##### 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, 2010
 Commission File Number: 0-19871
 STEMCELLS, INC.
  DELAWARE
    
    94-3078125(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
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
(Do not check if a smaller reporting company)
    
    Smaller reporting company o
 o þ




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##### 



Page NumberPART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets at September 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three and nine months ended September 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the nine months ended September 30, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    20Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    34Item 4. Controls and Procedures
    
    
    34PART II. OTHER INFORMATION
    
    
    34Item 1. Legal Proceedings
    
    
    34Item 1A. Risk Factors
    
    
    35Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    35Item 3. Defaults Upon Senior Securities
    
    
    35Item 4. Submission of Matters to a Vote of Security-Holders
    
    
    35Item 5. Other Information
    
    
    35Item 6. Exhibits
    
    
    35SIGNATURESEX-10.1EX-31.1EX-31.2EX-32.1EX-32.2
 NOTE REGARDING REFERENCES TO US AND OUR COMMON STOCK
   2




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PART I-FINANCIAL INFORMATION
 
  
 
 September 30, 2010
    
    
    December 31, 2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    24,554,574
    
    
    $
    38,617,977Marketable securities
    
    
    145,423
    
    
    
    196,995Trade receivables
    
    
    28,954
    
    
    
    87,019Other receivables
    
    
    143,633
    
    
    
    679,034Prepaid assets
    
    
    776,909
    
    
    
    560,144Total current assets
    
    
    25,649,493
    
    
    
    40,141,169Property, plant and equipment, net
    
    
    2,711,838
    
    
    
    2,856,695Other assets, non-current
    
    
    2,491,792
    
    
    
    2,525,185Goodwill
    
    
    1,918,661
    
    
    
    2,019,679Other intangible assets, net
    
    
    3,187,293
    
    
    
    3,647,596Total assets
    
    $
    35,959,077
    
    
    $
    51,190,324LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,235,820
    
    
    $
    890,582Accrued expenses and other current liabilities
    
    
    1,691,517
    
    
    
    3,760,438Accrued wind-down expenses, current
    
    
    1,410,677
    
    
    
    1,449,810Deferred revenue, current
    
    
    59,656
    
    
    
    119,542Capital lease obligation, current
    
    
    66,176
    
    
    
    68,000Deferred rent, current
    
    
    
    
    
    
    80,392Bonds payable, current
    
    
    172,500
    
    
    
    161,250Total current liabilities
    
    
    4,636,346
    
    
    
    6,530,014Capital lease obligation, non-current
    
    
    35,581
    
    
    
    85,826Bonds payable, non-current
    
    
    568,750
    
    
    
    698,750Fair value of warrant liability
    
    
    4,492,664
    
    
    
    9,676,968Deposits and other long-term liabilities
    
    
    458,032
    
    
    
    466,211Accrued wind-down expenses, non-current
    
    
    2,331,041
    
    
    
    3,056,675Deferred rent, non-current
    
    
    3,579
    
    
    
    50,600Deferred revenue, non-current
    
    
    117,594
    
    
    
    130,213Total liabilities
    
    
    12,643,587
    
    
    
    20,695,257Commitments and contingencies (Note 8)Stockholders equity:Common stock, $0.01 par value; 250,000,000
shares authorized; issued and outstanding
126,969,469 at September 30, 2010 and
118,349,587 at December 31, 2009
    
    
    1,269,694
    
    
    
    1,183,495Additional paid-in capital
    
    
    324,156,169
    
    
    
    314,944,784Accumulated deficit
    
    
    (302,314,613
    )
    
    
    (286,027,935
    )Accumulated other comprehensive income
    
    
    204,240
    
    
    
    394,723Total stockholders equity
    
    
    23,315,490
    
    
    
    30,495,067Total liabilities and stockholders equity
    
    $
    35,959,077
    
    
    $
    51,190,324
  3




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##### Table of Contents



Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Revenue from licensing agreements and grants
    
    $
    123,693
    
    
    $
    98,806
    
    
    $
    409,092
    
    
    $
    300,260Revenue from product sales
    
    
    129,826
    
    
    
    154,362
    
    
    
    318,831
    
    
    
    274,961Total revenue
    
    
    253,519
    
    
    
    253,168
    
    
    
    727,923
    
    
    
    575,221Cost of product sales
    
    
    35,914
    
    
    
    141,453
    
    
    
    104,538
    
    
    
    200,979Gross profit
    
    
    217,605
    
    
    
    111,715
    
    
    
    623,385
    
    
    
    374,242Operating expenses:Research and development
    
    
    5,200,612
    
    
    
    4,988,569
    
    
    
    15,096,354
    
    
    
    14,278,958Selling, general and administrative
    
    
    2,017,872
    
    
    
    2,111,838
    
    
    
    6,889,292
    
    
    
    6,852,724Wind-down expenses
    
    
    
    
    
    
    (5,679
    )
    
    
    291,168
    
    
    
    539,821Total operating expenses
    
    
    7,218,484
    
    
    
    7,094,728
    
    
    
    22,276,814
    
    
    
    21,671,503Loss from operations
    
    
    (7,000,879
    )
    
    
    (6,983,013
    )
    
    
    (21,653,429
    )
    
    
    (21,297,261
    )Other income (expense):Realized gain on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397,866Change in fair value of warrant liability
    
    
    1,227,585
    
    
    
    1,830,414
    
    
    
    5,184,304
    
    
    
    (822,517
    )Interest income
    
    
    10,911
    
    
    
    5,531
    
    
    
    24,814
    
    
    
    55,816Interest expense
    
    
    (22,221
    )
    
    
    (27,613
    )
    
    
    (72,775
    )
    
    
    (84,863
    )Other income (expense)
    
    
    232,348
    
    
    
    29,940
    
    
    
    230,408
    
    
    
    (41,694
    )Total other income (expense), net
    
    
    1,448,623
    
    
    
    1,838,272
    
    
    
    5,366,751
    
    
    
    (495,392
    )Net loss
    
    $
    (5,552,256
    )
    
    $
    (5,144,741
    )
    
    $
    (16,286,678
    )
    
    $
    (21,792,653
    )Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )Shares used to compute basic and diluted loss per share
    
    
    127,091,721
    
    
    
    108,257,345
    
    
    
    122,015,319
    
    
    
    103,071,957
  4




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##### Table of Contents



Nine months endedSeptember 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (16,286,678
    )
    
    $
    (21,792,653
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    1,169,054
    
    
    
    1,220,813Stock-based compensation
    
    
    2,987,883
    
    
    
    3,174,945Gain on sale of marketable securities
    
    
    
    
    
    
    (397,866
    )Gain from settlement agreement, net
    
    
    (226,580
    )
    
    
    Loss on disposal of fixed assets
    
    
    1,854
    
    
    
    Write-down of fixed assets
    
    
    62,807
    
    
    
    Write-down of intangible assets
    
    
    35,684
    
    
    
    Change in fair value of warrant liability
    
    
    (5,184,304
    )
    
    
    822,517Changes in operating assets and liabilities:Other receivables
    
    
    558,709
    
    
    
    398,742Trade receivables
    
    
    54,309Prepaid and other current assets
    
    
    (209,259
    )
    
    
    196,778Other assets, non-current
    
    
    42,482
    
    
    
    (269,393
    )Accounts payable and accrued expenses
    
    
    (1,706,687
    )
    
    
    (509,958
    )Accrued wind-down expenses
    
    
    (762,474
    )
    
    
    (775,547
    )Deferred revenue
    
    
    (61,289
    )
    
    
    (303,027
    )Deferred rent
    
    
    (130,768
    )
    
    
    (256,715
    )Net cash used in operating activities
    
    
    (19,655,257
    )
    
    
    (18,491,364
    )Cash flows from investing activities:Proceeds from the sale of marketable securities
    
    
    
    
    
    
    4,510,213Purchase of marketable securities
    
    
    
    
    
    
    (4,977,982
    )Payment of advances under notes receivable
    
    
    
    
    
    
    (79,829
    )Purchases of property, plant and equipment
    
    
    (766,907
    )
    
    
    (485,750
    )Acquisition of other assets
    
    
    
    
    
    
    (15,000
    )Net cash used in investing activities
    
    
    (766,907
    )
    
    
    (1,048,348
    )Cash flows from financing activities:Proceeds from issuance of common stock, net of issuance costs
    
    
    7,015,322
    
    
    
    17,694,812Proceeds from the exercise of stock options
    
    
    18,936
    
    
    
    252,984Proceeds from the exercise of warrants
    
    
    
    
    
    
    331,501Payments related to net share issuance of stock based awards
    
    
    (483,406
    )
    
    
    (380,548
    )Proceeds from (repayment of) capital lease obligations
    
    
    (52,069
    )
    
    
    147,825Repayment of bonds payable
    
    
    (118,750
    )
    
    
    (110,417
    )Net cash provided by financing activities
    
    
    6,380,033
    
    
    
    17,936,157Decrease in cash and cash equivalents
    
    
    (14,042,131
    )
    
    
    (1,603,555
    )Effects of foreign exchange rate changes on cash
    
    
    (21,272
    )
    
    
    (212,916
    )Cash and cash equivalents, beginning of period
    
    
    38,617,977
    
    
    
    30,042,986Cash and cash equivalents, end of period
    
    $
    24,554,574
    
    
    $
    28,226,515Supplemental disclosure of cash flow information:Interest paid
    
    $
    72,775
    
    
    $
    84,863Supplemental schedule of non-cash investing and financing activities:Stock issued as part of our acquisition of the operations of SCS Plc (1)
    
    
    
    
    
    $
    4,425,500Forgiveness of principal and accrued interest on notes receivable (1)
    
    
    
    
    
    $
    709,076Stock retired from settlement agreement (1)
    
    $
    241,150Stock issue for licensing agreement(2)
    
    
    
    
    
    $
    10,000
 
 (1)
    
    On April 1, 2009, we acquired the operations of Stem Cell Sciences Plc (SCS, now known as
Asset Realisation Company Limited). As consideration, we issued 2,650,000 shares of our 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. Pursuant to the
acquisition agreement, 20% of the 2,650,000 shares were placed into an escrow for a twelve
month period to satisfy any indemnification obligations owed to us by SCS. On August 19,
2010, we entered into a settlement agreement with SCS in which the parties agreed to the
release of half the escrowed shares to SCS and half to us in full satisfaction of our claims
for indemnification, and both parties waived all other claims, known and unknown, against the
other. The 265,000 shares returned to us are being treated as retired and no longer
outstanding. We have recorded approximately $227,000 as other income, which was the value of
these shares based on the closing price of $0.91 per share on August 19, 2010, and net of
amounts already accrued for potential claims against the escrowed shares.(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 shares of our common stock in 2009. In September 2010, we terminated all our
licensing agreements with Cal Tech.  5




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2010 and 2009
 Note 1. Summary of Significant Accounting Policies
 Nature of Business
    6




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##### Table of Contents



Principles of Consolidation
  Use of Estimates
   
    
    the grant date fair value of stock-based awards recognized as compensation
expense (see Note 6, Stock-Based Compensation);
    
    accrued wind-down expenses (see Note 7, Wind-Down Expenses);
    
    the fair value of warrants recorded as a liability (see Note 9, Warrant
Liability); and
    
    the fair value of goodwill and other intangible assets (see Note 5, Goodwill
and Other Intangible Assets).
 Financial Instruments
 Cash and Cash Equivalents
  Marketable Securities
   Trade and Other Receivables
  Warrant Liability
  7




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##### Table of Contents



Goodwill and Other Intangible Assets
  Revenue Recognition
  Stock-Based Compensation
   Net Loss per Share
  8




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##### Table of Contents



Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    (5,552,256
    )
    
    $
    (5,144,741
    )
    
    $
    (16,286,678
    )
    
    $
    (21,792,653
    )Weighted average shares outstanding
used to compute basic and diluted
net loss per share
    
    
    127,091,721
    
    
    
    108,257,345
    
    
    
    122,015,319
    
    
    
    103,071,957Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.05
    )
    
    $
    (0.13
    )
    
    $
    (0.21
    )
  2010
    
    
    2009Options
    
    
    11,427,099
    
    
    
    9,293,703Restricted stock units
    
    
    4,660,055
    
    
    
    2,367,901Warrants
    
    
    14,344,828
    
    
    
    10,344,828Total
    
    
    30,431,982
    
    
    
    22,006,432
 Comprehensive Loss
   Three months ended September 30,
    
    
    Nine months ended September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    (5,552,256
    )
    
    $
    (5,144,741
    )
    
    $
    (16,286,678
    )
    
    $
    (21,792,653
    )Net change in
unrealized gains
and losses on
marketable
securities
    
    
    20,462
    
    
    
    (5,248
    )
    
    
    (51,572
    )
    
    
    128,512Net change in
unrealized gains
and losses on
foreign currency
translations
    
    
    267,769
    
    
    
    (208,537
    )
    
    
    (138,911
    )
    
    
    (434,175
    )Comprehensive loss
    
    $
    (5,264,025
    )
    
    $
    (5,358,526
    )
    
    $
    (16,477,161
    )
    
    $
    (22,098,316
    )
 Recent Accounting Pronouncements
 Fair Value Measurements and Disclosures.
 Revenue
RecognitionMilestone Method,
 9




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Note 2. Financial Instruments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    (Losses)
    
    
    Fair ValueSeptember 30, 2010Cash
    
    $
    250,209
    
    
    $
    
    
    
    $
    
    
    
    $
    250,209Cash equivalents
    
    
    24,304,365
    
    
    
    
    
    
    
    
    
    
    
    24,304,365Marketable equity securities, current
    
    
    74,456
    
    
    
    70,967
    
    
    
    
    
    
    
    145,423Total cash, cash equivalents, and marketable securities
    
    $
    24,629,030
    
    
    $
    70,967
    
    
    $
    
    
    
    $
    24,699,997December 31, 2009Cash
    
    $
    1,064,148
    
    
    $
    
    
    
    $
    
    
    
    $
    1,064,148Cash equivalents
    
    
    37,553,829
    
    
    
    
    
    
    
    
    
    
    
    37,553,829Marketable equity securities, current
    
    
    74,456
    
    
    
    122,539
    
    
    
    
    
    
    
    196,995Total cash, cash equivalents, and marketable securities
    
    $
    38,692,433
    
    
    $
    122,539
    
    
    $
    
    
    
    $
    38,814,972
    10




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##### Table of Contents



Note 3. Fair Value Measurement
         Fair Value Measurementat Reporting Date UsingQuoted Prices
    
    
    Significantin Active Markets
    
    
    Otherfor
    
    
    Observable
    
    
    As ofIdentical Assets
    
    
    Inputs
    
    
    September 30,(Level 1)
    
    
    (Level 2)
    
    
    2010Financial assetsCash equivalents:Money market funds
    
    $
    24,304,365
    
    
    $
    
    
    
    $
    24,304,365Marketable securities:Equity securities
    
    
    145,423
    
    
    
    
    
    
    
    145,423Total financial assets
    
    $
    24,449,788
    
    
    
    
    
    
    
    24,449,788Financial liabilitiesBond payable
    
    $
    
    
    
    $
    741,250
    
    
    $
    741,250Warrant liability
    
    $
    
    
    
    
    4,492,664
    
    
    
    4,492,664Total financial liabilities
    
    $
    
    
    
    $
    5,233,914
    
    
    $
    5,233,914
 Note 4. Acquisition of Stem Cell Sciences Plc (SCS) Operations
  11




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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 5. Goodwill and Other Intangible Assets
   Balance as of December 31, 2009
    
    $
    2,019,679Reductions (R&D credit as described above)
    
    
    (47,374
    )Foreign currency translation
    
    
    (53,644
    )Balance as of September 30, 2010
    
    $
    1,918,661
  Net CarryingOther Intangible Asset Class
    
    AmountCustomer relationships and developed technology
    
    $
    1,155,995In-process research and development
    
    
    1,317,456Trade name
    
    
    304,746Patents
    
    
    366,702License agreements
    
    
    42,394Total other intangible assets
    
    $
    3,187,293
 12




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##### Table of Contents



Note 6. Stock-Based Compensation
   Three months ended
    
    
    Nine months endedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Research and development expense
    
    $
    371,694
    
    
    $
    551,210
    
    
    $
    1,531,632
    
    
    $
    1,629,551Selling, general and administrative expense
    
    
    493,675
    
    
    
    584,978
    
    
    
    1,456,251
    
    
    
    1,545,394Total employee stock-based compensation
expense and effect on net loss
    
    $
    865,369
    
    
    $
    1,136,188
    
    
    $
    2,987,883
    
    
    $
    3,174,945Effect on basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.03
    )
  Stock Options
   Weighted-averageNumber of options
    
    
    exercise price ($)Balance at June 30, 2010
    
    
    11,498,991
    
    
    
    2.02Granted
    
    
    3,000
    
    
    
    0.89Exercised
    
    
    
    
    
    
    Cancelled
    
    
    (74,892
    )
    
    
    3.74Outstanding options at
September 30, 2010
    
    
    11,427,099
    
    
    
    2.00
  Three months ended September 30,
    
    Nine months ended September 30,2010
    
    2009
    
    2010
    
    2009Expected life (years)(1)
    
    
    7.6
    
    
    
    7.6
    
    
    
    7.2
    
    
    
    7.4Risk-free interest rate(2)
    
    
    2.2
    %
    
    
    3.2
    %
    
    
    2.9
    %
    
    
    2.8
    %Expected volatility(3)
    
    
    88.0
    %
    
    
    91.8
    %
    
    
    88.4
    %
    
    
    93.6
    %Expected dividend yield(4)
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 13




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##### Table of Contents



(1)
    
    The expected term represents our estimated period during which our stock-based awards remain
outstanding. We estimated this period 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, 2010
    
    
    4,254,807
    
    
    
    1.09Granted
    
    
    3,000
    
    
    
    0.73Vested
    
    
    (254,651
    )
    
    
    1.65Cancelled
    
    
    
    
    
    
    Unvested options at September 30, 2010
    
    
    4,003,156
    
    
    
    1.06
  Restricted Stock Units
   Weighted-average grantNumber of RSUs
    
    
    date fair value ($)Balance at June 30, 2010
    
    
    4,888,388
    
    
    
    1.23Granted
    
    
    10,000
    
    
    
    1.03Vested and converted to common shares
    
    
    (33,333
    )
    
    
    1.09Cancelled
    
    
    (200,000
    )
    
    
    1.05Balance unvested at September 30, 2010 (1)
    
    
    4,665,055
    
    
    
    1.23
 
 (1)
    
    55,000 of these restricted stock units vest and convert into shares of our common stock after
one year from the date of grant. 2,380,754 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 following the grant. 2,069,301 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 following the grant. 160,000 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. 14




---



##### Table of Contents



Stock Appreciation Rights
    Number of SARsOutstanding at June 30, 2010
    
    
    1,354,088Granted
    
    
    Exercised
    
    
    Forfeited and expired
    
    
    Outstanding SARs at September 30, 2010
    
    
    1,354,088SARs exercisable at September 30, 2010
    
    
    1,354,088
   Note 7. Wind-Down Expenses
 Rhode Island
   January 1 to
    
    
    April 1 to
    
    
    July 1 to
    
    
    January 1 to
    
    
    January 1 toMarch 31,
    
    
    June 30,
    
    
    September 30,
    
    
    September 30,
    
    
    December 31,2010
    
    
    2010
    
    
    2010
    
    
    2010
    
    
    2009Accrued wind-down reserve at beginning of period
    
    $
    3,572,000
    
    
    $
    3,422,000
    
    
    $
    3,268,000
    
    
    $
    3,572,000
    
    
    $
    4,448,000Less actual expenses recorded against estimated
reserve during the period
    
    
    (315,000
    )
    
    
    (280,000
    )
    
    
    (303,000
    )
    
    
    (898,000
    )
    
    
    (1,216,000
    )Additional expense recorded to revise estimated
reserve at period-end
    
    
    165,000
    
    
    
    126,000
    
    
    
    
    
    
    
    291,000
    
    
    
    340,000Revised reserve at period-end
    
    
    3,422,000
    
    
    
    3,268,000
    
    
    
    2,965,000
    
    
    
    2,965,000
    
    
    
    3,572,000Add deferred rent at period-end
    
    
    809,000
    
    
    
    758,000
    
    
    
    708,000
    
    
    
    708,000
    
    
    
    861,000Total accrued wind-down expenses at period-end
(current and non-current)
    
    $
    4,231,000
    
    
    $
    4,026,000
    
    
    $
    3,673,000
    
    
    $
    3,673,000
    
    
    $
    4,433,000Accrued wind-down expenses, current
    
    $
    1,443,000
    
    
    $
    1,510,000
    
    
    $
    1,342,000
    
    
    $
    1,342,000
    
    
    $
    1,376,000Accrued wind-down expenses, non-current
    
    
    2,788,000
    
    
    
    2,516,000
    
    
    
    2,331,000
    
    
    
    2,331,000
    
    
    
    3,057,000Total accrued wind-down expenses
    
    $
    4,231,000
    
    
    $
    4,026,000
    
    
    $
    3,673,000
    
    
    $
    3,673,000
    
    
    $
    4,433,000
 15




---



##### Table of Contents



Australia
  July 1 toSeptember 30,2010Accrued wind-down reserve at June 30, 2010
    
    $
    61,000Less actual expenses recorded against estimated reserve during the period
    
    
    (1,000
    )Foreign currency translation
    
    
    9,000Accrued wind-down reserve at September 30, 2010
    
    $
    69,000
 Note 8. Commitments and Contingencies
 Leases
 Capital Leases
  Operating Leases
  Operating Leases  California
  16




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##### Table of Contents



.
 Operating Leases  Rhode Island
  Operating Leases  United Kingdom
  Contingencies
  17




---



##### Table of Contents



Note 9. Warrant Liability
    18




---



##### Table of Contents



To CalculateFair Value of WarrantLiability atSeptember 30, 2010
    
    
    June 30, 2010Expected life (years)
    
    
    3.6
    
    
    
    3.9Risk-free interest rate
    
    
    1.0
    %
    
    
    1.7
    %Expected volatility
    
    
    80.8
    %
    
    
    80.0
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
 At September 30,
    
    
    At June 30,
    
    
    Change in Fair Value2010
    
    
    2010
    
    
    of Warrant LiabilityFair value of warrant liability
    
    $
    2,908,344
    
    
    $
    3,755,689
    
    
    $
    (847,345
    )
   To CalculateFair Value of Warrant Liability atSeptember 30,
    
    
    June 30,2010
    
    
    2010Expected life (years)
    
    
    4.6
    
    
    
    4.8Risk-free interest rate
    
    
    1.3
    %
    
    
    2.1
    %Expected volatility
    
    
    77.0
    %
    
    
    76.2
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
 At September 30,
    
    
    At June 30,
    
    
    Change in Fair Value2010
    
    
    2010
    
    
    of Warrant LiabilityFair value of warrant liability
    
    $
    1,584,320
    
    
    $
    1,964,560
    
    
    $
    (380,240
    )
 Note 10. Common Stock
   19




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##### Table of Contents



ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  Overview
 The Company
 ®
 20




---



##### Table of Contents



in vitro
    21




---



##### Table of Contents



Significant Events
 PLoS
ONE.
  Nature
    Critical Accounting Policies and the Use of Estimates
  22




---



##### Table of Contents



Stock-Based Compensation
   Wind-down expenses  Rhode Island
    23




---



##### Table of Contents



Wind-down expenses  Australia
  Business Combinations
  Results of Operations
   24




---



##### Table of Contents



Revenue and Cost of Product Sales
  Three months ended,
    
    
    
    
    
    
    
    
    
    
    Nine months ended,September 30
    
    
    Change in 2010 versus 2009
    
    
    September 30
    
    
    Change in 2010 versus 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Revenue:Licensing agreements and grants
    
    $
    123,693
    
    
    $
    98,806
    
    
    $
    24,887
    
    
    
    25
    %
    
    $
    409,092
    
    
    $
    300,260
    
    
    $
    108,832
    
    
    
    36
    %Product sales
    
    
    129,826
    
    
    
    154,362
    
    
    
    (24,536
    )
    
    
    (16
    )%
    
    
    318,831
    
    
    
    274,961
    
    
    
    43,870
    
    
    
    16
    %Total revenue
    
    
    253,519
    
    
    
    253,168
    
    
    
    351
    
    
    
    0
    %
    
    
    727,923
    
    
    
    575,221
    
    
    
    152,702
    
    
    
    27
    %Cost of product sales
    
    
    35,914
    
    
    
    141,453
    
    
    
    (105,539
    )
    
    
    (75
    )%
    
    
    104,538
    
    
    
    200,979
    
    
    
    (96,441
    )
    
    
    (48
    )%Gross Profit
    
    $
    217,605
    
    
    $
    111,715
    
    
    $
    105,890
    
    
    
    95
    %
    
    $
    623,385
    
    
    $
    374,242
    
    
    $
    249,143
    
    
    
    67
    %
  Third quarter ended September 30, 2010 versus third quarter ended September 30, 2009.
  Nine-month period ended September 30, 2010 versus nine-month period ended September 30, 2009
 Operating Expenses
  Three months ended,
    
    
    Change in 2010 versus
    
    
    Nine months ended,
    
    
    Change in 2010 versusSeptember 30
    
    
    2009
    
    
    September 30
    
    
    20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Operating expenses:Research & development
    
    $
    5,200,612
    
    
    $
    4,988,569
    
    
    $
    212,043
    
    
    
    4
    %
    
    $
    15,096,354
    
    
    $
    14,278,958
    
    
    $
    817,396
    
    
    
    6
    %Selling, general & administrative
    
    
    2,017,872
    
    
    
    2,111,838
    
    
    
    (93,966
    )
    
    
    (4
    )%
    
    
    6,889,292
    
    
    
    6,852,724
    
    
    
    36,568
    
    
    
    1
    %Wind-down expenses
    
    
    
    
    
    
    (5,679
    )
    
    
    5,679
    
    
    
    (100
    )%
    
    
    291,168
    
    
    
    539,821
    
    
    
    (248,653
    )
    
    
    (46
    )%Total operating expenses
    
    $
    7,218,484
    
    
    $
    7,094,728
    
    
    $
    123,756
    
    
    
    2
    %
    
    $
    22,276,814
    
    
    $
    21,671,503
    
    
    $
    605,311
    
    
    
    3
    %
 25




---



##### Table of Contents



Research and Development Expenses
    Third quarter ended September 30, 2010 versus third quarter ended September 30, 2009.
  Nine-month period ended September 30, 2010 versus nine-month period ended September 30, 2009.
 26




---



##### Table of Contents



Selling, General and Administrative Expenses
   Third quarter ended September 30, 2010 versus third quarter ended September 30, 2009
  Nine-month period ended September 30, 2010 versus nine-month period ended September 30, 2009
 Wind-down Expenses
 Three months ended,
    
    
    Nine months ended,September 30
    
    
    September 302010
    
    
    2009
    
    
    2010
    
    
    2009Rhode Island
    
    $
    
    
    
    $
    (5,679
    )
    
    $
    291,168
    
    
    $
    229,552Australia
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    310,269Total wind-down expenses
    
    $
    
    
    
    $
    (5,679
    )
    
    $
    291,168
    
    
    $
    539,821
 Rhode Island
  27




---



##### Table of Contents



Australia
  Other Income (Expense)
  Three months ended,
    
    
    Change in 2010 versus
    
    
    Nine months ended,
    
    
    Change in 2010 versusSeptember 30
    
    
    2009
    
    
    September 30
    
    
    20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Other income (expense):Gain on sale of marketable securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    397,866
    
    
    $
    (397,866
    )
    
    
    (100
    )%Change in fair value of warrant liability
    
    
    1,227,585
    
    
    
    1,830,414
    
    
    
    (602,829
    )
    
    
    (33
    )%
    
    
    5,184,304
    
    
    
    (822,517
    )
    
    
    6,006,821
    
    
    
    (730
    )%Interest income
    
    
    10,911
    
    
    
    5,531
    
    
    
    5,380
    
    
    
    97
    %
    
    
    24,814
    
    
    
    55,816
    
    
    
    (31,002
    )
    
    
    (56
    )%Interest expense
    
    
    (22,221
    )
    
    
    (27,613
    )
    
    
    5,392
    
    
    
    (20
    )%
    
    
    (72,775
    )
    
    
    (84,863
    )
    
    
    12,088
    
    
    
    (14
    )%Other income (expense), net
    
    
    232,348
    
    
    
    29,940
    
    
    
    202,408
    
    
    
    676
    %
    
    
    230,408
    
    
    
    (41,694
    )
    
    
    272,102
    
    
    
    653
    %Total other income
    
    $
    1,448,623
    
    
    $
    1,838,272
    
    
    $
    (389,649
    )
    
    
    (21
    )%
    
    $
    5,366,751
    
    
    $
    (495,392
    )
    
    $
    5,862,143
    
    
    
    (1,183
    )%
 Gain on Sale of Marketable Equity Securities
  28




---



##### Table of Contents



Change in Fair Value of Warrant Liability
  Interest Income
  Interest Expense
  Other income (expense), net
  Liquidity and Capital Resources
  September 30,
    
    December 31,
    
    Change2010
    
    2009
    
    $
    
    %Cash and cash equivalents
    
    $
    24,554,574
    
    
    $
    38,617,977
    
    
    $
    (14,063,403
    )
    
    
    (36
    )%
 29




---



##### Table of Contents



Nine months ended September 30,
    
    Change in 2010 versus 20092010
    
    2009
    
    $
    
    %Net cash used in operating activities
    
    $
    (19,655,257
    )
    
    $
    (18,491,364
    )
    
    $
    (1,163,893
    )
    
    
    6
    %Net cash used in investing activities
    
    $
    (766,907
    )
    
    $
    (1,048,348
    )
    
    $
    281,441
    
    
    
    (27
    )%Net cash provided by financing activities
    
    $
    6,380,033
    
    
    $
    17,936,157
    
    
    $
    (11,556,124
    )
    
    
    (64
    )%
 Net Cash Used in Operating Activities
  Net Cash Provided by (Used in) Investing Activities
  Net Cash Provided by Financing Activities
   
    
    In November 2009, we sold 10,000,000 units to institutional investors at a price of
$1.25 per unit, for gross proceeds of $12,500,000. The units, each of which consisted of
one share of common stock and a warrant to purchase 0.4 shares of common stock at an
exercise price of $1.50 per share, were offered as a registered direct offering under a
shelf registration statement previously filed with and declared effective by the
Securities and Exchange Commission. We received total proceeds net of offering expenses
and placement agency fees of approximately $11,985,000.
    
    In June 2009, we filed a prospectus supplement that relates to the issuance and sale
of up to $30,000,000 of our common stock, from time to time through a sales agreement with
a sales agent. The prospectus is a part of a shelf registration statement that we filed
with the SEC on June 25, 2008. Under this shelf registration process, we may offer to sell
in one or more offerings equity or debt securities up to a total dollar amount of
$100,000,000. In 2009, we sold a total of 1,830,000 shares of our common stock under a
June 2009 sales agreement with a sales agent at an average price per share of $1.80 for
gross proceeds of approximately $3,291,000.
    
    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 a
shelf registration statement previously filed with and declared effective by the
Securities and Exchange Commission. We received total proceeds net of offering expenses
and placement agency fees of approximately $18,637,000.
    
    In 2007, 2008 and 2009, we sold a total of 10,000,000 shares of our common stock at
an average price per share of $2.06 for gross proceeds of approximately $20,555,000. These
 shares were sold under a sales agreement entered into in December 2006, under which up to
10,000,000 shares may be sold from time to time under a shelf registration statement.
 30




---



##### Table of Contents



Commitments
  Off-Balance Sheet Arrangements
  31




---



##### Table of Contents



Operating Leases
  Operating Leases  California
  .
 Operating Leases  Rhode Island
  Operating Leases  United Kingdom
   32




---



##### Table of Contents



Contractual Obligations
  Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payable inObligations
    
    
    Payable in (October to
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2015at September
    
    
    December)
    
    
    Payable in
    
    
    Payable in
    
    
    Payable in
    
    
    Payable in
    
    
    and30, 2010
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    BeyondOperating lease payments(1)
    
    $
    5,376,184
    
    
    $
    841,760
    
    
    $
    2,392,527
    
    
    $
    1,409,475
    
    
    $
    732,422
    
    
    $
    
    
    
    $
    Capital lease (equipment)
    
    
    110,068
    
    
    
    18,348
    
    
    
    73,391
    
    
    
    18,329
    
    
    
    
    
    
    
    
    
    
    
    Bonds Payable (principal & interest)(2)
    
    
    919,344
    
    
    
    61,912
    
    
    
    242,321
    
    
    
    240,666
    
    
    
    237,593
    
    
    
    136,852
    
    
    
    Total contractual cash obligations
    
    $
    6,405,596
    
    
    $
    922,020
    
    
    $
    2,708,239
    
    
    $
    1,668,470
    
    
    $
    970,015
    
    
    $
    136,852
    
    
    $
    
 
 (1)
    
    Operating lease payments exclude space-sharing and sub-lease income (see Off-Balance Sheet
Arrangements  Operating Leases above for further information), but include rent payments
for our Rhode Island facility that are included as part of our Accrued wind-down expenses in
our condensed consolidated financial statements. See Note 7, Wind-down expenses and Note
8, Commitments and Contingencies in the notes to condensed consolidated financial statements of
Part I, Item 1 of this Form 10-Q for further information.(2)
    
    See Note 8, Commitments and Contingencies in the notes to condensed consolidated financial
statements of Part I, Item 1 of this Form 10-Q for further information.    Recent Accounting Pronouncements
 Fair Value Measurements and Disclosures.
 33




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##### Table of Contents



Revenue
RecognitionMilestone Method,
 
    
    
 PART II-OTHER INFORMATION
 
    34




---



##### Table of Contents



None.
 
   
  Exhibit 10.1 
    
    Amendment to lease, dated August 25, 2010, between the Board of Trustees of the
Leland Stanford Junior University and the RegistrantExhibit 31.1 
    
    Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2 
    
    Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of
2002Exhibit 32.1 
    
    Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2 
    
    Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 35




---



##### Table of Contents



STEMCELLS, INC.
(name of Registrant)November 2, 2010
    /s/ Rodney K. B. YoungRodney K. B. YoungChief Financial Officer 36




---



##### Table of Contents



Exhibit 10.1 
    
    Amendment to lease, dated August 25, 2010, between the Board of Trustees of the
Leland Stanford Junior University and the RegistrantExhibit 31.1 
    
    Certification of Martin McGlynn under Section 302 of the Sarbanes-Oxley Act of 2002Exhibit 31.2 
    
    Certification of Rodney K. B. Young under Section 302 of the Sarbanes-Oxley Act of
2002Exhibit 32.1 
    
    Certification of Martin McGlynn Pursuant to 18 U.S.C. Section 1350, As Adopted
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002Exhibit 32.2 
    
    Certification of Rodney K. B. Young Pursuant to 18 U.S.C. Section 1350, As
Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 37