008**                                            | ** ** | **2007**                                          | ** ** | **2008** | ** ** | **2007** | ** ** |
|                       |       |                                                |       |                                              |       |   |   |   |   |
| Selling                    |       | $                                                   | 231        |                                              | $          | 367 |   | $ | 479 |   | $ | 852 |   |
| General and administrative |       | 974                                                 |       | 1,090                                             |       | 1,926 |   | 2,151 |   |
| Total                      |       | $                                                   | 1,205      |                                              | $          | 1,457 |   | $ | 2,405 |   | $ | 3,003 |   |

 

Selling expenses for the threemonths ended June 30, 2008 decreased by $136,000 or 37%, compared with thesame period in 2007. For the six-month period ended June 30, 2008 sellingexpenses decreased $373,000 or 44%, compared with the six month period ended June 30,2007. The decreases are attributable to our November 2006 restructuring,which eliminated most of our sales force by the second quarter of 2007, as wellas reduced personnel costs in Europe. For the three and six month periods endedJune 30, 2008, WorldHeart recorded $6,000 and $11,000, respectively, instock-based compensation expense compared with nil in the comparable 2007periods. Selling expenses primarily relate to enrollment of newcenters in the anticipated Levacor clinical trials, field support of existingNovacor patients and marketing/show costs. Selling expenses are expected to remain atcurrent levels for the next several quarters.

 

General and administrativeexpenses decreased by $116,000 or 11%, for the three months ended June 30,2008, compared with the same period in 2007. For the six-month periods ended June 30,2008 and June 30, 2007 general and administrative expenses decreased$225,000 or 10%. The current quarter and six months to date decreases areattributable to non-recurring charges incurred in 2007 for site restoration ofone of the two Oakland headquarters buildings previously occupied under a leasewhich expired in April, 2007. For the three and six months ended June 30,2008, WorldHeart recorded $43,000 and $96,000, respectively, in stock-basedcompensation expense compared with $110,000 and $142,000 recorded in thecomparable 2007 periods. General and administrative expenses are expected toremain at about current levels for the next several quarters.

 

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

 

Research and development expenses for the three months ended June 30,2008 decreased by $1,204,000 or 38%, compared with the three months ended June 30,2007. The second quarter of 2007 included $567,000 of non-recurring charges,primarily relatedto site restoration of one of the two Oakland headquarters buildings previouslyoccupied under a lease, which expired in April, 2007. Additionally, due to cashconstraints in the second quarter of 2008, expenditures for Levacor developmentwere curtailed. For the six-month periods ended June 30, 2008 and June 30,2007 research and development expenses decreased  by $580,000 or 12%, primarily related to the non-recurring siterestoration charges incurred in 2007. Research and development expensesfor our Levacor Rotary VAD are expected to increase during the remainder of2008 with additional development and pre-clinical testing.

 

***Amortizationof intangibles:*****Amortization of the acquired MedQuest workforce for the three andsix month periods ended June 30, 2008 and June 30, 2007 was $48,000and $96,000 respectively. This intangible asset is being amortized on astraight-line basis over four years.

 

***ForeignExchange:***Foreign exchange transactions resultedin a loss of $5,000 for the three-month period and $11,000 for the six-monthperiod ended June 30, 2008. This compares with a loss of $4,000 and a gainof $131,000 for the three and six-month periods ended June 30, 2007.

 

***Investmentand other income:*** Investment and other income forthe quarter ended June 30, 2008 was a loss of $5,000 compared with a gainof $140,000 during the three months ended June 30, 2007. The secondquarter loss results from immediate payment discounts granted customers inorder to generate operating funds. Additionally, interest earnings weresignificantly lower as invested cash balances were minimal during the quarter.Investment and other income for the six-month period ended June 30, 2008was $18,000, compared to $258,000 for the six-month period ended June 30,2007. The decrease results from lower average invested cash balances along withlower interest rates and immediate payment discounts granted customers in thesecond quarter of 2008.

 

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***Interestexpense:***Interest expense for the secondquarter of 2008 was $103,000 and $1,615,000 for the six-months ended June 30,2008. In the second quarter interest expense on the Abiomed $5.0 millionconvertible note was $101,000 and interest expense on the $1.0 millionre-capitalization bridge loans was $2,000. For the six month period ended June 30,2008, interest of $1,414,000 was related to the beneficial conversion featureof the $4.0 million convertible note issued to Abiomed on January 3, 2008and recorded in the first quarter, $200,000 was accrued interest expensecalculated at 8% on the $5.0 million Abiomed convertible note and $2,000 wasaccrued interest on the re-capitalization bridge loans. There were no suchcharges recorded for the quarter and six month period ended June 30, 2007(See Note 8 and Note 9).

 

***Clinicaland marketing support:******In the first quarter of2008,*********we recorded  an expense of $6.5 million related to thefair value of the 2.7 million warrants issued to Abiomed. There was no suchcharge recorded for the quarter and six month period ended June 30, 2007(See Note 8).

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

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

 

At June 30, 2008, wehad cash and cash equivalents of $0.5 million, a decrease of $0.2 million from December 31,2007. In January 2008 we received $4.0 million in proceeds from the secondtranche of the Abiomed note and in June 2008 we received $1.0 million inrecapitalization bridge-loan proceeds. For the first six-months of 2008, cash usedto fund operating activities was $5.1 million, consisting primarily of the netloss for the period of $14.5 million offset by non-cash charges of $1.5 millionrelated to the beneficial conversion feature of the Abiomed note and $6.5million related to the fair value of warrants issued to Abiomed. Additionalnon-cash charges of $0.7 million consist of amortization and depreciation,write-down of inventory and stock option expense. Working capital changesconsisted of a $0.3 million decrease in inventories, a $0.6 million increase inaccounts payable and accrued compensation offset by an increase of $0.1 millionin accounts receivable and prepaid expenses.

 

Investing activities in thefirst half of 2008 requiring cash resources consisted of $45,000 in propertyand equipment additions.

 

On July 31, 2008,WorldHeart completed a $30.0 million private placement transaction andrecapitalization under the terms of the Recapitalization Agreement dated June 20,2008 and amended on July 31, 2008 (See Note 9). With the completion of theprivate placement and recapitalizaton, the Corporation believes it hassufficient cash to fund operations for at least twelve months and believes thatit will be able to realize its assets and discharge its liabilities in thenormal course of operations.

 

**CRITICAL ACCOUNTING ESTIMATES**

 

As a result of theCorporation’s decision to reduce commercial operations associated with theNovacor LVAS, and refocus its resources on the development of its nextgeneration products, WorldHeart wrote-off $4.6 million of Novacor relatedinventories in 2006 that management estimated were surplus. In 2007 theCorporation wrote off an additional $1.4 million of inventory. Through thefirst six months of 2008 an additional $0.3 million of Novacor inventory waswritten-off. Management estimated future usage of inventory on hand byprojecting future sales of its Novacor product, and used these to predict rawmaterial parts and components that would be consumed in manufacturing productto meet these sales. Future write-downs may be required based on actual salesachieved and will be recorded when they can be reasonably determined.

 

**OFF- BALANCE SHEET ARRANGEMENTS**

 

None.

 

**ITEM 3.  CONTROLS AND PROCEDURES**

 

*Evaluationof disclosure controls and procedures*: Based on theirevaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and15d-15(e) under the Exchange Act) as of June 30, 2008, ourpresident and chief executive officer (principal executive officer) and ourchief financial officer (principal accounting and financial officer) haveconcluded that our disclosure controls and procedures are designed to ensurethat information required to be disclosed in the reports that we file or submitunder the Exchange Act is recorded, processed, summarized and reported withinthe time periods specified in the Securities and Exchange Commission’s rules andforms and are operating in an effective manner at the reasonable assuranceslevel.

 

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*Changes ininternal controls over financial reporting:* There was nochange in our internal controls over financial reporting that occurred duringthe quarter ended June 30, 2008 that has materiallyaffected, or is reasonably likely to materially affect, our internal controlsover financial reporting.

 

**PART II—OTHERINFORMATION**

 

**ITEM 1.LEGAL PROCEEDINGS**

 

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

 

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

 

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

 

(None)

 

**ITEM 3.DEFAULTS UPON SENIOR SECURITIES**

 

(None)

 

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

 

(None)

 

**ITEM 5.OTHER INFORMATION**

 

(None)

 

**ITEM6.  EXHIBITS**

 

(a)               Exhibits

 
| Exhibit 10.19 |   | Summary of  Recapitalization Agreement among the Corporation, of its wholly owned  subsidiary, World Heart Inc, ABIOMED, Venrack and SSF (incorporated by  reference to Exhibit 99.2 to the Corporations Form 8-K filed in June 25, 2008  (Commission File No 000-28882)). |
|--------------------|--------|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|               |   |                                                                                                                                                                                                                                                                       |
| Exhibit 31.1  |   | Certification of  Principal Executive Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                             |
|               |   |                                                                                                                                                                                                                                                                       |
| Exhibit 31.2  |   | Certification of  Principal Financial Officer pursuant to Section 302 of the  Sarbanes-Oxley Act of 2002.                                                                                                                                                             |
|               |   |                                                                                                                                                                                                                                                                       |
| Exhibit 32.1  |   | Certification of  Principal Executive Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.                                                                                                                                             |
|               |   |                                                                                                                                                                                                                                                                       |
| Exhibit 32.2  |   | Certification of  Principal Financial Officer pursuant to Section 906 of the  Sarbanes-Oxley Act of 2002, 18 U.S.C. 1350.                                                                                                                                             |

 

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**SIGNATURES**

 

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

 
|                                                 |   | World Heart Corporation                 |
|------------------------------------------------------|--------|-----------------------------------------|
|                                                 |   | (Registrant)                            |
|                                                 |   |                                    |
|                                                 |   |                                    |
|    Dated:   August 13, 2008 |   | /s/ Jal S. Jassawalla                   |
|                                                 |   | Jal S.  Jassawalla, President and Chief |
|                                                 |   | Executive  Officer                      |
|                                                 |   |                                    |
|                                                 |   |                                    |
|    Dated:   August 13, 2008 |   | /s/ David Pellone                       |
|                                                 |   | David  Pellone,Vice President, Finance  |
|                                                 |   | and Chief  Financial Officer            |

 

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