##### Table of Contents



UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF
THE SECURITIES EXCHANGE ACT OF 1934
 For the quarter ended: September 30, 2009
 Commission File Number: 0-19871
 STEMCELLS, INC.
  DELAWARE
    
    94-3078125(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    identification No)
 (Address of principal executive offices including zip code)
 (Registrants telephone number, including area code)
 þ o
 o o
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




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##### 



Page NumberPART I. FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)
    
    3Condensed Consolidated Balance Sheets at September 30, 2009 and December 31, 2008
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30,
2009 and 2008
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2009 and 2008
    
    5Notes to Condensed Consolidated Financial Statements
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    17Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    29Item 4. Controls and Procedures
    
    29PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    29Item 1A. Risk Factors
    
    30Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    30Item 3. Defaults Upon Senior Securities
    
    30Item 4. Submission of Matters to a Vote of Security-Holders
    
    30Item 5. Other Information
    
    30Item 6. Exhibits
    
    30SIGNATURES
    
    32EX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
  NOTE REGARDING REFERENCES TO US AND OUR COMMON STOCK
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
   
 
 September 30, 2009
    
    
    December 31, 2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    28,226,515
    
    
    $
    30,042,986Marketable securities
    
    
    5,175,739
    
    
    
    4,181,592Other receivables
    
    
    273,937
    
    
    
    164,204Notes receivable
    
    
    
    
    
    
    298,032Prepaid and other current assets
    
    
    492,979
    
    
    
    645,242Total current assets
    
    
    34,169,170
    
    
    
    35,332,056Property, plant and equipment, net
    
    
    3,012,856
    
    
    
    3,173,468Other assets, non-current
    
    
    2,357,968
    
    
    
    2,079,278Goodwill and other intangible assets, net
    
    
    5,384,762
    
    
    
    645,538Total assets
    
    $
    44,924,756
    
    
    $
    41,230,340LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,362,407
    
    
    $
    1,078,123Accrued expenses and other liabilities
    
    
    2,306,007
    
    
    
    2,261,245Accrued wind-down expenses, current
    
    
    1,435,234
    
    
    
    1,420,378Deferred revenue, current
    
    
    147,678
    
    
    
    43,909Capital lease obligation, current
    
    
    71,337
    
    
    
    18,739Deferred rent, current
    
    
    180,429
    
    
    
    346,930Bond payable, current
    
    
    157,500
    
    
    
    149,167Total current liabilities
    
    
    5,660,592
    
    
    
    5,318,491Capital lease obligation, non-current
    
    
    101,757
    
    
    
    6,529Bond payable, non-current
    
    
    741,250
    
    
    
    860,000Fair value of warrant liability
    
    
    9,262,448
    
    
    
    8,439,931Deposits and other long-term liabilities
    
    
    458,032
    
    
    
    466,211Accrued wind-down expenses, non-current
    
    
    3,322,076
    
    
    
    4,092,939Deferred rent, non-current
    
    
    
    
    
    
    90,215Deferred revenue, non-current
    
    
    158,736
    
    
    
    147,039Total liabilities
    
    
    19,704,891
    
    
    
    19,421,355Commitments and contingencies (Note 6)Stockholders equity:Common stock, $.01 par value;
250,000,000 shares authorized; issued
and outstanding 108,319,091 at September
30, 2009 and 94,945,603 at December 31,
2008
    
    
    1,083,190
    
    
    
    949,455Additional paid-in capital
    
    
    305,244,263
    
    
    
    279,868,802Accumulated deficit
    
    
    (280,794,177
    )
    
    
    (259,001,524
    )Accumulated other comprehensive loss
    
    
    (313,411
    )
    
    
    (7,748
    )Total stockholders equity
    
    
    25,219,865
    
    
    
    21,808,985Total liabilities and stockholders equity
    
    $
    44,924,756
    
    
    $
    41,230,340
  3




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Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue:Revenue from licensing agreements and grants
    
    $
    98,806
    
    
    $
    12,379
    
    
    $
    300,260
    
    
    $
    59,561Revenue from product sales
    
    
    154,362
    
    
    
    
    
    
    
    274,961
    
    
    
    Total Revenue
    
    
    253,168
    
    
    
    12,379
    
    
    
    575,221
    
    
    
    59,561Cost of product sales
    
    
    (141,453
    )
    
    
    
    
    
    
    (200,979
    )
    
    
    Gross Profit
    
    
    111,715
    
    
    
    12,379
    
    
    
    374,242
    
    
    
    59,561Operating expenses:Research and development
    
    
    4,988,569
    
    
    
    4,171,799
    
    
    
    14,278,958
    
    
    
    13,087,165Selling, general and administrative
    
    
    2,111,838
    
    
    
    1,631,580
    
    
    
    6,852,724
    
    
    
    6,231,629Wind-down expenses
    
    
    (5,679
    )
    
    
    53,636
    
    
    
    539,821
    
    
    
    381,136Total operating expenses
    
    
    7,094,728
    
    
    
    5,857,015
    
    
    
    21,671,503
    
    
    
    19,699,930Loss from operations
    
    
    (6,983,013
    )
    
    
    (5,844,636
    )
    
    
    (21,297,261
    )
    
    
    (19,640,369
    )Other income (expense):Realized gain on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    397,866
    
    
    
    Change in fair value of warrant liability
    
    
    1,830,414
    
    
    
    
    
    
    
    (822,517
    )
    
    
    Interest income
    
    
    5,531
    
    
    
    138,332
    
    
    
    55,816
    
    
    
    738,107Interest expense
    
    
    (27,613
    )
    
    
    (26,849
    )
    
    
    (84,863
    )
    
    
    (84,010
    )Other income (expense)
    
    
    29,940
    
    
    
    (10,800
    )
    
    
    (41,694
    )
    
    
    (18,145
    )Total other income (expense), net
    
    
    1,838,272
    
    
    
    100,683
    
    
    
    (495,392
    )
    
    
    635,952Net loss
    
    $
    (5,144,741
    )
    
    $
    (5,743,953
    )
    
    $
    (21,792,653
    )
    
    $
    (19,004,417
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.07
    )
    
    $
    (0.21
    )
    
    $
    (0.24
    )Shares used to compute basic and diluted loss per share
    
    
    108,257,345
    
    
    
    80,961,150
    
    
    
    103,071,957
    
    
    
    80,827,141
  4




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Nine months endedSeptember 30,2009
    
    
    2008Cash flows from operating activities: Net loss
    
    $
    (21,792,653
    )
    
    $
    (19,004,417
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,220,813
    
    
    
    895,617Stock-based compensation
    
    
    3,174,945
    
    
    
    3,021,444Gain on sale of marketable securities
    
    
    (397,866
    )
    
    
    Change in fair value of warrant liability
    
    
    822,517
    
    
    
    Changes in operating assets and liabilities:Other receivables
    
    
    398,742
    
    
    
    141,967Prepaid and other current assets
    
    
    196,778
    
    
    
    441,662Other assets, non-current
    
    
    (269,393
    )
    
    
    (322,821
    )Accounts payable and accrued expenses
    
    
    (509,958
    )
    
    
    (1,415,468
    )Accrued wind-down expenses
    
    
    (775,547
    )
    
    
    (707,061
    )Deferred revenue
    
    
    (303,027
    )
    
    
    (2,464
    )Deferred rent
    
    
    (256,715
    )
    
    
    (214,104
    )Net cash used in operating activities
    
    
    (18,491,364
    )
    
    
    (17,165,645
    )Cash flows from investing activities:Proceeds from the sale of marketable securities
    
    
    4,510,213
    
    
    
    22,658,794Purchase of marketable securities
    
    
    (4,977,982
    )
    
    
    Repayment (payment) of advances under notes receivable
    
    
    (79,829
    )
    
    
    1,000,000Purchases of property, plant and equipment
    
    
    (485,750
    )
    
    
    (261,693
    )Acquisition of other assets
    
    
    (15,000
    )
    
    
    (24,375
    )Net cash provided by (used in) investing activities
    
    
    (1,048,348
    )
    
    
    23,372,726Cash flows from financing activities:Proceeds from issuance of common stock, net of issuance costs
    
    
    17,694,812
    
    
    
    194,061Proceeds from the exercise of stock options
    
    
    252,984
    
    
    
    123,253Proceeds from the exercise of warrants
    
    
    331,501
    
    
    
    Payments related to net share issuance of stock based awards
    
    
    (380,548
    )
    
    
    Proceeds from (repayment of) capital lease obligations
    
    
    147,825
    
    
    
    (13,038
    )Repayment of bonds payable
    
    
    (110,417
    )
    
    
    (100,000
    )Net cash provided by financing activities
    
    
    17,936,157
    
    
    
    204,276Increase (decrease) in cash and cash equivalents
    
    
    (1,603,555
    )
    
    
    6,411,357Effects of foreign exchange rate changes on cash
    
    
    (212,916
    )
    
    
    Cash and cash equivalents, beginning of period
    
    
    30,042,986
    
    
    
    9,759,169Cash and cash equivalents, end of period
    
    $
    28,226,515
    
    
    $
    16,170,526Supplemental disclosure of cash flow information:Interest paid
    
    $
    84,863
    
    
    $
    84,010Supplemental schedule of non-cash investing and financing activities:Stock issued as part of our acquisition of the operations of SCS Plc (1)
    
    $
    4,425,500
    
    
    
    Forgiveness of principal and accrued interest on notes receivable (1)
    
    $
    709,076
    
    
    
    Stock issued for licensing agreement (2)
    
    $
    10,000
    
    
    $
    10,000
 
 (1)
    
    On April 1, 2009, we acquired the operations of Stem Cell Sciences Plc (SCS). As
consideration, we issued to SCS 2,650,000 shares of common stock with a closing price of $1.67
per share and waived certain commitments of SCS to repay approximately $709,000 in principal
and accrued interest owed to us.(2)
    
    Under terms of a license agreement with the California Institute of Technology (Cal Tech),
annual fees of $5,000 were due on each of two patents to which we hold a license from Cal
Tech, payable in cash or common stock at our choice. We elected to pay the fees in stock and
issued 5,900 and 6,924 shares of our common stock in 2009 and 2008 respectively.  5




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Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2009 and 2008
 Note 1. Summary of Significant Accounting Policies
 Nature of Business
    Principles of Consolidation
  Use of Estimates
   
    
    the grant date fair value of stock-based awards recognized as compensation expense (see
Note 4, Stock Based Compensation);
 
    
    accrued wind-down expenses (see Note 5, Wind-Down Expenses);
 
    
    the fair value of warrants recorded as a liability (see Note 7, Warrant Liability); and
 
    
    the fair value of goodwill and other intangible assets (see Note 9, Acquisition of SCS
Operations).
 6




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Financial Instruments
 Cash and Cash Equivalents
  Marketable Securities
   Other Receivables
  Revenue Recognition
  Stock-Based Compensation
    7




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##### Table of Contents



Net Loss per Share
   Three months ended September 30,
    
    Nine months ended September 30,2009
    
    2008
    
    2009
    
    2008Net loss
    
    $
    (5,144,741
    )
    
    $
    (5,743,953
    )
    
    $
    (21,792,653
    )
    
    $
    (19,004,417
    )Weighted average shares outstanding
used to compute basic and diluted
net loss per share
    
    
    108,257,345
    
    
    
    80,961,150
    
    
    
    103,071,957
    
    
    
    80,827,141Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.07
    )
    
    $
    (0.21
    )
    
    $
    (0.24
    )
  2009
    
    
    2008Options
    
    
    9,293,703
    
    
    
    8,471,887Restricted stock units
    
    
    2,367,901
    
    
    
    1,650,000Warrants
    
    
    10,344,828
    
    
    
    1,255,000Total
    
    
    22,006,432
    
    
    
    11,376,887
 Comprehensive Loss
   Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (5,144,741
    )
    
    $
    (5,743,953
    )
    
    $
    (21,792,653
    )
    
    $
    (19,004,417
    )Net change in
unrealized gains
and losses on
marketable
securities
    
    
    (5,248
    )
    
    
    (272,066
    )
    
    
    128,512
    
    
    
    (1,691,631
    )Net change in
unrealized gains
and losses on
foreign currency
translations
    
    
    (208,537
    )
    
    
    
    
    
    
    (434,175
    )
    
    
    Comprehensive loss
    
    $
    (5,358,526
    )
    
    $
    (6,016,019
    )
    
    $
    (22,098,316
    )
    
    $
    (20,696,048
    )
 Recent Accounting Pronouncements
 Fair
Value Measurements and Disclosures  Measuring Liabilities at
Fair Value.
 Note 2. Financial Instruments
  8




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Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    (Losses)
    
    
    Fair ValueSeptember 30, 2009Cash
    
    $
    515,459
    
    
    $
    
    
    
    $
    
    
    
    $
    515,459Cash equivalents (money market accounts)
    
    
    27,711,056
    
    
    
    
    
    
    
    
    
    
    
    27,711,056Marketable debt securities, current (maturity within 1 year)
    
    
    4,980,519
    
    
    
    
    
    
    
    (711
    )
    
    
    4,979,808Marketable equity securities, current
    
    
    74,456
    
    
    
    121,475
    
    
    
    
    
    
    
    195,931Total cash, cash equivalents, and marketable securities
    
    $
    33,281,490
    
    
    $
    121,475
    
    
    $
    (711
    )
    
    $
    33,402,254December 31, 2008Cash
    
    $
    243,883
    
    
    $
    
    
    
    $
    
    
    
    $
    243,883Cash equivalents (money market accounts)
    
    
    29,799,103
    
    
    
    
    
    
    
    
    
    
    
    29,799,103Marketable debt securities, current (maturity within 1 year)
    
    
    4,002,537
    
    
    
    
    
    
    
    (7,748
    )
    
    
    3,994,789Marketable equity securities, current
    
    
    186,803
    
    
    
    
    
    
    
    
    
    
    
    186,803Total cash, cash equivalents, and marketable securities
    
    $
    34,232,326
    
    
    $
    
    
    
    $
    (7,748
    )
    
    $
    34,224,578
  9




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Notes Receivable
  Note 3. Fair Value Measurement
        10




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Fair Value Measurementat Reporting Date UsingQuoted Prices
    
    
    Significantin Active Markets
    
    
    Otherfor
    
    
    Observable
    
    
    As ofIdentical Assets
    
    
    Inputs
    
    
    September 30,(Level 1)
    
    
    (Level 2)
    
    
    2009AssetsCash Equivalents:Money market funds
    
    $
    1,266,401
    
    
    $
    
    
    
    $
    1,266,401U.S. Treasury securities
    
    
    31,424,463
    
    
    
    
    
    
    
    31,424,463Marketable Securities:Equity securities
    
    
    195,931
    
    
    
    
    
    
    
    195,931Total assets
    
    $
    32,886,795
    
    
    
    
    
    
    
    32,886,795LiabilitiesBond payable
    
    $
    
    
    
    $
    898,750
    
    
    $
    898,750
 Note 4. Stock-Based Compensation
   Three months ended September 30,
    
    
    Nine months ended September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Research and development expense
    
    $
    555,450
    
    
    $
    473,828
    
    
    $
    1,542,023
    
    
    $
    1,430,157General and administrative expense
    
    
    542,400
    
    
    
    465,351
    
    
    
    1,525,699
    
    
    
    1,443,788Total employee stock-based compensation expense and
effect on net loss
    
    $
    1,097,850
    
    
    $
    939,179
    
    
    $
    3,067,722
    
    
    $
    2,873,945Effect on basic and diluted net loss per common share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.03
    )
    
    $
    (0.04
    )
  Stock Options
   Weighted-averageNumber of options
    
    
    exercise price ($)Balance at June 30, 2009
    
    
    9,380,197
    
    
    
    2.27Granted
    
    
    47,500
    
    
    
    1.70Exercised
    
    
    (69,654
    )
    
    
    1.11Cancelled
    
    
    (64,340
    )
    
    
    1.93Outstanding options at September 30, 2009
    
    
    9,293,703
    
    
    
    2.28
  11




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Three months ended September 30,
    
    Nine months ended September 30,2009
    
    2008
    
    2009
    
    2008Expected life (years)(1)
    
    
    7.59
    
    
    
    7.71
    
    
    
    7.38
    
    
    
    7.22Risk-free interest rate(2)
    
    
    3.22
    %
    
    
    3.56
    %
    
    
    2.79
    %
    
    
    3.32
    %Expected volatility(3)
    
    
    91.83
    %
    
    
    93.78
    %
    
    
    93.56
    %
    
    
    93.81
    %Expected dividend yield(4)
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 
 (1)
    
    The expected term represents the period during which our stock-based awards are expected to
be outstanding. We estimated this amount based on historical experience of similar awards,
giving consideration to the contractual terms of the awards, vesting requirements, and
expectation of future employee behavior, including post-vesting terminations.(2)
    
    The risk-free interest rate is based on U.S. Treasury debt securities with maturities close
to the expected term of the option as of the date of grant.(3)
    
    Expected volatility is based on historical volatility over the most recent historical period
equal to the length of the expected term of the option as of the date of grant.(4)
    
    We have not historically issued any dividends, and we do not expect to in the foreseeable
future.   Weighted-average grantNumber of options
    
    
    date fair value ($)Unvested options at June 30, 2009
    
    
    3,265,484
    
    
    
    1.62Granted
    
    
    47,500
    
    
    
    1.38Vested
    
    
    (360,500
    )
    
    
    1.95Cancelled
    
    
    (64,340
    )
    
    
    1.45Unvested options at September 30, 2009
    
    
    2,888,144
    
    
    
    1.58
  Restricted Stock Units
   Weighted-average grantNumber of RSUs
    
    
    date fair value ($)Balance at June 30, 2009 (1)
    
    
    2,303,068
    
    
    
    1.49Granted (2)
    
    
    103,333
    
    
    
    1.70Vested and converted to common shares
    
    
    
    
    
    
    Cancelled
    
    
    (38,500
    )
    
    
    1.26Balance unvested at September 30, 2009
    
    
    2,367,901
    
    
    
    1.50
 
 (1)
    
    1,100,000 of these restricted stock units vest and convert into shares of our common stock
over a three year period from the date of grant: one-third of the award will vest on each
grant date anniversary over the following three years. 953,068 of these restricted stock units
vest and convert into shares of our common stock over a four year period from the date of
grant: one-fourth of the award will vest on each grant date anniversary over the following
four years. 250,000 of these restricted stock units will vest and convert into shares of our
common stock subject to attainment of certain performance criteria and will be forfeited if
not met by March 31, 2011.(2)
    
    93,333 of these restricted stock units vest and convert into shares of our common stock over
a four year period from the date of grant: one-fourth of the award will vest on each grant
date anniversary over the following four years. 10,000 of these restricted stock units vest
and convert into shares of our common stock after one year from the date of grant. Stock Appreciation Rights
  12




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##### Table of Contents



Number of SARsOutstanding at June 30, 2009
    
    
    1,430,849Granted
    
    
    Exercised
    
    
    Forfeited and expired
    
    
    Outstanding SARs at September 30, 2009
    
    
    1,430,849SARs exercisable at September 30, 2009
    
    
    1,132,755
   Note 5. Wind-Down Expenses
 Rhode Island
   January to
    
    
    April to
    
    
    July to
    
    
    January to
    
    
    January toMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    September 30,
    
    
    December 31,2009
    
    
    2009
    
    
    2009
    
    
    2009
    
    
    2008Accrued wind-down reserve at beginning of period
    
    $
    4,448,000
    
    
    $
    4,323,000
    
    
    $
    4,060,000
    
    
    $
    4,448,000
    
    
    $
    4,875,000Less actual expenses recorded against estimated
reserve during the period
    
    
    (331,000
    )
    
    
    (293,000
    )
    
    
    (286,000
    )
    
    
    (910,000
    )
    
    
    (1,293,000
    )Additional expense recorded to revise estimated
reserve at period-end
    
    
    206,000
    
    
    
    30,000
    
    
    
    (6,000
    )
    
    
    230,000
    
    
    
    866,000Revised reserve at period-end
    
    
    4,323,000
    
    
    
    4,060,000
    
    
    
    3,768,000
    
    
    
    3,768,000
    
    
    
    4,448,000Add deferred rent at period-end
    
    
    1,014,000
    
    
    
    962,000
    
    
    
    911,000
    
    
    
    911,000
    
    
    
    1,065,000Total accrued wind-down expenses at period-end
(current and non current)
    
    $
    5,337,000
    
    
    $
    5,022,000
    
    
    $
    4,679,000
    
    
    $
    4,679,000
    
    
    $
    5,513,000Accrued wind-down expenses, current
    
    $
    1,496,000
    
    
    $
    1,438,000
    
    
    $
    1,357,000
    
    
    $
    1,357,000
    
    
    $
    1,420,000Accrued wind-down expenses, non-current
    
    
    3,841,000
    
    
    
    3,584,000
    
    
    
    3,322,000
    
    
    
    3,322,000
    
    
    
    4,093,000Total accrued wind-down expenses
    
    $
    5,337,000
    
    
    $
    5,022,000
    
    
    $
    4,679,000
    
    
    $
    4,679,000
    
    
    $
    5,513,000
 Australia
  13




---



##### Table of Contents



July toSeptember 30,2009Accrued wind-down reserve at June 30, 2009
    
    $
    310,000Less actual expenses recorded against estimated reserve during the period
    
    
    (232,000
    )Additional expense recorded to revise estimated reserve at period-end
    
    
    Accrued wind-down reserve at September 30, 2009
    
    $
    78,000
 Note 6. Commitments and Contingencies
 Leases
 Capital leases
  Operating leases
    14




---



##### Table of Contents



Contingencies
   Indemnification Agreement
  Note 7. Warrant Liability
  15




---



##### Table of Contents



Expected life (years)
    
    
    4.62Risk-free interest rate
    
    
    2.39
    %Expected volatility
    
    
    77.85
    %Expected dividend yield
    
    
    0
    %
 Change infair value for theAt September 30,
    
    
    At June 30,
    
    
    quarter ended2009
    
    
    2009
    
    
    September 30, 2009Fair value of warrant liability
    
    $
    9,262,448
    
    
    $
    11,092,862
    
    
    $
    (1,830,414
    )
  Note 8. Common Stock
  Note 9. Acquisition of SCS Operations
    16




---



##### Table of Contents



Estimated life ofAllocated purchase
    
    
    intangible assetsprice
    
    
    in yearsNet tangible assets
    
    $
    36,000Intangible assets:Customer relationships and developed technology
    
    
    1,310,000
    
    
    6 to 9In process research and development
    
    
    1,340,000
    
    
    13 to 19Trade name
    
    
    310,000
    
    
    15Goodwill
    
    
    2,139,000
    
    
    N/ATotal
    
    $
    5,135,000
  Note 10. Subsequent Events
    
 ITEM 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  17




---



##### Table of Contents



Overview
 The Company
 ®
   in vitro
  18




---



##### Table of Contents



Significant Events
   Cell Stem Cell.
 ®
 Critical Accounting Policies and the Use of Estimates
  19




---



##### Table of Contents



Stock-Based Compensation
   Wind-down expenses  Rhode Island
    20




---



##### Table of Contents



Wind-down expenses  Australia
  Business Combinations
  Results of Operations
  Revenue and Cost of Product Sales
  Three months ended,
    
    
    
    
    
    
    
    
    
    
    Nine months ended,September 30
    
    
    Change in 2009 versus 2008
    
    
    September 30
    
    
    Change in 2009 versus 20082009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Revenue:Licensing agreements and grants
    
    $
    98,806
    
    
    $
    12,379
    
    
    $
    86,427
    
    
    
    698
    %
    
    $
    300,260
    
    
    $
    59,561
    
    
    $
    240,699
    
    
    
    404
    %Product sales
    
    
    154,362
    
    
    
    
    
    
    
    154,362
    
    
    
    *
    
    
    
    274,961
    
    
    
    
    
    
    
    274,961
    
    
    
    *Total revenues
    
    
    253,168
    
    
    
    12,379
    
    
    
    240,789
    
    
    
    1,945
    %
    
    
    575,221
    
    
    
    59,561
    
    
    
    515,660
    
    
    
    866
    %Cost of product sales
    
    
    (141,453
    )
    
    
    
    
    
    
    (141,453
    )
    
    
    *
    
    
    
    (200,979
    )
    
    
    
    
    
    
    (200,979
    )
    
    
    *Gross Profit
    
    $
    111,715
    
    
    $
    12,379
    
    
    $
    99,336
    
    
    
    802
    %
    
    $
    374,242
    
    
    $
    59,561
    
    
    $
    314,681
    
    
    
    528
    %
 
 *
    
    Calculation is not meaningful  Third quarter ended September 30, 2009 versus third quarter ended September 30, 2008.
 21




---



##### Table of Contents



Nine-month period ended September 30, 2009 versus nine-month period ended September 30, 2008.
 Operating Expenses
  Three months ended,
    
    
    Change in 2009 versus
    
    
    Nine months ended,
    
    
    Change in 2009 versusSeptember 30
    
    
    2008
    
    
    September 30
    
    
    20082009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Operating expenses:Research & development
    
    $
    4,988,569
    
    
    $
    4,171,799
    
    
    $
    816,770
    
    
    
    20
    %
    
    $
    14,278,958
    
    
    $
    13,087,165
    
    
    $
    1,191,793
    
    
    
    9
    %Selling, general &
administrative
    
    
    2,111,838
    
    
    
    1,631,580
    
    
    
    480,258
    
    
    
    29
    %
    
    
    6,852,724
    
    
    
    6,231,629
    
    
    
    621,095
    
    
    
    10
    %Wind-down expenses
    
    
    (5,679
    )
    
    
    53,636
    
    
    
    (59,315
    )
    
    
    (111
    )%
    
    
    539,821
    
    
    
    381,136
    
    
    
    158,685
    
    
    
    42
    %Total operating expenses
    
    $
    7,094,728
    
    
    $
    5,857,015
    
    
    $
    1,237,713
    
    
    
    21
    %
    
    $
    21,671,503
    
    
    $
    19.699,930
    
    
    $
    1,971,573
    
    
    
    10
    %
 Research and Development Expenses
   22




---



##### Table of Contents



Third quarter ended September 30, 2009 versus third quarter ended September 30, 2008.
 Nine-month period ended September 30, 2009 versus nine-month period ended September 30, 2008.
 Selling, General and Administrative Expenses
   Third quarter ended September 30, 2009 versus third quarter ended September 30, 2008.
 Nine-month period ended September 30, 2009 versus nine-month period ended September 30, 2008
 23




---



##### Table of Contents



Wind-down Expenses
 Three months ended,
    
    
    Nine months ended,September 30
    
    
    September 302009
    
    
    2008
    
    
    2009
    
    
    2008Rhode Island
    
    $
    (5,679
    )
    
    $
    53,636
    
    
    $
    229,552
    
    
    $
    381,136Australia
    
    
    
    
    
    
    
    
    
    
    310,269
    
    
    
    Total wind-down expenses
    
    $
    (5,679
    )
    
    $
    53,636
    
    
    $
    539,821
    
    
    $
    381,136
 Rhode Island
  Australia
  Other Income (Expense)
  Three months ended,
    
    
    Change in 2009 versus
    
    
    Nine months ended,
    
    
    Change in 2009 versusSeptember 30
    
    
    2008
    
    
    September 30
    
    
    20082009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Other income
(expense):Gain on sale of
marketable
securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    397,866
    
    
    $
    
    
    
    $
    397,866
    
    
    
    *Change in fair
value of warrant
liability
    
    
    1,830,414
    
    
    
    
    
    
    
    1,830,414
    
    
    
    *
    
    
    
    (822,517
    )
    
    
    
    
    
    
    (822,517
    )
    
    
    *Interest income
    
    
    5,531
    
    
    
    138,332
    
    
    
    (132,801
    )
    
    
    (96
    )%
    
    
    55,816
    
    
    
    738,107
    
    
    
    (682,291
    )
    
    
    (92
    )%Interest expense
    
    
    (27,613
    )
    
    
    (26,849
    )
    
    
    (764
    )
    
    
    3
    %
    
    
    (84,863
    )
    
    
    (84,010
    )
    
    
    (853
    )
    
    
    1
    %Other income
(expense), net
    
    
    29,940
    
    
    
    (10,800
    )
    
    
    40,740
    
    
    
    (377
    )%
    
    
    (41,694
    )
    
    
    (18,145
    )
    
    
    (23,549
    )
    
    
    130
    %Total other income
(expense), net
    
    $
    1,838,272
    
    
    $
    100,683
    
    
    $
    1,737,589
    
    
    
    1,726
    %
    
    $
    (495,392
    )
    
    $
    635,952
    
    
    $
    (1,131,344
    )
    
    
    (178
    )%
 
 *
    
    Calculation is not meaningful. 24




---



##### Table of Contents



Gain on Sale of Marketable Equity Securities
  Change in fair value of warrant liability
  25




---



##### Table of Contents



Fair value of warrant liability at December 31, 2008
    
    $
    8,439,931Change in fair value for the quarter ended March 31, 2009
    
    
    2,755,448Fair value of warrant liability at March 31, 2009
    
    
    11,195,379Change in fair value for the quarter ended June 30, 2009
    
    
    (102,517
    )Fair value of warrant liability at June 30, 2009
    
    
    11,092,862Change in fair value for the quarter ended September 30, 2009
    
    
    (1,830,414
    )Fair value of warrant liability at September 30, 2009
    
    $
    9,262,448
 Interest Income
  Interest Expense
  Liquidity and Capital Resources
  September 30,
    
    
    December 31,
    
    
    Change2009
    
    
    2008
    
    
    $
    
    
    %Cash, cash equivalents and marketable debt securities
    
    $
    33,206,323
    
    
    $
    34,037,775
    
    
    $
    (831,452
    )
    

    (2)%
  Change in2009Nine months ended September 30,
    
    Versus 20082009
    
    2008
    
    $
    
    %Net cash used in operating activities
    
    $
    (18,491,364
    )
    
    $
    (17,165,645
    )
    
    $
    (1,325,719
    )
    
    
    8
    %Net cash provided by(used in) investing activities
    
    $
    (1,048,348
    )
    
    $
    23,372,726
    
    
    $
    (24,421,074
    )
    
    
    (104
    )%Net cash provided by financing activities
    
    $
    17,936,157
    
    
    $
    204,276
    
    
    $
    17,731,881
    
    
    
    8,680
    %
 Net Cash Used in Operating Activities
  Net Cash Provided by (Used in) Investing Activities
  Net Cash Provided by Financing Activities
  26




---



##### Table of Contents




    
    In November 2009, we raised gross proceeds of $12,500,000 through the sale to certain
institutional investors of 10,000,000 shares of common stock and warrants to purchase
4,000,000 shares of common stock. The common stock and warrants were sold in units, with
each unit consisting of (i) one share of common stock and (ii) a warrant to purchase 0.4 of
a share of common stock at an exercise price of $1.50 per share, and the purchase price was
$1.25 per unit. The warrants will generally be exercisable for a period of five years
beginning six months after the date of issuance. The shares and warrants were offered as a
registered direct offering under our effective shelf registration statement previously filed
with the SEC. We received total proceeds, net of offering expenses and placement
agency fees, of approximately $11,900,000. The net proceeds of the financing will be used
for general corporate purposes, including working capital, product development and capital
expenditures, as well as for other strategic purposes.
    
    In June 2009 and July 2009, we sold a total of 1,830,000 shares of common stock under a
sales agreement with Cantor, which we entered into and filed a Prospectus Supplement to
announce, in June 2009. These shares were sold at an average price of approximately $1.80
per share for gross proceeds of approximately $3,291,000. Under the terms of the agreement,
up to $30,000,000 worth of shares may be sold from time to time under a shelf registration
statement and Cantor is paid compensation equal to 3.0% of the gross proceeds of such sales.
    
    From January 2007 through June 2009, we sold a total of 10,000,000 shares of common stock
under a separate sales agreement with Cantor, which we entered into and filed a Prospectus
Supplement to announce, in December 2006. These shares were sold at an average price of
$2.06 per share for gross proceeds of approximately $20,555,000. Under the terms of this
agreement, up to 10,000,000 shares could be sold from time to time under a shelf
registration statement and Cantor was paid compensation equal to 5.0% of the gross proceeds.
    
    In November 2008, we sold 13,793,104 units to institutional investors at a price of $1.45
per unit, for gross proceeds of $20,000,000. The units, each of which consisted of one share
of common stock and a warrant to purchase 0.75 shares of common stock at an exercise price
of $2.30 per share, were offered as a registered direct offering under an effective shelf
registration statement previously filed with and declared effective by the SEC. We received
total proceeds net of offering expenses and placement agency fees of approximately
$18,637,000.
    
    In April 2006, we sold 11,750,820 shares of our common stock to institutional investors
at a price of $3.05 per share, for gross proceeds of approximately $35,840,000. The shares
were offered as a registered direct offering under an effective shelf registration statement
previously filed with and declared effective by the SEC. We received total proceeds, net of
offering expenses and placement agency fees, of approximately $33,422,000. No warrants were
issued as part of this financing transaction.
   27




---



##### Table of Contents



Commitments
  Off-Balance Sheet Arrangements
  Operating Leases
  Operating Leases  California
  Operating Leases  Rhode Island
  Operating Leases  United Kingdom
  Operating Leases  Australia
  28




---



##### Table of Contents



Contractual Obligations
  Recent Accounting Pronouncements
 Fair
Value Measurements and Disclosures  Measuring Liabilities at
Fair Value.
 
    
    
 PART II-OTHER INFORMATION
 
   29




---



##### Table of Contents



Exhibit 10.1 
 Exhibit 31.1 
 30




---



##### Table of Contents



Exhibit 31.2 
 Exhibit 32.1 
 Exhibit 32.2 
 31




---



##### Table of Contents



STEMCELLS, INC.
(name of Registrant)November 4, 2009
    
    /s/ Rodney K. B. YoungRodney K. B. YoungChief Financial Officer 32




---



##### Table of Contents



Exhibit 10.1 
 Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32.1 
 Exhibit 32.2 
 33