**UNITED STATESSECURITIES AND EXCHANGECOMMISSION**

**Washington,D.C. 20549**

 

**FORM 10-QSB**

 

**(Mark One)**

 

**ý****        ****QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIESEXCHANGEACT OF 1934**

 

**Forquarterly period ended   ****September 30, 2005**

 

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

 

**For the transition periodfrom       to**

 

**Commission file number:  000-28882**

 

**WORLD HEART CORPORATION**

(Exact name of Company asspecified in its charter)

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

 

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

(Address of principalexecutive offices)

 

**(510) 563-5000**

(Issuer’s telephone number)

 

**N/A**

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

 

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

 

Indicate by check mark whether the Registrant is a shell company (asdefined in Rule 12b-2 of the Securities Exchange Act of 1934).                         Yes o                                    No ý

 

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

 

The number of common shares outstanding as of November 3, 2005 was55,479,549.

 

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

 

----

 

**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                                               |       |
|         |     |       |                                                            |       |
|         | 5        |       | Exhibits                                                        |       |
|         |     |       |                                                            |       |
|         |     |       | Signatures                                                      |       |

 

2

----

 

**PART I—FINANCIALINFORMATION**

 

**ITEM1.  FINANCIAL STATEMENTS.**

 

**WORLD HEART CORPORATION**

**Consolidated Balance Sheets**

(United States Dollars)

 
| ** **                                                                                             | ** ** | **September 30,  2005** | ** **     | **December 31,  2004** | ** ** |
|--------------------------------------------------------------------------------------------------------|------------|------------------------------|----------------|-----------------------------|------------|
| ** **                                                                                             | ** ** | **(unaudited)**              | ** **     | ** **                  | ** ** |
| **ASSETS**                                                                                             |       |                         |           |                        |       |
| **Current assets**                                                                                     |       |                         |           |                        |       |
| Cash and cash equivalents                                                                              |       | $                            | 14,921,833     |                        | $          | 3,818,767 |   |
| Short-term investments                                                                                 |       | —                       |           | 4,999,034                   |       |
| Trade and other receivables                                                                            |       | 3,048,358                    |           | 4,238,049                   |       |
| Prepaid expenses                                                                                       |       | 885,172                      |           | 575,261                     |       |
| Inventory                                                                                              |       | 9,222,074                    |           | 8,112,525                   |       |
|                                                                                                   |       | 28,077,437                   |           | 21,743,636                  |       |
| **Long-term assets**                                                                                   |       |                         |           |                        |       |
| Long-term receivable                                                                                   |       | —                       |           | 318,553                     |       |
| Cash pledged as collateral  for lease                                                                  |       | 750,000                      |           | 750,000                     |       |
| Capital assets                                                                                         |       | 1,953,524                    |           | 2,011,586                   |       |
| Goodwill                                                                                               |       | 17,179,643                   |           | 17,179,643                  |       |
| Intangible assets                                                                                      |       | 734,162                      |           | 255,012                     |       |
|                                                                                                   |       | 20,617,329                   |           | 20,514,794                  |       |
| **Total assets**                                                                                       | ** ** | **$**                        | **48,694,766** | ** **                  | **$**      | **42,258,430** | ** ** |
|                                                                                                   |       |                         |           |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**                                                          |       |                         |           |                        |       |
| **Current liabilities**                                                                                |       |                         |           |                        |       |
| Accounts payable and accrued  liabilities                                                              |       | $                            | 4,478,981      |                        | $          | 3,854,833 |   |
| Indirect taxes payable                                                                                 |       | 344,027                      |           | 832,000                     |       |
| Accrued compensation                                                                                   |       | 638,510                      |           | 1,343,364                   |       |
| Deferred revenue                                                                                       |       | 1,240,308                    |           | 1,607,622                   |       |
|                                                                                                   |       | 6,701,826                    |           | 7,637,819                   |       |
| **Long-term liabilities**                                                                              |       |                         |           |                        |       |
| Convertible debentures (Note  4)                                                                       |       | —                       |           | 8,177,140                   |       |
| Long-term obligation                                                                                   |       | —                       |           | 16,368                      |       |
|                                                                                                   |       | —                       |           | 8,193,508                   |       |
| **Total liabilities**                                                                                  | ** ** | **6,701,826**                | ** **     | **15,831,327**              | ** ** |
|                                                                                                   |       |                         |           |                        |       |
| **Shareholders’ equity**                                                                          |       |                         |           |                        |       |
| Common shares                                                                                          |       | 271,864,300                  |           | 214,616,061                 |       |
| Issued and outstanding -  55,479,549 common shares (December 31, 2004 - 15,744,522 common shares) |       |                         |           |                        |       |
| Additional paid-in-capital                                                                             |       | 6,465,360                    |           | 11,451,267                  |       |
| Cumulative other  comprehensive income                                                                 |       | (6,285,577                   | )              | (6,285,577                  | )          |
| Accumulated deficit                                                                                    |       | (230,051,143                 | )              | (193,354,648                | )          |
| Total shareholders’ equity                                                                        |       | 41,992,940                   |           | 26,427,103                  |       |
|                                                                                                   |       |                         |           |                        |       |
| **Total liabilities and  shareholders’ equity**                                                   | ** ** | **$**                        | **48,694,766** | ** **                  | **$**      | **42,258,430** | ** ** |

 

(The accompanying notes are an integral part ofthese consolidated financial statements.)

 

3

----

 

**WORLD HEART CORPORATION**

**Consolidated Statements of Operations and Accumulated Deficit**

(United States Dollars)

(unaudited)

 
| ** **                                                | ** ** | **Three  months ended September 30,** | ** **   | **Nine  months ended September 30,** | ** ** |
|-----------------------------------------------------------|------------|--------------------------------------------|--------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                   | ** **   | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Revenue**                                               |       | $                                          | 2,149,751    |                                      | $          | 2,250,050 |   | $ | 8,015,917 |   | $ | 6,588,781 |   |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Cost of goods sold**                                    |       | (1,726,158                                 | )            | (1,805,515                                | )          | (5,980,126 | ) | (4,685,677 | ) |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Gross margin**                                          |       | 423,593                                    |         | 444,535                                   |       | 2,035,791 |   | 1,903,104 |   |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Operating expenses**                                    |       |                                       |         |                                      |       |   |   |   |   |
| Selling, general and  administrative                      |       | 2,540,113                                  |         | 3,246,213                                 |       | 9,003,272 |   | 10,084,015 |   |
| Research and development                                  |       | 1,913,941                                  |         | 1,585,102                                 |       | 4,376,010 |   | 4,615,505 |   |
| Restructuring costs (Note 6)                              |       | (8,373                                     | )            | 1,176,445                                 |       | 333,030 |   | 1,176,445 |   |
| Amortization of intangibles                               |       | 31,491                                     |         | 129,166                                   |       | 286,518 |   | 387,498 |   |
| Acquired in-process research  and development             |       | 18,147,341                                 |         | —                                    |       | 18,147,341 |   | — |   |
| **Total operating expenses**                              |       | 22,624,513                                 |         | 6,136,926                                 |       | 32,146,171 |   | 16,263,463 |   |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Operating loss before the undernoted**                  |       | (22,200,920                                | )            | (5,692,391                                | )          | (30,110,380 | ) | (14,360,359 | ) |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Other income (expenses)**                               |       |                                       |         |                                      |       |   |   |   |   |
| Foreign exchange gain (loss)                              |       | (51,279                                    | )            | (10,882                                   | )          | (68,558 | ) | (378,787 | ) |
| Investment income                                         |       | 91,841                                     |         | 10,778                                    |       | 124,081 |   | 135,462 |   |
| Loss on disposal of capital  assets                       |       | —                                     |         | (44,024                                   | )          | (959 | ) | (44,024 | ) |
| Interest expense and  financing costs                     |       | (90,750                                    | )            | (5,199,376                                | )          | (780,429 | ) | (5,200,582 | ) |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Net loss for the period**                               |       | (22,251,108                                | )            | (10,935,895                               | )          | (30,836,245 | ) | (19,848,290 | ) |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Effect of warrant exchange**                            |       | (5,860,250                                 | )            | —                                    |       | (5,860,250 | ) | — |   |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Net loss applicable to common shareholders**            |       | (28,111,358                                | )            | (10,935,895                               | )          | (36,696,495 | ) | (19,848,290 | ) |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Accumulated deficit, beginning of the period**          |       | (201,939,785                               | )            | (176,125,249                              | )          | (193,354,648 | ) | (167,212,854 | ) |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Accumulated deficit, end of the period**                |       | $                                          | (230,051,143 | )                                         | $          | (187,061,144 | ) | $ | (230,051,143 | ) | $ | (187,061,144 | ) |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Weighted average number of  common shares outstanding** |       | 43,797,104                                 |         | 15,355,573                                |       | 25,918,252 |   | 15,249,176 |   |
|                                                      |       |                                       |         |                                      |       |   |   |   |   |
| **Basic and diluted loss per common share**               |       | $                                          | (0.64        | )                                         | $          | (0.71 | ) | $ | (1.42 | ) | $ | (1.30 | ) |

 

(Theaccompanying notes are an integral part of these consolidated financialstatements.)

 

4

----

 

**WORLD HEART CORPORATION**

**Consolidated Statements of Cash Flow**

(United States Dollars)

(unaudited)

 
| ** **                                                        | ** ** | **Three  months ended September 30,** | ** **     | **Nine  months ended September 30,** | ** ** |
|-------------------------------------------------------------------|------------|--------------------------------------------|----------------|--------------------------------------|------------|
| **CASH FLOWS FROM (USED IN)**                                     | ** ** | **2005**                                   | ** **     | **2004**                             | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                        | ** ** | ** **                                 | ** **     | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Operating activities**                                          |       |                                       |           |                                 |       |   |   |   |   |
| Net loss for the period                                           |       | $                                          | (22,251,108    | )                                    | $          | (10,935,895 | ) | $ | (30,836,245 | ) | $ | (19,848,290 | ) |
| Items not involving cash –                                   |       |                                       |           |                                 |       |   |   |   |   |
| Amortization and  depreciation                                    |       | 196,479                                    |           | 366,108                              |       | 765,540 |   | 1,038,018 |   |
| Loss on disposal of capital  assets                               |       | —                                     |           | 44,024                               |       | 588 |   | 44,024 |   |
| In-process research and  development                              |       | 18,147,341                                 |           | —                               |       | 18,147,341 |   | — |   |
| Write down of capital and  intangible assets                      |       | —                                     |           | 342,460                              |       | 36,842 |   | 342,460 |   |
| Non-cash expense on issuance  of options                          |       | 160,935                                    |           | —                               |       | 160,935 |   | 81,466 |   |
| Interest on debt                                                  |       | 93,153                                     |           | 5,199,016                            |       | 770,954 |   | 5,166,011 |   |
| Unrealized foreign exchange  loss (gain)                          |       | 108,496                                    |           | (16,460                              | )          | 385,495 |   | 266,282 |   |
| Change in operating components of working capital                 |       | (1,235,921                                 | )              | (453,999                             | )          | (1,079,436 | ) | (6,162,465 | ) |
| ** **                                                        | ** ** | **(4,780,625**                             | **)**          | **(5,454,746**                       | **)**      | **(11,647,986** | **)** | **(19,072,494** | **)** |
|                                                              |       |                                       |           |                                 |       |   |   |   |   |
| **Investing activities**                                          |       |                                       |           |                                 |       |   |   |   |   |
| Purchase and redemption of  short-term investments                |       | —                                     |           | —                               |       | 4,999,035 |   | 11,504,032 |   |
| Purchase of capital assets                                        |       | (12,274                                    | )              | (143,523                             | )          | (127,954 | ) | (297,685 | ) |
| Deferred transaction costs  paid                                  |       | (1,255,696                                 | )              | —                               |       | (1,255,696 | ) | — |   |
| Cash pledged as collateral  for lease                             |       | —                                     |           | —                               |       | — |   | (222,003 | ) |
| ** **                                                        | ** ** | **(1,267,970**                             | **)**          | **(143,523**                         | **)**      | **3,615,385** | ** ** | **10,984,344** | ** ** |
|                                                              |       |                                       |           |                                 |       |   |   |   |   |
| **Financing activities**                                          |       |                                       |           |                                 |       |   |   |   |   |
| Convertible debenture  proceeds                                   |       | —                                     |           | 13,318,750                           |       | — |   | 13,318,750 |   |
| Repayment of bridge loan                                          |       | (3,500,000                                 | )              | —                               |       | (3,500,000 | ) | — |   |
| Issuance of common shares  through private placement              |       | 12,000,000                                 |           | —                               |       | 12,000,000 |   | — |   |
| Common shares issued through  exercise of warrants                |       | 10,655,000                                 |           | —                               |       | 10,655,000 |   | 1,499,404 |   |
| Payment of expenses relating  to convertible debentures           |       | —                                     |           | (378,166                             | )          | — |   | (378,166 | ) |
| ** **                                                        | ** ** | **19,155,000**                             | ** **     | **12,940,584**                       | ** ** | **19,155,000** | ** ** | **14,439,988** | ** ** |
| ** **                                                        | ** ** | ** **                                 | ** **     | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Effect of exchange rate changes  on cash and cash equivalents** |       | **3,497**                                  |           | **98,679**                           |       | **(19,333** | **)** | **24,332** |   |
| ** **                                                        | ** ** | ** **                                 | ** **     | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Change in cash and cash  equivalents for the period**           |       | **13,109,902**                             |           | **7,440,994**                        |       | **11,103,066** |   | **6,376,170** |   |
| ** **                                                        | ** ** | ** **                                 | ** **     | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| **Cash and cash equivalents,  beginning of the period**           |       | **1,811,931**                              |           | **5,272,853**                        |       | **3,818,767** |   | **6,337,677** |   |
|                                                              |       |                                       |           |                                 |       |   |   |   |   |
| **Cash and cash equivalents, end  of the period**                 | ** ** | **$**                                      | **14,921,833** | ** **                           | **$**      | **12,713,847** | ** ** | **$** | **14,921,833** | ** ** | **$** | **12,713,847** | ** ** |

 

5

----

 
| ** **                                                                             | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended Septembr 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                                                             | ** ** | **2005**                                   | ** ** | **2004**                            | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                             | ** ** | **(unaudited)**                            | ** ** | **(unaudited)**                     | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                                                                   |       |                                       |       |                                |       |   |   |   |   |
| **Supplementary Cash Flow Information**                                                |       |                                       |       |                                |       |   |   |   |   |
|                                                                                   |       |                                       |       |                                |       |   |   |   |   |
| Convertible debentures  settled with the issuance of common shares                     |       | $                                          | 11,639,289 |                                | $          | — |   | $ | 13,318,750 |   | $ | — |   |
| Accrued interest on  convertible debentures settled with the issuance of common shares |       | 301,988                                    |       | —                              |       | 320,988 |   | — |   |
|                                                                                        |            |                                            |            |                                     |            |  |  |  |  |  |  |  |  |

 

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

 

6

----

 

**WORLDHEARTCORPORATION**

**Notesto Unaudited Consolidated Financial Statements**

 

**1.****              Going Concern Assumption**

 

Theseinterim unaudited consolidated financial statements have been prepared on thebasis of accounting principles applicable to a going concern, which assume thatWorld Heart Corporation (the “Company” or “WorldHeart”) will continue inoperation for the foreseeable future and will be able to realize its assets anddischarge its liabilities in the normal course of operations.

 

The Company continued to experience losses and a netcash outflow in the third quarter. During July 2005, the Company receivedapproximately $22.7 million in gross proceeds from the exercise of warrants anda private placement financing (see Notes 3 and 4) which management believeswill be sufficient to sustain operations until mid-year 2006. The Company’scontinuance as a going concern beyond that time is dependent upon its abilityto obtain additional financing, control expenses or becoming commerciallysuccessful.

 

Thesefinancial statements do not reflect adjustments to the carrying values ofassets and liabilities, the reported revenues and expenses, and the balancesheet classifications used that would be necessary if the going concernassumption were not appropriate. Such adjustments could be material.

 

**2.****              Significant AccountingPolicies**

 

*Basis of presentation*

 

Theaccompanying interim unaudited consolidated financial statements have beenprepared by management in accordance with accounting principles generallyaccepted in the United States (“U.S. GAAP”), and include all assets,liabilities, revenues and expenses of the Company and its wholly ownedsubsidiaries: World Heart Inc. and World Heart B.V. All material inter-companytransactions and balances have been eliminated. These interim unauditedconsolidated financial statements follow the same accounting policies andmethods of their application as the Company’s audited consolidated financialstatements for the year ended December 31, 2004. These interim unauditedconsolidated financial statements do not conform in all respects to therequirements of GAAP for annual financial statements. These condensed notes tothe interim unaudited consolidated financial statements should be read inconjunction with the audited consolidated financial statements and notes forthe year ended December 31, 2004. In the opinion of management, theseinterim unaudited consolidated financial statements reflect all normal andrecurring adjustments considered necessary to state fairly the results for theperiods presented.

 

*Use of estimates*

 

Thepreparation of these interim unaudited consolidated financial statements inconformity with GAAP requires management to make estimates and assumptions thataffect the amounts reported in the interim unaudited consolidated financialstatements and the accompanying notes. Actual results could differ from theseestimates and the operating results for the interim periods presented are notnecessarily indicative of the results expected for the full year.

 

*Goodwill and Other Intangible Assets*

 

Inaccordance with Financial Accounting Standards Board (“FASB”) Statement ofFinancial Accounting Standard (“SFAS”) No. 144, “Accounting for theImpairment or Disposal of Long-Lived Assets”, WorldHeart reviews the carryingvalue of long-lived assets including goodwill whenever events or changes incircumstances indicate that the carrying amount of an asset may not berecoverable. Such events or circumstances might include a significant declinein market share, a significant decline in profits, changes in technology,significant litigation or other items.

 

Inaccordance with the SFAS No. 142 “Goodwill and Other Intangible Assets”,management annually completes an impairment test of goodwill by comparing thecarrying amount of goodwill with its fair value. As of the end of the fiscal2004, it was determined that goodwill was not impaired. An impairment test ofgoodwill will be performed at the end of 2005.

 

**3.**              MedQuest Acquisition

** **

On July 29,2005, the Company completed its acquisition (“MedQuest Acquisition”), ofMedQuest Products, Inc. (“MedQuest”), the developer of the WorldHeartrotary VAD (previously called the HeartQuest Rotary VAD), a small rotary pumpat its advanced stage of development for aggregate consideration of 9,300,000common shares of WorldHeart. The acquisition was accounted for as anacquisition of assets as the operations of MedQuest did not meet the definitionof a business as defined in Emerging Issues Task Force Issue (“EITF”) Abstract No. 98-3“Determining Whether a Non-monetary Transaction Involves Receipt of ProductiveAssets or of a Business”. Assets acquired and liabilities assumed were recordedat their estimated fair values. The value of the acquisition consideration,including certain acquisition and closing costs, exceeded the fair value of thenet assets acquired by approximately $3.9 million. In accordance with SFAS No. 142,such excess is to be allocated to the relative fair values of the non-monetaryassets acquired. Amounts allocated to identifiable intangible assets areamortized over their estimated useful lives. Amounts allocated to purchasedresearch and development were expensed immediately.

 

7

----

 

The valueof the acquisition consideration is as follows:

 
| Issuance of WorldHeart common shares |   | $         | 14,694,000 |   |
|--------------------------------------|--------|-----------|------------|--------|
| Transaction  costs                   |   | 1,255,696 |       |
| Total purchase price                 |   | $         | 15,949,696 |   |

 

Thefair value of the WorldHeart common shares on January 31, 2005, the announcementdate of the acquisition, was $1.58 per share.

 

Theallocation of the purchase price, based on the estimated fair values of theassets and liabilities assumed, at the acquisition date of July 29, 2005is as follows:

 
| Current assets                                |   | $          | 765,027    |   |
|-----------------------------------------------|--------|------------|------------|--------|
| Property and equipment                        |   | 264,183    |       |
| Acquired workforce                            |   | 765,684    |       |
| Purchased in-process research and development |   | 18,147,341 |       |
| Current liabilities                           |   | (3,992,539 | )          |
| Net assets acquired                           |   | $          | 15,949,696 |   |

 

Thein-process research and development (“IPR&D) was valued at approximately$18.1 million. We used an income approach and applied risk-adjusted discountrates to the estimated future revenues and expenses attributable to IPR&Dprograms at MedQuest. The most significant in-process program relates primarilyto the development of the WorldHeart rotary VAD, an advanced, next generation,rotary blood pump intended for the Destination Therapy (DT) market. TheWorldHeart rotary VAD has an estimated fair value of approximately $9.6million. The other major development program called MagLev Plus has anestimated fair value of approximately $5.0 million.

 

Anaggregate amount of $14.6 million was allocated to purchased research anddevelopment. The estimated fair value of the purchased research and developmentwas increased by approximately $3.5 million related to the excess of thepurchase price over the estimated fair value of the net assets acquired. TheCompany recorded a non-cash charge to operations in the third quarter of2005 of approximately $18.1 million for the purchased research anddevelopment.

 

***Pro formaFinancial Information***

 

TheMedQuest Acquisition was completed on July 29, 2005 and MedQuest’s resultsof operations subsequent to that date are included in the Company’s interimunaudited consolidated statements of operations for the three and nine monthperiods ended September 30, 2005. However, the Company has preparedunaudited pro forma financial information showing revenues and net loss for thecombined entity for the three and nine months ended September 30, 2005 asif the acquisition occurred as of January 1, 2005. The following unauditedpro forma financial information should not be taken as representative of thefuture consolidated results of operations or financial condition of theCompany.

 
| ** **                                  | ** ** | **Three  months ended**      | ** **  | **Nine  months ended** | ** ** |
|---------------------------------------------|------------|------------------------------|-------------|------------------------|------------|
| ** **                                  | ** ** | **September 30,  2005** | ** **  |
|                                        |       |                         |        |                   |       |
| Revenues                                    |       | $                            | 2,149,751   |                   | $          | 8,015,917 |   |
| Net loss                                    |       | $                            | (28,491,752 | )                      | $          | (37,260,875 | ) |
| Basic and diluted net loss per common share |       | $                            | (0.51       | )                      | $          | (0.67 | ) |

 

The interimunaudited pro forma net loss per share is computed by dividing the interimunaudited pro forma net loss by the interim unaudited pro forma weightedaverage number of shares outstanding, assuming WorldHeart had acquired MedQueston January 1, 2005. The pro forma weighted average number of sharesoutstanding for both the three and nine-month periods ended September 30,2005 is as follows:

 

8

----

 
| ** **                                                                            | ** ** | **Proforma weighted  average shares outstanding  from January 1, 2005 to  September 30, 2005** | ** ** |
|---------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | ** **                                                                                     | ** ** |
| WorldHeart  common shares outstanding at January 1, 2005                         |       | 15,744,522                                                                                     |       |
| Common  shares issued for MedQuest assets                                             |       | 9,300,000                                                                                      |       |
| Common  shares issued to MedQuest majority shareholders                               |       | 8,888,889                                                                                      |       |
| Common  shares issued upon exercise of 10,655,000 warrants                            |       | 10,655,000                                                                                     |       |
| Common shares issued upon conversion of  convertible debenture principal and interest |       | 10,891,138                                                                                     |       |
| ** **                                                                            | ** ** | **55,479,549**                                                                                 | ** ** |

 

*Private Placement*

 

Inconnection with the MedQuest acquisition on July 29, 2005, WorldHeartentered into a private placement agreement with Maverick Venture Management,LLC, (“Maverick”) which was the majority shareholder of MedQuest. Maverickpurchased 8,888,889 common shares of WorldHeart at a purchase price of $1.35per share for total gross proceeds of approximately $12.0 million. Pursuant tothe asset purchase agreement between MedQuest and WorldHeart, WorldHeartassumed certain liabilities of MedQuest including approximately $3.5 million owed to Maverickin connection with the ongoing operations of the MedQuest business and repayedthat amount to Maverick upon closing of the MedQuest Acquisition. As a result,WorldHeart received net proceeds of approximately $8.5 million from the privateplacement. The common stock issued in connection with these transactions,including 9,300,000 shares for the acquisition and 8,888,889 for the privateplacement were registered with the Securities and Exchange Commission in a Form S-3which was declared effective on September 23, 2005.

 

**4.**              Convertible Debentures andWarrants

** **

As partof the MedQuest Acquisition, the Company issued tender offers to the holders ofits unsecured convertible debentures (the “Debentures”) and the holders of itscommon stock purchase warrants issued to investors in September 2004 (the “Warrants”).The holders of the Debentures unanimously agreed to convert all of theoutstanding Debentures at the stated conversion price of $1.25 per common sharealong with all accrued interest. On July 18, 2005, the shareholdersapproved a reduction in the Warrant exercise price from $1.55 to $1.00 pershare on the condition that the Warrant holders exercise the Warrantsimmediately. The holders of the Warrants unanimously agreed to exercise the10,655,000 Warrants into 10,655,000 common shares. During the last two weeks ofJuly 2005, all of the Warrants were exercised into common shares and theremaining outstanding Debentures were converted to common shares. In addition,the accrued interest on the Debentures was also converted into an additional236,097 common shares at a conversion price equal to the volume weightedaverage stock price at the date of conversion.

 

TheDebentures, which would have become due on September 15, 2009, wereconvertible at any time at the holder’s option into common shares of theCompany at a price of $1.25 per share and accumulated non-compounding interestat an annual rate of 3%. The interest was convertible at any time into commonshares of the Company at a price equal to the volume weighted average stockprice at the date of conversion.

 

TheCompany could have redeemed the Debentures when the trading price of theCompany’s common shares was greater than $3.00 for 20 consecutive days, subjectto a maximum of 20% of the initially issued Debentures in any 90-day period. TheWarrants allowed the holders to purchase 10,655,000 common shares of theCompany at an exercise price of $1.55 per share and were exercisable for aperiod of five years. WorldHeart could have called the Warrants when thetrading price of the Company’s common shares was greater than $4.50 for 20 consecutivetrading days, subject to a maximum of 20% of the initially issued Warrants inany 90-day period.

 

As a result ofthe change in fair value attributed to the decrease in the exercise price ofthe Warrants from $1.55 to $1.00, $5,860,250 was recorded in the third quarterof 2005 as an increase in net loss applicable to common shareholders and anincrease in the carrying value of the Warrants included in additional paid-incapital.

 

**5.**              Stock-based Compensation

** **

The Company accounts for its stock option plan inaccordance withSFAS No. 123, “Accounting for Stock Based Compensation”,which requires companies to recognize as expense, over the vesting period, thefair value of all stock-based awards on the date of grant or to continue toapply the provisions of Accounting Principles Board (“APB”) Opinion No. 25,“Accounting for Stock Issued to Employees” and provide proforma net income and pro forma income per share disclosures as if the fairvalue based method defined in SFAS No. 123 had been applied to stock-basedawards. The Company follows this alternative method.

 

9

----

 

The estimated stock-based compensation costs based on stock optionsgranted to directors and employees and the pro forma net loss and loss pershare are as follows:

 
| ** **                                             | ** ** | **Three  months ended September 30,** | ** **  | **Nine  months ended September 30,** | ** **  |
|--------------------------------------------------------|------------|--------------------------------------------|-------------|-------------------------------------------|-------------|
| ** **                                             | ** ** | **2005**                                   | ** **  | **2004**                                  | ** **  | **2005** | ** ** | **2004** | ** ** |
| Net loss applicable - to  common shareholders          |       | $                                          | (28,111,358 | )                                         | (10,935,895 | ) | (36,696,495 | ) | (19,848,290 | ) |
| Adjustment for stock based  costs included in net loss |       | 160,931                                    |        | —                                    |        | 160,931 |   | — |   |
| Stock-based costs under fair  value method             |       | (1,214,519                                 | )           | (476,090                                  | )           | (1,863,823 | ) | (1,693,573 | ) |
| Adjusted pro forma net loss                            |       | $                                          | (29,164,946 | )                                         | $           | (11,411,985 | ) | $ | (38,399,387 | ) | $ | (21,541,863 | ) |
|                                                   |       |                                       |        |                                      |        |   |   |   |   |
| Reported basic and diluted  loss per common share      |       | $                                          | (0.64       | )                                         | $           | (0.71 | ) | $ | (1.42 | ) | $ | (1.30 | ) |
| Stock-based compensation  costs per common share       |       | (0.01                                      | )           | (0.03                                     | )           | (0.03 | ) | (0.11 | ) |
| Pro forma basic and diluted  net loss per common share |       | $                                          | (0.65       | )                                         | $           | (0.74 | ) | $ | (1.45 | ) | $ | (1.41 | ) |

 

On September 23,2004, the Company conditionally granted 2,383,725 options to purchase commonshares of the Company to employees, officers, directors, and consultants,subject to shareholder approval of an increase in the number of options availableunder the employee stock option plan. Shareholder approval occurred on July 18,2005. These options have an exercise price of $1.12 per share, except for215,000 options which have an exercise price of Cdn $1.43 per share. Theoptions vest one third on each of the first, second and third anniversaries ofthe date of grant and expire on September 22, 2013. The Company recognizeda non-cash stock compensation expense of $146,000 in the third quarter of 2005related to the intrinsic value of these September 2004 grants. Theintrinsic value of these options was determined to be $0.18 per option. Thisintrinsic value will be amortized over the three year vesting period beginning September 23,2004.

 

Inaddition, on January 31, 2005, the Company conditionally granted a totalof 3,290,750 options to purchase common shares of the Company to employees,officers, directors and consultants. These grants were also subject toshareholder approval of an increase in the numberof options available under the employee stock option plan. Shareholder approvaloccurred on July 18, 2005. The exercise price is $1.48 per share and theseoptions vest one third on each of the first, second and third anniversaries ofthe date of grant and each one third expires six years after vesting date. Theshare-based compensation costs and the adjusted pro forma net loss aboveinclude the charges related to these options.

 

Theweighted average fair value of options issued during the three and nine monthsended September 30, 2005 was $1.28. The fair values of options granted isdetermined using the Black-Scholes model. For the three months and nine monthsended September 30, 2005, the following weighted average assumptions wereutilized:

 
| ** **                      | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|---------------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
| Expected options life, in years |       | 6                                          |       | 6                                         |       | 6 |   | 6 |   |
| Volatility                      |       | 83                                         | %          | 73                                        | %          | 78 | % | 73 | % |
| Risk free interest rate         |       | 4.17                                       | %          | 4.00                                      | %          | 4.00 | % | 4.00 | % |
| Dividend yield                  |       | Nil                                        |       | Nil                                       |       | Nil |   | Nil |   |

 

In June 2001, the FASBissued SFAS No. 148,which amended the transitional provisions of SFAS No. 123for companies electing to recognize employee stock-based compensation using thefair value based method. The provisions of FASB No. 148 will be effectivefor years beginning on or after January 1, 2006. In addition, during 2004,the FASB issued SFAS No. 123R, which also amended the provisions of SFAS No. 123.The provisions of FASB No. 123R will be effective for years beginning onor after January 1, 2006. The Company plans on adopting these newpronouncements in 2006.

 

**6.**              Restructuring

** **

On August 25,2004, the Company approved a plan to consolidate its Ottawa, Ontario operationsinto its facilities in Oakland, California where the Novacor® LVAS ismanufactured. The consolidation of the North American operations into onelocation has reduced ongoing business expenses and management expects it willcontinue to improve the Company’s operational efficiency and effectiveness. Theconsolidation was completed by June 30, 2005.

 

During thethree months ended September 30, 2005, no restructuring costs wererecorded. During the nine months ended September 30, 2005, restructuringcosts of $341,000 were recorded, $230,000 of the June 30, 2005 accruedbalance was paid, $8,300 was settled in the third quarter of 2005 and a $48,000accrual balance remains at September 30, 2005.

 

10

----

 

The amountsaccrued and expensed to date are as follows:

 
| ** **                                                 | ** ** | **Employee  severance** | ** ** | **Contract  settlement** | ** ** | **Write  down** | ** ** | **Other**  | ** ** | **Total**  | ** ** |
|------------------------------------------------------------|------------|-------------------------|------------|--------------------------|------------|-----------------|------------|------------|------------|------------|------------|
| ** **                                                 | ** ** | ** **              | ** ** | ** **               | ** ** | ** **      | ** ** | ** ** | ** ** | ** ** | ** ** |
| Costs accrued during 2004                                  |       | $                       | 1,396,037  |                     | $          | 57,653          |       | $          | 338,595    |       | $          | 22,509 |   | $ | 1,814,794 |   |
| Costs paid or settled in  2004                             |       | (795,923                | )          | —                   |       | (338,595        | )          | (8,624     | )          | (1,143,142 | )          |
| Balance in accrued  liabilities at December 31, 2004  |       | 600,114                 |       | 57,653                   |       | —          |       | 13,885     |       | 671,652    |       |
|                                                       |       |                    |       |                     |       |            |       |       |       |       |       |
| Costs accrued during the  period                           |       | $                       | 110,539    |                     | $          | —          |       | $          | (3,546     | )          | $          | 22,505 |   | $ | 129,498 |   |
| Costs paid or settled in the  period                       |       | (674,414                | )          | —                   |       | 3,546           |       | (20,518    | )          | (691,386   | )          |
| Balance in accrued  liabilities at March 31, 2005     |       | 36,239                  |       | 57,653                   |       | —          |       | 15,872     |       | 109,764    |       |
|                                                       |       |                    |       |                     |       |            |       |       |       |       |       |
| Costs accrued during the  period                           |       | $                       | 20,186     |                     | $          | 192,012         |       | $          | (3,255     | )          | $          | 2,962 |   | $ | 211,905 |   |
| Costs paid or settled in the  period                       |       | (56,425                 | )          | —                   |       | 3,255           |       | —     |       | (53,170    | )          |
| Balance in accrued liabilities  at June 30, 2005      |       | —                  |       | 249,665                  |       | —          |       | 18,834     |       | 268,499    |       |
|                                                       |       |                    |       |                     |       |            |       |       |       |       |       |
| Costs accrued during the  period                           |       | $                       | —     |                     | $          | —          |       | $          | —     |       | $          | — |   | $ | — |   |
| Costs paid or settled in the  period                       |       | —                  |       | (220,894                 | )          | —          |       | —     |       | (220,894   | )          |
| Balance in accrued  liabilities at September 30, 2005 |       | $                       | —     |                     | $          | 28,771          |       | $          | —     |       | $          | 18,834 |   | $ | 47,605 |   |

 

**7.****              Canadian Accounting Principles**

 

The interimunaudited consolidated financial statements have been prepared in accordancewith U.S. GAAP. These principles differ, as they affect the Company, for thethree and nine month periods ended September 30, 2005 and for the balancesheets as at September 30, 2005 and December 31, 2004, in thefollowing material respects from Canadian generally accepted accountingprinciples (“Canadian GAAP”). There are no differences in adjustment foracquired in-process research and development due to Canadian GAAP reported cashflows for the periods presented.

 

(a)   Balancesheets – Canadian GAAP

 
| ** **                                                  | ** ** | **September 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-------------------------------------------------------------|------------|------------------------------|------------|-----------------------------|------------|
| ** **                                                  | ** ** | **(unaudited)**              | ** ** | ** **                  | ** ** |
| **ASSETS**                                                  |       |                         |       |                        |       |
| Current assets                                              |       | $                            | 28,077,437 |                        | $          | 21,743,636 |   |
| Long-term receivable                                        |       | —                       |       | 318,553                     |       |
| Cash pledged as collateral  for lease                       |       | 750,000                      |       | 750,000                     |       |
| Capital assets                                              |       | 1,953,524                    |       | 2,011,586                   |       |
| In-process research and  development, net (4)               |       | 17,542,429                   |       | —                      |       |
| Goodwill and intangible  assets                             |       | 17,913,805                   |       | 17,434,655                  |       |
| **Total Assets**                                            |       | $                            | 66,237,195 |                        | $          | 42,258,430 |   |
|                                                        |       |                         |       |                        |       |
| **LIABILITIES AND SHAREHOLDERS’ EQUITY**               |       |                         |       |                        |       |
| Current liabilities                                         |       | $                            | 6,701,825  |                        | $          | 7,637,819 |   |
| Convertible debentures (1)                                  |       | —                       |       | 2,530,659                   |       |
| Long-term obligation                                        |       | —                       |       | 16,368                      |       |
| **Total Liabilities**                                       |       | 6,701,825                    |       | 10,184,846                  |       |
|                                                        |       |                         |       |                        |       |
| **Shareholders’ equity (deficiency)**                  |       |                         |       |                        |       |
| Common shares (1)                                           |       | 245,087,350                  |       | 187,027,058                 |       |
| Contributed surplus (1) (3)                                 |       | 13,742,281                   |       | 22,871,780                  |       |
| Cumulative translation  adjustment                          |       | (6,490,184                   | )          | (6,490,184                  | )          |
| Accumulated deficit (1) (2)  (3) (4)                   |       | (192,804,077                 | )          | (171,335,070                | )          |
| **Total Shareholders’ equity**                         |       | 59,535,370                   |       | 32,073,584                  |       |
|                                                        |       |                         |       |                        |       |
| **Total Liabilities &  Shareholders’ equity** |       | $                            | 66,237,195 |                        | $          | 42,258,430 |   |

 

11

----

 

(b)          Statements of loss –Canadian GAAP

 
| ** **                                                 | ** ** | **Three  months ended  September 30,** | ** **  | **Nine  months ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------------|-------------|--------------------------------------------|------------|
| ** **                                                 | ** ** | **2005**                                    | ** **  | **2004**                                   | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                 | ** ** | **(unaudited)**                             | ** **  | **(unaudited)**                            | ** ** | **(unaudited)** | ** ** | **(unaudited)** | ** ** |
|                                                       |       |                                        |        |                                       |       |   |   |   |   |
| Net loss for the period in accordance with U.S. GAAP       |       | $                                           | (28,111,358 | )                                          | $          | (10,935,895 | ) | $ | (36,696,495 | ) | $ | (19,848,290 | ) |
|                                                       |       |                                        |        |                                       |       |   |   |   |   |
| Adjustment to reconcile to Canadian GAAP:                  |       |                                        |        |                                       |       |   |   |   |   |
|                                                       |       |                                        |        |                                       |       |   |   |   |   |
| Stock-based costs under fair  value method (3)             |       | (1,214,519                                  | )           | (476,090                                   | )          | (1,864,123 | ) | (1,693,573 | ) |
|                                                       |       |                                        |        |                                       |       |   |   |   |   |
| Stock-based costs included  in net loss under  US GAAP (3) |       | 160,931                                     |        | —                                     |       | 160,931 |   | — |   |
|                                                       |       |                                        |        |                                       |       |   |   |   |   |
| Interest and accretion on  convertible debentures (1)      |       | (73,673                                     | )           | (49,300                                    | )          | (608,910 | ) | (49,300 | ) |
| In-process research and  development (4)                   |       | 18,147,341                                  |        | —                                     |       | 18,147,341 |   | — |   |
| Amortization of in-process  research and  development (4)  |       | (604,912                                    | )           |                                       |       | (604,912 | ) |   |   |
|                                                       |       |                                        |        |                                       |       |   |   |   |   |
| Net loss for the period in  accordance with Canadian GAAP  |       | $                                           | (11,696,193 | )                                          | $          | (11,461,285 | ) | $ | (21,466,168 | ) | $ | (21,591,163 | ) |
|                                                       |       |                                        |        |                                       |       |   |   |   |   |
| Weighted average number of  common shares outstanding      |       | 43,797,104                                  |        | 15,355,573                                 |       | 25,918,252 |   | 15,249,176 |   |
|                                                       |       |                                        |        |                                       |       |   |   |   |   |
| Basic and diluted loss per common                          |       | $                                           | (0.27       | )                                          | $          | (0.75 | ) | $ | (0.83 | ) | $ | (1.42 | ) |

 

----

Footnotes

 

(1)          Under U.S. GAAP, theproceeds of the issue of the Debentures were allocated between the Debentures,the Warrants, and the beneficial conversion feature based on their relativefair values. The value of the Warrants and the beneficial conversion featurewere recorded in additional paid-in capital. On September 16, 2004, theearliest possible exercise date, the full value of the beneficial conversionfeature was charged to interest expense. Under Canadian GAAP, the proceeds ofthe issue were allocated based on the relative fair values of the Debentures,the Warrants and the conversion feature. The net proceeds were allocated asfollows:

 
| ** **              | ** ** | **September 15, 2004** | ** ** |
|-------------------------|------------|-----------------------------|------------|
|                    |       |                        |       |
| Convertible  Debentures |       | $                           | 1,734,350  |   |
| Warrants                |       | 4,504,127                   |       |
| Conversion  feature     |       | 5,863,191                   |       |
| Total                   |       | $                           | 12,101,668 |   |

 

The value allocated to the Debentures will accrete tothe cash value at maturity at the effective interest rate. Due to theconversion of the Debentures and the related accrued interest during the ninemonths ended September 30, 2005, under U.S. GAAP, $8,948,106 wastransferred from convertible Debentures and $585,463 was transferred fromadditional paid-in capital to common shares. Under Canadian GAAP, the amounttransferred to common shares were $3,910,540 related to convertible debentures,$4,504,127 related to the warrant exercise and $5,863,191 related to theconversion feature.

 

(2)          The difference between theissue price and initial public offering (IPO) price of shares issued within aone-year period prior to the IPO is generally accounted for as an expense andcharged against earnings for the period with a corresponding and equal amountrecorded as paid-in capital. There is no corresponding requirement underCanadian GAAP. The difference of $26,776,950 related to the Company’s IPO in1996 increases the common shares and accumulated deficit reported under U.S.GAAP, with no difference reported in total shareholders’ equity.

 

12

----

 

(3)   Under U.S.GAAP, the Company accounts for its stock option plan in accordance with APBOpinion No. 25 and provides pro forma net income and pro forma loss pershare disclosure as if the fair value based method as defined in SFAS No. 123had been applied to stock-based awards. Under Canadian GAAP, the Companyaccounts for its stock option plan in accordance with the Canadian Institute ofChartered Accountants (“CICA”) Handbook section 3870, “Stock-basedCompensation and Other Stock-based Payments”, which requires entities toaccount for employee stock options using the fair value based method, wherecompensation cost is measured at fair value at the date of grant and isexpensed over the stock-based awards vesting period.

 

(4)          Under U.S. GAAP, the Companycharged the in-process research and developed acquired in the MedQuest Acquisitionto earnings at the time the acquisition was completed. Under Canadian GAAP, theCompany accounts for this as an acquired intangible and amortizes the $18.1million value originally assigned to it against earnings on a straight-linebasis over its estimated useful life of five years.

 

13

----

 

**ITEM 2.   MANAGEMENT’S DISCUSSIONAND ANALYSIS OR PLAN OF OPERATION**

 

**INTRODUCTION**

 

World HeartCorporation and its subsidiaries are collectively referred to as “WorldHeart”. Thefollowing Management Discussion and Analysis of Financial Condition and Resultsof Operations (“MD&A”) is an update of our discussion and analysis of thethree and six month period ended June 30, 2005. This MD&A discussesmaterial changes in WorldHeart’s financial condition and results of operationsand cash flows for the three and nine months ended September 30, 2005. Suchdiscussion and comments on the liquidity and capital resources should be readin conjunction with the information contained in WorldHeart’s auditedconsolidated financial statements for the year ended December 31, 2004,prepared in accordance with U.S. GAAP included in our Annual Report on Form 10 – KSB/Afor the fiscal year ended December 31, 2004. Significant differences betweenCanadian GAAP and U.S. GAAP are presented in Note 7 to the interim unauditedconsolidated financial statements for the three and nine months ended September 30,2005. In this discussion, all amounts are in United States dollars (“U.S.dollars”) unless otherwise stated.

 

The discussionand comments contained hereunder include both historical information andforward-looking information. The forward-looking information, which generallyis information stated to be anticipated, expected, or projected by management,involves known and unknown risks, uncertainties and other factors that maycause the actual results and performance to be materially different from anyfuture results and performance expressed or implied by such forward-lookinginformation. Potential risks and uncertainties include, without limitation:numerous uncertainties and time delays inherent in the development of newproducts for use in the human body; WorldHeart’s need to establishreimbursement mechanisms and product acceptance from third-party payers;extensive government regulation of our products; rapid developments intechnology by competitors who have significantly greater financial, productionand marketing resources; lack of anticipated synergies and efficiencies relatedto the MedQuest Acquisition, slower than anticipated growth in the DestinationTherapy (DT) market and the need for and our ability to raise additionalfunding.

 

**OVERVIEW**

 

WorldHeart is a global technology leader in mechanical circulatorysupport systems currently developing and commercializing implantableventricular assist devices (“VADs”), which are mechanical pumpsthat allow for the restoration of normal blood circulation to patientssuffering from advanced heart failure. WorldHeart has facilities in Oakland, California, SaltLake City, Utah and Heesch, Netherlands. During the second quarter 2005, weconsolidated the Ottawa operations into our Oakland facility. WorldHeartcurrently derives substantially all of its revenue from its Novacor®LVAS (left ventricular assist system) and related peripheral equipment which itmanufactures in Oakland and sells directly tomedical clinics and hospitals in the United States, most of Europe and Canadaand through a distributor in Japan and certain other countries.

 

The Novacor LVAS iscommercially approved as a bridge to transplantation device in the UnitedStates and Canada. In Europe, the Novacor LVAS has unrestricted approval foruse as an alternative to transplantation, a bridge to transplantation, and tosupport patients who may have an ability to recover the use of their naturalheart. In Japan, the device is commercially approved for use in cardiacpatients at risk of imminent death from non-reversible left ventricular failurefor which there is no alternative except heart transplantation.

 

WorldHeart is conductinga long-term use pivotal trial in the United States called RELIANT (RandomizedEvaluation of the Novacor LVAS in aNon-TransplantPopulation). Data from the RELIANT Trial is expected to support a Pre-marketApproval Supplement that will request approval for the use of the Novacor LVASby non-transplant eligible or DT patients in the United States.

 

WorldHeart is developing a next-generation smallimplantable pulsatile VAD (the “Novacor II”) and during the third quarter of2005 has acquired MedQuest’s technology and development programs associatedwith a magnetically levitated centrifugal rotary VAD (the “WorldHeart rotaryVAD”). Developmentwork on the Novacor II continues with a successful initial animal implant completedin July 2005 and further animal trials are planned for 2006 followed byhuman trials. Pre-clinical animal testing of the WorldHeart rotary VAD isunderway with an initial feasibility clinical study planned for early 2006.

 

Research and development by WorldHeart’s competitorsis proceeding for several next-generation non-pulsatile continuous flow assistdevices. Certain of these devices have received the CE Mark in Europe and areadvancing through clinical trials in the United States and Europe. It hasnot been determined whether these non-pulsatile devices will be suitable forlong-term use.

 

Although the Destination Therapy patient populationcontinues to be largely untreated by cardiac assist devices, we believe thatthe DT market will evolve more rapidly when devices are accepted as reliableand durable. A wider adoption of VADs for DT will likely occur with thenext-generation VADs and we believe that late-stage and end-stage heart failurewill be best served by a combination of rotary and pulsatile flow VADs.

 

**MEDQUEST ACQUISITION**

 

On January 31,2005, WorldHeart announced a definitive agreement to concurrently: acquire allthe assets of MedQuest for 9,300,000 common shares; issue 8,888,889 commonshares through a private placement to Maverick Venture Management, LLC (“Maverick”),

 

14

----

 

forgross proceeds of $12,000,000; issue 10,655,000 common shares upon the exerciseof 10,655,000 warrants for gross proceeds of $10,655,000 and convert all ofWorldHeart’s outstanding convertible debentures.

 

Uponapproval by shareholder vote on July 18, 2005, and unanimous tendering ofthe debentures and warrants, WorldHeart successfully completed, on July 29,2005, the acquisition of all assets of MedQuest, raised approximately $22.7million in gross financing proceeds from the private placement with Maverickand the exercise of all the outstanding warrants. The Company also convertedall of its remaining convertible debentures.

 

WorldHeartbegan consolidating the results of operations of MedQuest in its financialstatements from the date the transaction was consummated. This resulted to aone-time charge to earnings for the value of the acquired in-process researchand development of approximately $18.1 million in the period ended September 30,2005.

 

**SUMMARY OF QUARTERLY RESULTS**

 
| ** **                                 | ** ** | **Three  months ended**      | ** **  |
|--------------------------------------------|------------|------------------------------|-------------|
| ** **                                 | ** ** | **September 30,  2005** | ** **  | **June 30,  2005** | ** ** | **March 31,  2005** | ** ** | **December 31,  2004** | ** ** |
|                                       |       |                         |        |   |   |   |   |   |   |
| Net revenue                                |       | $                            | 2,149,751   |   | $ | 2,449,178 |   | $ | 3,416,988 |   | $ | 2,986,980 |   |
| Net loss for the period                    |       | $                            | (22,251,108 | ) | $ | (4,642,741 | ) | $ | (3,942,396 | ) | $ | (5,608,818 | ) |
| Net loss applicable to common shareholders |       | $                            | (28,111,358 | ) | $ | (4,642,741 | ) | $ | (3,942,396 | ) | $ | (6,293,510 | ) |
| Basic and diluted loss per  share          |       | $                            | (0.64       | ) | $ | (0.27 | ) | $ | (0.24 | ) | $ | (0.41 | ) |

 
| ** **                                 | ** ** | **Three  months ended**      | ** **  |
|--------------------------------------------|------------|------------------------------|-------------|
| ** **                                 | ** ** | **September 30,  2004** | ** **  | **June 30,  2004** | ** ** | **March 31,  2004** | ** ** | **December 31,  2003** | ** ** |
|                                       |       |                         |        |   |   |   |   |   |   |
| Net revenue                                |       | $                            | 2,250,050   |   | $ | 2,146,388 |   | $ | 2,192,343 |   | $ | 559,704 |   |
| Net loss for the period                    |       | $                            | (10,935,895 | ) | $ | (5,402,792 | ) | $ | (3,509,603 | ) | $ | (4,846,928 | ) |
| Net loss applicable to common shareholders |       | $                            | (10,935,895 | ) | $ | (5,402,792 | ) | $ | (3,509,603 | ) | $ | (6,864,152 | ) |
| Basic and diluted loss per share           |       | $                            | (0.71       | ) | $ | (0.35 | ) | $ | (0.23 | ) | $ | (0.47 | ) |

 

**RESULTSOF OPERATIONS FOR THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2005COMPARED WITH THE THREE AND NINE MONTH PERIODS ENDED SEPTEMBER 30, 2004**

 
| ** **                                     | ** ** | **Three  months ended September 30,** | ** **      | **Nine  months ended September 30,** | ** ** |
|------------------------------------------------|------------|--------------------------------------------|-----------------|-------------------------------------------|------------|
| ** **                                     | ** ** | **2005**                                   | ** **      | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                           |       |                                       |            |                                      |       |   |   |   |   |
| Revenue                                        |       | $                                          | 2,149,751       |                                      | $          | 2,250,050 |   | $ | 8,015,917 |   | $ | 6,588,781 |   |
| Cost of goods sold                             |       | (1,726,158                                 | )               | (1,805,515                                | )          | (5,980,126 | ) | (4,685,677 | ) |
| Gross margin                                   |       | 423,593                                    |            | 444,535                                   |       | 2,035,791 |   | 1,903,104 |   |
| % of Revenue                                   |       | 20                                         | %               | 20                                        | %          | 25 | % | 29 | % |
|                                           |       |                                       |            |                                      |       |   |   |   |   |
| **Operating expenses:**                        |       |                                       |            |                                      |       |   |   |   |   |
| Selling, general and administrative            |       | 2,540,113                                  |            | 3,246,213                                 |       | 9,003,272 |   | 10,084,015 |   |
| Research and development                       |       | 1,913,941                                  |            | 1,585,102                                 |       | 4,376,010 |   | 4,615,505 |   |
| Restructuring costs                            |       | (8,373                                     | )               | 1,176,445                                 |       | 333,030 |   | 1,176,445 |   |
| Amortization of intangibles                    |       | 31,491                                     |            | 129,166                                   |       | 286,518 |   | 387,498 |   |
| Acquired in-process research and development   |       | 18,147,341                                 |            | —                                    |       | 18,147,341 |   | — |   |
| Total operating expenses                       |       | 22,624,513                                 |            | 6,136,926                                 |       | 32,146,171 |   | 16,263,463 |   |
|                                           |       |                                       |            |                                      |       |   |   |   |   |
| **Other income (expense):**                    |       |                                       |            |                                      |       |   |   |   |   |
| Foreign exchange loss                          |       | (51,279                                    | )               | (10,882                                   | )          | (68,558 | ) | (378,787 | ) |
| Investment income                              |       | 91,841                                     |            | 10,778                                    |       | 124,081 |   | 135,462 |   |
| Loss on disposal of assets                     |       | —                                     |            | (44,024                                   | )          | (959 | ) | (44,024 | ) |
| Interest and financing expenses                |       | (90,750                                    | )               | (5,199,376                                | )          | (780,429 | ) | (5,200,582 | ) |
| Total other income (expense)                   |       | (50,188                                    | )               | (5,243,504                                | )          | (725,865 | ) | (5,487,931 | ) |
|                                           |       |                                       |            |                                      |       |   |   |   |   |
| **Total expenses**                             |       | 22,674,701                                 |            | 11,380,430                                |       | 32,872,036 |   | 21,751,394 |   |
|                                           |       |                                       |            |                                      |       |   |   |   |   |
| **Net loss for the period**                    |       | (22,251,108                                | )               | (10,935,895                               | )          | (30,836,245 | ) | (19,848,290 | ) |
|                                           |       |                                       |            |                                      |       |   |   |   |   |
| **Effect of warrant exchange**                 |       | (5,860,250                                 | )               | —                                    |       | (5,860,250 | ) | — |   |
|                                           |       |                                       |            |                                      |       |   |   |   |   |
| **Net loss applicable to common shareholders** | ** ** | **$**                                      | **(28,111,358** | **)**                                     | **$**      | **(10,935,895** | **)** | **$** | **(36,696,495** | **)** | **$** | **(19,848,290** | **)** |

 

15

----

 

**Revenue:**The sale ofNovacor LVAS implant kits (“implant kits”) and related peripheral equipment andservices accounts for substantially all of WorldHeart’s revenues. WorldHeartprimarily sells its products directly, except for certain countries includingJapan, where we sell through distributors.

 

The composition of revenue is as follows:

 
| ** **            | ** ** | **Three months ended September 30,** | ** ** | **Nine months ended September 30,** | ** ** |
|-----------------------|------------|-------------------------------------------|------------|------------------------------------------|------------|
| ** **            | ** ** | **2005**                                  | ** ** | **2004**                                 | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **            | ** ** | **$**                                     | ** ** | **Units**                                | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** | **$** | ** ** | **Units** | ** ** |
|                  |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Implant kits          |       | $                                         | 1,481,748  |                                     | 22         |   | $ | 1,658,645 |   | 29 |   | $ | 5,173,482 |   | 77 |   | $ | 5,118,095 |   | 79 |   |
| Peripherals and other |       | 668,003                                   |       | —                                   |       | 591,405 |   | — |   | 2,842,435 |   | — |   | 1,470,686 |   | — |   |
|                  |       |                                      |       |                                     |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Revenue               |       | $                                         | 2,149,751  |                                     | 22         |   | $ | 2,250,050 |   | 29 |   | $ | 8,015,917 |   | 77 |   | $ | 6,588,781 |   | 79 |   |

 

Revenue for the thirdquarter of 2005 decreased by $100,000 to approximately $2.1 millionrepresenting a decrease of 4% versus the same quarter in 2004. Implant kitrevenue decreased by $177,000 to approximately $1.5 million for the three monthsended September 30, 2005, compared with approximately $1.7 million for thethree months ended September 30, 2004, representing a decrease of 11%. Implantkits recognized as revenue in the third quarter of 2005 totaled 22, comparedwith 29 in the third quarter of 2004. The revenue per implant kit was $67,000in the recent quarter, a slight increase in the revenue recognized per implantkit in the second quarter of 2005, and up 18% compared with the third quarterof 2004. In future periods, we expect implant kit revenue to increase and theaverage revenue per implant kit to continue at current levels, assuming newcenters become enabled with the required peripheral equipment and increaseimplant volume under the RELIANT Trial.

 

As of June 30, 2005, 17 implantkits had been shipped and invoiced, however the revenue was deferred as thetransactions did not meet revenue recognition criteria. Revenue was recognizedon three of these previously shipped implant kits during the third quarter of2005 when revenue recognition criteria were met. There was no new deferredrevenue relating to implant kits shipped and invoiced in the third quarter asall shipments met revenue recognition criteria. There are 14 implant kitsremaining in deferred revenue at September 30, 2005. These kits, plus someundelivered components of multiple element transactions, have resulted indeferred revenue as at September 30, 2005 of approximately $1.2 million thatwill be recognized in future periods.

 

Revenue during the firstnine months of 2005 increased by approximately $1.4 million, or 22%, toapproximately $8.0 million, over the same period in 2004. Implant kit revenueincreased by 1% to approximately $5.2 million for the nine months endedSeptember 30, 2005, compared with approximately $5.1 million for the ninemonths ended September 30, 2004. Implant kits recognized as revenue for thenine months ended September 30, 2005 totaled 77, compared with 79 during thesame period of 2004. The revenue per implant kit increased approximately 4%during the nine months ended September 30, 2005, compared with the same periodin 2004.

 

Peripherals and otherrevenues, including Novacor LVAS hardware and peripheral sales and services,were $668,000 and $591,000 for the three months ended September 30, 2005and September 30, 2004, respectively, which represents an increase of 13%.Peripherals and other revenues for the nine months ended September 30,2005, were approximately $2.8 million, which represents an increase of 93% overperipherals and other revenue of approximately $1.4 million recorded in theperiod ended September 30, 2004. This increase relates to the sale ofrequired peripheral equipment to new medical centers joining the RELIANT Trial.We believe that sales may shift from hardware, peripheral and services toimplant kit sales assuming centers enrolled in our RELIANT Trial increaseimplant volume.

 

**Costof goods sold:****For the three months ended September 30,2005, the cost of goods sold as a percent of revenue remained consistent at80%, compared with the three months ended September 30, 2004. We haveexperienced production inefficiencies caused primarily by production volumesbelow standard capacity resulting in higher Novacor LVAS manufacturing costs. Althoughwe are continuing to implement cost improvement programs to reducemanufacturing costs and control inventory, we expect our cost per unit toremain at current levels until we reach sustainable increased productionvolumes.

 

For the nine months endedSeptember 30, 2005, the overall cost of goods sold increased to 75% ofrevenue, compared with 71% in the nine months ended September 30, 2004. We experiencedgreater production inefficiencies during the first nine months of 2005 versusthe same prior year period caused by supply shortages associated with theacceptance process for components being manufactured by new suppliers andproduction volumes well below capacity.

 

**GrossMargin:****Gross margin for the three months ended September 30,2005 is consistent at 20% of revenues compared with the three months ended September 30,2004.******Grossmargin for the nine months ended September 30, 2005 decreased to 25% ofrevenues from 29% of revenues for the nine months ended September 30,2004. These decreases were due primarily to production inefficiencies, asdescribed above. In addition, certain lower margin sales were made to newcenters for the initial equipment needed to begin a Novacor LVAS implantprogram at those centers. Improvement in gross margin percentage is contingenton implementation of cost reduction programs and production volume increases.We expect the effects of higher incentives on start-up

 

16

----

 

equipment initiallyoffered to certain new centers to continue to decrease as the centers shift topurchasing implant kits in response to usage.

 

**Selling,general and administrative:**Selling, general and administrative expenses consistprimarily of salaries and related expenses for sales, marketing, accounting andadministrative personnel, as well as, professional fees, travel expenses,promotional activities, customer service and technical support, insurance,facility costs and other general corporate expenses.

 

The composition of selling, general and administrativeexpenses is as follows: 

 
| ** **                 | ** ** | **Three  months ended September 30,** | ** ** | **Nine  months ended September 30,** | ** ** |
|----------------------------|------------|--------------------------------------------|------------|-------------------------------------------|------------|
| ** **                 | ** ** | **2005**                                   | ** ** | **2004**                                  | ** ** | **2005** | ** ** | **2004** | ** ** |
|                       |       |                                       |       |                                      |       |   |   |   |   |
| Selling                    |       | $                                          | 1,020,537  |                                      | $          | 1,608,229 |   | $ | 4,355,741 |   | $ | 4,566,642 |   |
| General and administrative |       | 1,519,576                                  |       | 1,637,984                                 |       | 4,647,531 |   | 5,517,373 |   |
| Total                      |       | $                                          | 2,540,113  |                                      | $          | 3,246,213 |   | $ | 9,003,272 |   | $ | 10,084,015 |   |

 

Selling, general andadministrative expense for the three months ended September 30, 2005 decreased$706,000, or 22%, versus the same period in 2004, and for the nine months endedSeptember 30, 2005 decreased approximately $1,081,000, or 11%, versus the sameperiod in 2004.

 

Selling expenses for thethree months ended September 30, 2005 decreased by $588,000, or 36%, comparedwith the same period in 2004 and for the nine month period decreased by $211,000,or 5%, compared with the same period last year. Selling expenses decreased dueto lower medical conference and promotional costs, as well as, lower salariesand selling commissions.

 

General andadministrative expenses decreased by $118,000, or 7%, in the third quarter of2005, compared with the third quarter of 2004 and by $870,000, or 16%, for theyear over year nine-month period. These reductions are primarily due to costsavings associated with the consolidation of our North American operations.Administrative expenses are expected to decrease in the next several quartersresulting from additional cost reduction programs offset somewhat by costsassociated with the implementation of Sarbanes-Oxley Act compliance programs.

 

**Researchand development:****Research and development expenses consistprincipally of salaries and related expenses for research personnel, prototypemanufacturing, testing, clinical trial expenses, factory costs and regulatoryaffairs expenses incurred at our Oakland and Salt Lake City facilities.

 

Research and developmentexpenses for the three months ended September 30, 2005 increased byapproximately $329,000, or 21%, compared with the three months ended September 30,2004. Research and development expenses for the nine months ended September 30,2005 decreased by about $239,000, or 5%, compared with the nine months ended September 30,2004. The MedQuest Acquisition in the third quarter of 2005 resulted in$560,000 ofadditional research and development expenses. Research and development costsdecreased by $240,000, or 5%, for the first nine months of 2005, compared withthe same period in 2004, reflecting the reduction in expenses due to theconsolidation of the North American operations. Development work and relatedexpenses on the next-generation Novacor II and WorldHeart rotary VAD areexpected to increase in preparation for continuing animal and initial humanclinical trials.

 

**Restructuring costs:**On August 25, 2004, we approved a planto consolidate the Ottawa, Ontario operations into our facilities in Oakland,California where the Novacor LVAS is manufactured. The consolidation of theNorth American operations into one location was and is expected to continue toreduce ongoing business expenses and improve operational efficiency andeffectiveness. The restructuring was completed by the end of June 2005. Duringthe three months ended September 30, 2005, no restructuring costs wererecorded. During the nine months ended September 30, 2005, restructuringcosts of $341,000 were recorded, $230,000 of the June 30, 2005 accruedbalance was paid, $8,300 was settled in the third quarter of 2005 and a $48,000accrual balance remains at September 30, 2005.

 

**Acquired in-process research and development:**During the third quarter of2005, we recorded a one-time, non-cash charge of approximately $18.1 million associated withthe MedQuest Acquisition. The $18.1 million valuation was based on an income approach,applying risk-adjusted discount rates to the estimated future revenues andexpenses attributable to in-process research and development programs atMedQuest. An aggregate amount of approximately $14.6 million was allocated topurchased research and development. The estimated fair value of the purchasedresearch and development was increased by approximately $3.5 million, the amount bywhich the value of the acquisition consideration of approximately $15.9 millionexceeded the fair value of net assets acquired of approximately $12.4 million.

 

**Amortization of intangibles:** Amortization of intangibles for the three months ended September 30,2005 was $31,000. These intangible assets were recorded as part of the MedQuestAcquisition and represent the estimated intangible value of the MedQuestworkforce of $765,000, which is being amortized on a straight-line basis over 4years. The amortization of the Novacor asset 

 

17

----

 

intangiblesfor the nine-month period ended September 30, 2005 was $255,000. At June 30,2005, the Novacor assets were fully amortized and no amortization was recordedin the third quarter of 2005.

 

**Foreign Exchange:**Foreignexchange transactions resulted in a loss of $51,000 for the three-month periodended September 30, 2005, compared with a loss of $11,000 for thethree-month period ended September 30, 2004. Foreign exchange transactionsresulted in a loss of approximately $69,000 for the nine-month period ended September 30,2005, compared with a loss of $379,000 for the nine-month period ended September 30,2004.  Exchange gains or losses areexpected to diminish in the future with the winding down of our Canadianoperations.

 

**Effect of warrant exchange:** We recorded a one-time charge of approximately $5.9 million in thethird quarter of 2005 resulting from a reduction in the exercise price ofwarrants originally issued, with convertible debentures, in a private placementin September 2004 and subsequently exercised during July 2005. Theexercise price of these warrants was reduced by $0.55 from $1.55 to $1.00. Thisexercise price reduction applied to about 10.7 million warrants that resultedin the approximately $5.9 million charge to net loss applicable to shareholders.

 

**Other Income (Expense):**Interest and financing expenses during the three months ended September 30,2005 were $91,000, compared with $5,199,000 during the three months ended September 30,2004. During the nine months ended September 30, 2005, interest andfinancing expenses were $781,000, compared with $5,201,000 during the ninemonths ended September 30, 2004. Interest and financing expenses consistedof non-cash interest and accretion related to the convertible debentures. Alloutstanding debentures were converted in July 2005 resulting in asignificant expense reduction in the third quarter of 2005. These non-cashinterest charges will be eliminated in future periods. Interest incomeincreased to $92,000 in the third quarter of 2005, compared with $11,000in the third quarter of 2004. This increase was the result of the higher cashbalance in the third quarter of 2005 resulting from the private placement andthe exercise of warrants.

 

**LIQUIDITY AND CAPITAL RESOURCES**

 

Historically, WorldHeart has funded losses fromoperations through the sale of equity and issuance of debt instruments. Combinedwith revenues, these funds have provided us with the resources to operate ourbusiness, attract and retain key personnel, fund our research and developmentprogram and clinical trials, apply for and obtain the necessary regulatoryapprovals and develop our technology and products.

 

**Liquidity**: At September 30,2005, we had cash, cash equivalents and short-term investments of approximately$14.9 million, compared with approximately $1.8 million at June 30,2005 and approximately $8.8 million at December 31, 2004.

 

Cash and cash equivalents increased during the thirdquarter of 2005 by approximately $13.1 million. This increase was relatedto financing activities which provided net cash of approximately $19.2 million,resulting from the private placement of approximately $12.0 million and thewarrant exercise of approximately $10.7 million, offset by a repayment of theMaverick bridge loan of $3.5 million. During the third quarter of 2005, cashused to fund operating activities was approximately $4.8 million,consisting primarily of the net loss for the period of approximately $22.2million affected primarily by:

 

•                  the non-cashin-process research and development charge of $18.1 million related to theMedQuest Acquisition; and

•                  working capitalchanges that required cash of $1.2 million, consisting primarily of a decreaseof $1.5 million in accounts payables and other liabilities, and offset by $0.3million of all other working capital changes.

 

In addition, investing activities for the thirdquarter of 2005 required cash of approximately $1.3 million consistingprimarily of approximately $1.3 million in deferred transaction costs relatedto the MedQuest Acquisition.

 

At August 1, 2005, after the MedQuestAcquisition and including the completion of the private placement and warrantexercise, offset by other operating expenses incurred in July 2005 and therepayment by MedQuest to Maverick of a bridge loan netted from the proceeds ofthe private placement, we had approximately $20.0 million in cash and cashequivalents. With the completion of these transactions and through costreduction programs to re-align our cost structure in light of slower thananticipated Destination Therapy adoption rates we ended the third quarter of2005 with $14.9 million in cash and cash equivalents. We believe that wecurrently have sufficient cash to fund operations into mid-year 2006, andintend to obtain additional funding through financings and corporatecollaborations during the first half of 2006.

 

Our long-term working capital and capitalrequirements will depend upon numerous factors, including the following: ourcontinued focus on improving commercial operations; expanded Novacor LVAS kitsales and enrolment in the RELIANT Trial; decreasing production costs through amanufacturing cost reduction program; the rate of investment in ournext-generation technologies, including our Novacor II VAD and WorldHeart rotaryVAD; the clinical trials costs and the approval process for the next-generationproducts; our general efforts to improve operational efficiency and conservecash, including anticipated synergies from the MedQuest Acquisition and othercost improvement programs.

 

18

----

 

**ITEM 3.    CONTROLS AND PROCEDURES**

 

*Evaluation of disclosure controlsand procedures*: Based on their evaluation of our disclosurecontrols and procedures (as defined in Rules 13a-15(e) and 15d-14(e) underthe Exchange Act) as of September 30, 2005, our president and chiefexecutive officer (principal executive officer) and our chief financial officer(principal accounting and financial officer) have concluded that our disclosurecontrols and procedures are designed to ensure that information required to bedisclosed in the reports that we file or submit under the Exchange Act isrecorded, processed, summarized and reported within the time periods specifiedin the Securities and Exchange Commission’s rules and forms are operatingin an effective manner.

 

*Changes in internal controls overfinancial reporting:* There was no change in ourinternal controls over financial reporting that occurred during the quarterended September 30, 2005, that has materially affected, or is reasonablylikely to materially affect, our internal controls over financial reporting.

 

19

----

 

**PART II—OTHER INFORMATION**

 

**ITEM 1. LEGAL PROCEEDINGS**

 

(None)

 

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

 

As previously disclosed in a Current Report on Form 8-Kfiled with the SEC on August 2, 2005, in July 2005, WorldHeart completedits acquisition of MedQuest by issuing 9,300,000 common shares to MedQuest forsubstantially all of the assets of MedQuest. In conjunction with theacquisition, the Company also raised gross proceeds of approximately $22.7million through the exercise of 10,655,000 outstanding warrants to purchasecommon shares of the Company at an adjusted exercise price of $1.00 per shareand from a private placement financing with Maverick Venture Management, LLC,the principal MedQuest shareholder, through the issuance to Maverick of8,888,889 common shares at a purchase price of $1.35 per share. Each of the above transactions wasdone in reliance on Section 4(2) of the Securities Act of 1933, asamended, as transactions not involving a public offering.

 

In addition, all of the Company’s outstanding convertible debentures were converted at a conversion price of $1.25 per common share, resulting in the issuance of approximately 10.7 million common shares. Accrued interest on the convertible debentures was converted into additional 236,097 common shares at a conversion price equal to the volume weighted average stock price at the date of conversion.

 

The Company has made no repurchases of common shares during the period.

 

 

**ITEM 3. DEFAULTS UPON SENIOR SECURITIES**

 

(None)

 

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

 

As previously disclosed in a Current Report on Form 8-K filed with the SEC on July 21, 2005, World Heart held its annual and special shareholders meeting on July 18, 2005. The complete voting results have been published as an exhibit to the above Current Report on Form 8-K.

 

**ITEM 5. OTHER INFORMATION**

 

(None)

 

**ITEM 6.  EXHIBITS**

 

(a)               Exhibits

 
| Exhibit 22.1(1) |   | Voting Results Report  from the Annual and Special Meeting of Shareholders held on July 18,  2005.                        |
|----------------------|--------|--------------------------------------------------------------------------------------------------------------------------------|
|                 |   |                                                                                                                           |
| 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. |

 

----

(1) Incorporatedby reference to the Current Report on Form 8-K filed with the SEC on July 21,2005.

 

 

20

----

 

**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)             |   |
|                                                     |                   |                     |
| Date     November 9,  2005 | /s/ Jal S.  Jassawalla |                     |   |
|                                                     | (Signature)*           |                     |
|                                                     |                   |
| Date     November 9,  2005 | /s/ Richard  Juelis    |                     |
|                                                     | (Signature)*           |                     |
|                                                          |                        |                          |        |  |  |  |  |  |

 

21

----