##### 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: June 30, 2009
 Commission
File Number: 0-19871
 STEMCELLS, INC.
  DELAWARE
    
    94-3078125(State or other jurisdiction of 
incorporation or organization)
    
    (I.R.S. Employer
identification No)
 
 
  
 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 INFORMATIONItem 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets at June 30, 2009 and December 31, 2008
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2009 and 2008
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 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
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATIONItem 1. Legal Proceedings
    
    
    31Item 1A. Risk Factors
    
    
    31Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    31Item 3. Defaults Upon Senior Securities
    
    
    31Item 4. Submission of Matters to a Vote of Security-Holders
    
    
    31Item 5. Other Information
    
    
    32Item 6. Exhibits
    
    
    32SIGNATURES
    
    
    33EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  NOTE REGARDING REFERENCES TO US AND OUR COMMON STOCK
  2




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##### Table of Contents



PART IFINANCIAL INFORMATION
 
  
 
 June 30, 2009
    
    
    December 31, 2008ASSETSCurrent assets:Cash and cash equivalents
    
    $
    36,760,470
    
    
    $
    30,042,986Marketable securities
    
    
    200,468
    
    
    
    4,181,592Other receivables
    
    
    207,093
    
    
    
    164,204Notes receivable
    
    
    
    
    
    
    298,032Prepaid assets
    
    
    891,276
    
    
    
    645,242Total current assets
    
    
    38,059,307
    
    
    
    35,332,056Property, plant and equipment, net
    
    
    3,293,803
    
    
    
    3,173,468Other assets, non-current
    
    
    2,095,349
    
    
    
    2,079,278Goodwill and other intangible assets, net
    
    
    5,623,709
    
    
    
    645,538Total assets
    
    $
    49,072,168
    
    
    $
    41,230,340LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,016,271
    
    
    $
    1,078,123Accrued expenses and other liabilities
    
    
    2,628,507
    
    
    
    2,261,245Accrued wind-down expenses, current
    
    
    1,748,264
    
    
    
    1,420,378Deferred revenue, current
    
    
    270,851
    
    
    
    43,909Capital lease obligation, current
    
    
    74,632
    
    
    
    18,739Deferred rent, current
    
    
    270,643
    
    
    
    346,930Bond payable, current
    
    
    154,167
    
    
    
    149,167Total current liabilities
    
    
    6,163,335
    
    
    
    5,318,491Capital lease obligation, non-current
    
    
    117,296
    
    
    
    6,529Bond payable, non-current
    
    
    782,500
    
    
    
    860,000Fair value of warrant liability
    
    
    11,092,862
    
    
    
    8,439,931Deposits and other long-term liabilities
    
    
    458,032
    
    
    
    466,211Accrued wind-down expenses, non-current
    
    
    3,583,977
    
    
    
    4,092,939Deferred rent, non-current
    
    
    
    
    
    
    90,215Deferred revenue, non-current
    
    
    226,419
    
    
    
    147,039Total liabilities
    
    
    22,424,421
    
    
    
    19,421,355Commitments and contingencies (Note 6)Stockholders equity:Common stock, $.01 par value;
250,000,000 shares authorized; issued
and outstanding 106,650,985 at June 30,
2009 and 94,945,603 at December 31, 2008
    
    
    1,066,509
    
    
    
    949,455Additional paid-in capital
    
    
    301,330,299
    
    
    
    279,868,802Accumulated deficit
    
    
    (275,649,435
    )
    
    
    (259,001,524
    )Accumulated other comprehensive loss
    
    
    (99,626
    )
    
    
    (7,748
    )Total stockholders equity
    
    
    26,647,747
    
    
    
    21,808,985Total liabilities and stockholders equity
    
    $
    49,072,168
    
    
    $
    41,230,340
  3




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##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Revenue:Revenue from licensing agreements and grants
    
    $
    144,851
    
    
    $
    29,832
    
    
    $
    201,453
    
    
    $
    47,182Revenue from product sales
    
    
    120,600
    
    
    
    
    
    
    
    120,600
    
    
    
    Total Revenue
    
    
    265,451
    
    
    
    29,832
    
    
    
    322,053
    
    
    
    47,182Cost of product sales
    
    
    (59,525
    )
    
    
    
    
    
    
    (59,525
    )
    
    
    Gross Profit
    
    
    205,926
    
    
    
    29,832
    
    
    
    262,528
    
    
    
    47,182Operating expenses:Research and development
    
    
    5,054,600
    
    
    
    4,415,615
    
    
    
    9,290,389
    
    
    
    8,915,366General and administrative
    
    
    2,201,974
    
    
    
    2,345,846
    
    
    
    4,740,886
    
    
    
    4,600,049Wind-down expenses
    
    
    340,064
    
    
    
    167,250
    
    
    
    545,500
    
    
    
    327,500Total operating expenses
    
    
    7,596,638
    
    
    
    6,928,711
    
    
    
    14,576,775
    
    
    
    13,842,915Loss from operations
    
    
    (7,390,712
    )
    
    
    (6,898,879
    )
    
    
    (14,314,247
    )
    
    
    (13,795,733
    )Other income (expense):Realized gain on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    397,866
    
    
    
    Change in fair value of warrant liability
    
    
    102,517
    
    
    
    
    
    
    
    (2,652,931
    )
    
    
    Interest income
    
    
    8,338
    
    
    
    216,109
    
    
    
    50,285
    
    
    
    599,774Interest expense
    
    
    (29,074
    )
    
    
    (28,970
    )
    
    
    (57,250
    )
    
    
    (57,161
    )Other expense
    
    
    (57,424
    )
    
    
    (3,736
    )
    
    
    (71,634
    )
    
    
    (7,345
    )Total other income (expense), net
    
    
    24,357
    
    
    
    183,403
    
    
    
    (2,333,664
    )
    
    
    535,268Net loss
    
    $
    (7,366,355
    )
    
    $
    (6,715,476
    )
    
    $
    (16,647,911
    )
    
    $
    (13,260,465
    )Basic and diluted net loss per share
    
    $
    (0.07
    )
    
    $
    (0.08
    )
    
    $
    (0.17
    )
    
    $
    (0.16
    )Shares used to compute basic and diluted loss per share
    
    
    104,776,073
    
    
    
    80,814,838
    
    
    
    100,436,291
    
    
    
    80,759,400
  4




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##### Table of Contents



Six months endedJune 30,2009
    
    
    2008Cash flows from operating activities:Net loss
    
    $
    (16,647,911
    )
    
    $
    (13,260,465
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    754,863
    
    
    
    602,239Stock-based compensation
    
    
    2,038,757
    
    
    
    2,041,545Gain on sale of marketable securities
    
    
    (397,868
    )
    
    
    Change in fair value of warrant liability
    
    
    2,652,931
    
    
    
    Changes in operating assets and liabilities:Other receivables
    
    
    467,987
    
    
    
    142,377Prepaid assets
    
    
    (199,428
    )
    
    
    199,247Other assets, non-current
    
    
    (16,070
    )
    
    
    (41,816
    )Accounts payable and accrued expenses
    
    
    (551,038
    )
    
    
    (1,348,622
    )Accrued wind-down expenses
    
    
    (200,406
    )
    
    
    (394,233
    )Deferred revenue
    
    
    (118,140
    )
    
    
    (28,725
    )Deferred rent
    
    
    (166,501
    )
    
    
    (137,818
    )Net cash used in operating activities
    
    
    (12,382,824
    )
    
    
    (12,226,271
    )Cash flows from investing activities:Proceeds from the sale of marketable securities
    
    
    4,512,750
    
    
    
    20,265,211Repayment (payment) of advances under notes receivable
    
    
    (79,829
    )
    
    
    1,000,000Purchases of property, plant and equipment
    
    
    (379,732
    )
    
    
    (255,020
    )Acquisition of other assets
    
    
    (15,000
    )
    
    
    Net cash provided by investing activities
    
    
    4,038,189
    
    
    
    21,010,191Cash flows from financing activities:Proceeds from issuance of common stock, net
    
    
    14,987,348
    
    
    
    Proceeds from the exercise of stock options
    
    
    175,992
    
    
    
    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
    
    
    166,659
    
    
    
    (8,619
    )Repayment of bonds payable
    
    
    (72,500
    )
    
    
    (65,000
    )Net cash provided by financing activities
    
    
    15,208,452
    
    
    
    49,634Increase in cash and cash equivalents
    
    
    6,863,817
    
    
    
    8,833,554Effects of foreign exchange rate changes on cash
    
    
    (146,333
    )
    
    
    Cash and cash equivalents, beginning of period
    
    
    30,042,986
    
    
    
    9,759,169Cash and cash equivalents, end of period
    
    $
    36,760,470
    
    
    $
    18,592,723Supplemental disclosure of cash flow information:Interest paid
    
    $
    57,250
    
    
    $
    57,161Supplemental 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
    
    
    
    
 
 (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.  5




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##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
June 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 in
accordance with the provisions of Statement of Financial Accounting Standards (SFAS) No. 123
(Revised 2004) Share Based Payment (SFAS 123R) (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 in accordance with Emerging Issues
Task Force (EITF) Issue No. 00-19, Accounting for Derivative Financial Instruments Indexed
to and Potentially Settled in a Companys Own Stock(EITF 00-19). These warrants were issued
as part of our November 2008 financing (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
  Accounting For Equity Instruments That Are Issued To Other Than Employees For
Acquiring, Or In Conjunction With Selling, Goods Or Services
  7




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##### Table of Contents



Net Loss per Share
   Three months ended June 30,
    
    Six months ended June 30,2009
    
    2008
    
    2009
    
    2008Net loss
    
    $
    (7,366,355
    )
    
    $
    (6,715,476
    )
    
    $
    (16,647,911
    )
    
    $
    (13,260,465
    )Weighted average shares outstanding
used to compute basic and diluted
net loss per share
    
    
    104,776,073
    
    
    
    80,814,838
    
    
    
    100,436,291
    
    
    
    80,759,400Basic and diluted net loss per share
    
    $
    (0.07
    )
    
    $
    (0.08
    )
    
    $
    (0.17
    )
    
    $
    (0.16
    )
  2009
    
    2008Options
    
    
    9,380,197
    
    
    
    8,629,392Restricted stock units
    
    
    2,303,068
    
    
    
    1,650,000Warrants
    
    
    10,344,828
    
    
    
    1,255,000Total
    
    
    22,028,093
    
    
    
    11,534,392
 Comprehensive Loss
   Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Net loss
    
    $
    (7,366,355
    )
    
    $
    (6,715,476
    )
    
    $
    (16,647,911
    )
    
    $
    (13,260,465
    )Net change in
unrealized gains
and losses on
marketable
securities
    
    
    83,279
    
    
    
    (557,071
    )
    
    
    133,760
    
    
    
    (1,419,565
    )Net change in
unrealized gains
and losses on
foreign currency
translations
    
    
    (225,638
    )
    
    
    
    
    
    
    (225,638
    )
    
    
    Comprehensive loss
    
    $
    (7,508,714
    )
    
    $
    (7,272,547
    )
    
    $
    (16,739,789
    )
    
    $
    (14,680,030
    )
 Recent Accounting Pronouncements
 The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles 
a replacement of FASB Statement No. 162 )
 Subsequent Events
 8




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
    
    FASB Staff Position No. 107-1 (FSP 107-1) and Accounting Principles Board (APB) Opinion
No. 28-1 (APB 28-1), Interim Disclosures about Fair Value of Financial Instruments,which
amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments(SFAS
107) and APB Opinion No. 28, Interim Financial Reporting(APB 28),to require disclosures
about the fair value of financial instruments for interim and in annual financial
statements. FSP 107-1 and APB 28-1 will be effective for interim reporting periods ending
after June 15, 2009. The adoption of this accounting standard did not have a material impact
on our consolidated financial statements.
    
    FASB Staff Position No. FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly(FSP 157-4). FSP 157-4 provides additional guidance for
estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the
volume and level of activity for the asset or liability have significantly decreased. FSP
157-4 will be applied prospectively and will be effective for interim and annual reporting
periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact
on our consolidated financial statements.
    
    FASB Staff Position No. 115-2, (FSP 115-2) and FASB Staff Position No. 124-2 (FSP124-2),
Recognition and Presentation of Other-Than-Temporary Impairments,which amends the
other-than-temporary impairment guidance for debt and equity securities. FSP 115-2 and FSP
124-2 shall be effective for interim and annual reporting periods ending after June 15,
2009. The adoption of FSP 115-2 and FSP 124-2 did not have a material impact on our
consolidated financial statements.
    
    FASB Staff Position No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies(FSP 141 (R)-1). FSP 141
(R)-1 amends and clarifies FASB statement No. 141 (R), Business Combinations(SFAS 141
(R)),to address issues related to the recognition and measurement of assets and liabilities
arising from contingencies in a business combination. Assets and liabilities assumed in a
business combination that arise from contingencies should be recognized at fair value on the
acquisition date if fair value can be reasonably estimated during the measurement period. If
fair value cannot be reasonably estimated, companies should typically account for the
acquired contingencies using existing guidance. We adopted SFAS 141(R) and FSP 141(R)-1 on
January 1, 2009. We expect SFAS 141(R) and FSP 141(R)-1 will have an impact on our
consolidated financial statements; however, the nature and magnitude of the impact will
depend upon the nature, terms and size of the acquisition we consummate after the effective
date.
 Note 2. Financial Instruments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    (Losses)
    
    
    Fair ValueJune 30, 2009Cash
    
    $
    623,850
    
    
    $
    
    
    
    $
    
    
    
    $
    623,850Cash equivalents (money market accounts)
    
    
    36,136,620
    
    
    
    
    
    
    
    
    
    
    
    36,136,620Marketable equity securities, current
    
    
    74,456
    
    
    
    126,012
    
    
    
    
    
    
    
    200,468Total cash, cash equivalents, and marketable securities
    
    $
    36,834,926
    
    
    $
    126,012
    
    
    $
    
    
    
    $
    36,960,938December 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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##### Table of Contents



Fair Value Measurementat Reporting Date UsingQuoted Prices
    
    
    Significantin Active Markets
    
    
    Otherfor
    
    
    Observable
    
    
    As ofIdentical Assets
    
    
    Inputs
    
    
    June 30,(Level 1)
    
    
    (Level 2)
    
    
    2009AssetsCash Equivalents:Money market funds
    
    $
    715,058
    
    
    $
    
    
    
    $
    715,058U.S. Treasury securities
    
    
    35,421,562
    
    
    
    
    
    
    
    35,421,562Marketable Securities:Equity securities
    
    
    200,468
    
    
    
    
    
    
    
    200,468Corporate bonds
    
    
    
    
    
    
    
    
    
    
    Total assets
    
    $
    36,337,088
    
    
    
    
    
    
    
    36,337,088LiabilitiesBond payable
    
    $
    
    
    
    $
    936,667
    
    
    $
    936,667
 Note 4. Stock-Based Compensation
   Three months ended June 30,
    
    
    Six months ended June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Research and development expense
    
    $
    525,304
    
    
    $
    475,980
    
    
    $
    986,573
    
    
    $
    956,329General and administrative expense
    
    
    494,160
    
    
    
    487,859
    
    
    
    983,299
    
    
    
    978,437Total employee stock-based compensation expense and
effect on net loss
    
    $
    1,019,464
    
    
    $
    963,839
    
    
    $
    1,969,872
    
    
    $
    1,934,766Effect on basic and diluted net loss per common share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
  Incentive Stock Options
   Weighted-averageNumber of options
    
    exercise price ($)Balance at March 31, 2009
    
    
    8,355,287
    
    
    
    2.32Granted
    
    
    1,255,800
    
    
    
    1.73Exercised
    
    
    (185,623
    )
    
    
    0.54Cancelled
    
    
    (45,267
    )
    
    
    2.48Outstanding options at June 30, 2009
    
    
    9,380,197
    
    
    
    2.27
  11




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##### Table of Contents



Three months ended June 30,
    
    Six months ended June 30,2009
    
    2008
    
    2009
    
    2008Expected life (years)(1)
    
    
    7.39
    
    
    
    7.97
    
    
    
    7.44
    
    
    
    6.36Risk-free interest rate(2)
    
    
    2.81
    %
    
    
    3.85
    %
    
    
    2.72
    %
    
    
    2.89
    %Expected volatility(3)
    
    
    93.52
    %
    
    
    94.52
    %
    
    
    94.17
    %
    
    
    93.87
    %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 March 31, 2009
    
    
    2,320,361
    
    
    
    1.80Granted
    
    
    1,255,800
    
    
    
    1.41Vested
    
    
    (310,677
    )
    
    
    2.12Cancelled
    
    
    
    
    
    
    Unvested options at June 30, 2009
    
    
    3,265,484
    
    
    
    1.62
  Restricted Stock Units
   Weighted-average grantNumber of RSUs
    
    date fair value ($)Balance at March 31, 2009 (1)
    
    
    1,350,000
    
    
    
    1.30Granted (2)
    
    
    953,068
    
    
    
    1.75Vested and converted to common shares
    
    
    
    
    
    
    Cancelled
    
    
    
    
    
    
    Balance unvested at June 30, 2009
    
    
    2,303,068
    
    
    
    1.49
 
 (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. 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)
    
    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. 12




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##### Table of Contents



Stock Appreciation Rights
   Number of SARsOutstanding at March 31, 2009
    
    
    1,430,849Granted
    
    
    Exercised
    
    
    Forfeited and expired
    
    
    Outstanding SARs at June 30, 2009
    
    
    1,430,849SARs exercisable at June 30, 2009
    
    
    1,043,322
   Note 5. Wind-Down Expenses
 Rhode Island
   January to
    
    
    April to
    
    
    January to
    
    
    January toMarch 31,
    
    
    June 30,
    
    
    June 30,
    
    
    December 31,2009
    
    
    2009
    
    
    2009
    
    
    2008Accrued wind-down reserve at beginning of period
    
    $
    4,448,000
    
    
    $
    4,323,000
    
    
    $
    4,448,000
    
    
    $
    4,875,000Less actual expenses recorded against estimated reserve during the period
    
    
    (331,000
    )
    
    
    (293,000
    )
    
    
    (624,000
    )
    
    
    (1,293,000
    )Additional expense recorded to revise estimated reserve at period-end
    
    
    206,000
    
    
    
    30,000
    
    
    
    236,000
    
    
    
    866,000Revised reserve at period-end
    
    
    4,323,000
    
    
    
    4,060,000
    
    
    
    4,060,000
    
    
    
    4,448,000Add deferred rent at period-end
    
    
    1,014,000
    
    
    
    962,000
    
    
    
    962,000
    
    
    
    1,065,000Total accrued wind-down expenses at period-end (current and non current)
    
    $
    5,337,000
    
    
    $
    5,022,000
    
    
    $
    5,022,000
    
    
    $
    5,513,000Accrued wind-down expenses, current
    
    $
    1,496,000
    
    
    $
    1,438,000
    
    
    $
    1,438,000
    
    
    $
    1,420,000Accrued wind-down expenses, non-current
    
    
    3,841,000
    
    
    
    3,584,000
    
    
    
    3,584,000
    
    
    
    4,093,000Total accrued wind-down expenses
    
    $
    5,337,000
    
    
    $
    5,022,000
    
    
    $
    5,022,000
    
    
    $
    5,513,000
 Australia
 Accounting for Costs
Associated with Exit
 13




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##### Table of Contents



or Disposal Activities
  Early termination facility costs
    
    $
    86,000Employee termination costs
    
    
    127,000Other expenses
    
    
    97,000Total accrued wind-down expenses at June 30, 2009
    
    $
    310,000
 Note 6. Commitments and Contingencies
 Leases
 Capital leases
  Operating leases
     Contingencies
  14




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##### Table of Contents



Indemnification Agreement
  Note 7. Warrant Liability
   Expected life (years)
    
    
    4.87Risk-free interest rate
    
    
    2.08
    %Expected volatility
    
    
    87.4
    %Expected dividend yield
    
    
    0
    %
 At March 31,
    
    Change inAt June 30, 2009
    
    2009
    
    Fair ValueFair value of warrant liability
    
    $
    11,092,862
    
    
    $
    11,195,379
    
    
    $
    (102,517
    )
 15




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##### Table of Contents



Note 8. Common Stock
  
    
    On April 1, 2009, we acquired the operations of SCS. As consideration, we issued to SCS
2,650,000 shares of common stock and waived certain commitments of SCS to repay approximately
$709,000 in principal and accrued interest owed to us. The closing price of our common stock
was $1.67 per share on April 1, 2009.
    
    On June 8, 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 our sales agent Cantor
Fitzgerald & Co (Cantor). These sales will be made pursuant to the terms of a sales agreement
with Cantor, under which we will pay Cantor a fee of 3.0% of the gross proceeds. The
prospectus is a part of a registration statement that we filed with the SEC on June 25, 2008,
using a shelf registration process. Under this shelf registration process, we may offer to
sell in one or more offerings up to a total dollar amount of $100,000,000.
    
    In the second quarter of 2009, we sold an aggregate 4,937,400 shares of common stock at an
average price of approximately $1.75 per share for gross proceeds of approximately
$8,655,000. Of the 4,937,400 shares sold, 4,662,400 shares were sold pursuant to a sales
agreement we entered into with Cantor in December 2006. Cantor was paid compensation equal
to 5.0% of the gross proceeds and the total number of shares available to be sold under that
agreement have been sold. The remaining 275,000 shares were sold pursuant to the sales
agreement we entered into with Cantor in June 2009 and Cantor was paid compensation equal to
3.0% of the gross proceeds under the terms of this second agreement.
 Note
9. Acquisition of SCS Operations
     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
 16




---



##### Table of Contents



Note 10. Subsequent Events
   
   Overview
 The Company
 ®
 17




---



##### Table of Contents



in vitro
   18




---



##### Table of Contents



Significant Events
     ® ®
 Critical Accounting Policies and the Use of Estimates
  Stock-Based Compensation
 Share-Based Payment Share-Based Payment Share-Based Payment
 19




---



##### Table of Contents



Wind-down expenses  Rhode Island
 Liability Recognition for Certain Employee Termination Benefits and Other Costs to
Exit an Activity (Including Certain Costs Incurred in a Restructuring)
   Wind-down expenses  Australia
 Accounting for Costs
Associated with Exit or Disposal Activities
 20




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##### Table of Contents



Business Combinations
 Business Combinations Goodwill and Other Intangible Assets
 Results of Operations
  Revenue
and Cost of Product Sales
  Three months ended,
    
    
    
    
    
    
    
    
    
    
    Six months ended,June 30
    
    
    Change in 2009 versus 2008
    
    
    June 30
    
    
    Change in 2009 versus 20082009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Revenue:Licensing
agreements and
grants
    
    $
    144,851
    
    
    $
    29,832
    
    
    $
    115,019
    
    
    
    386
    %
    
    $
    201,453
    
    
    $
    47,182
    
    
    $
    154,271
    
    
    
    327
    %Product sales
    
    
    120,600
    
    
    
    
    
    
    
    120,600
    
    
    
    *
    
    
    
    120,600
    
    
    
    
    
    
    
    120,600
    
    
    
    *Total revenues
    
    
    265,451
    
    
    
    29,832
    
    
    
    235,619
    
    
    
    790
    %
    
    
    322,053
    
    
    
    47,182
    
    
    
    274,871
    
    
    
    583
    %Cost of product
sales
    
    
    (59,525)
    
    
    
    
    
    
    
    (59,525)
    
    
    
    *
    
    
    
    (59,525)
    
    
    
    
    
    
    
    (59,525)
    
    
    
    *Gross Profit
    
    $
    205,926
    
    
    $
    29,832
    
    
    $
    176,094
    
    
    
    590
    %
    
    $
    262,528
    
    
    $
    47,182
    
    
    $
    215,346
    
    
    
    456
    %
 
 *
    
    Calculation is not meaningful  21




---



##### Table of Contents



Second quarter ended June 30, 2009 versus second quarter ended June 30, 2008.
 Six-month period ended June 30, 2009 versus six-month period ended June 30, 2008.
 Operating Expenses
  Three months ended,
    
    
    Change in 2009 versus
    
    
    Six months ended,
    
    
    Change in 2009 versusJune 30
    
    
    2008
    
    
    June 30
    
    
    20082009
    
    
    2008
    
    
    $
    
    
    %
    
    
    2009
    
    
    2008
    
    
    $
    
    
    %Operating expenses:Research &
development
    
    $
    5,054,600
    
    
    $
    4,415,615
    
    
    $
    638,985
    
    
    
    14
    %
    
    $
    9,290,389
    
    
    $
    8,915,366
    
    
    $
    375,023
    
    
    
    4
    %General &
administrative
    
    
    2,201,974
    
    
    
    2,345,846
    
    
    
    (143,872
    )
    
    
    (6
    )%
    
    
    4,740,886
    
    
    
    4,600,049
    
    
    
    140,837
    
    
    
    3
    %Wind-down expenses
    
    
    340,064
    
    
    
    167,250
    
    
    
    172,814
    
    
    
    103
    %
    
    
    545,500
    
    
    
    327,500
    
    
    
    218,000
    
    
    
    67
    %Total operating
expenses
    
    $
    7,596,638
    
    
    $
    6,928,711
    
    
    $
    667,927
    
    
    
    10
    %
    
    $
    14,576,775
    
    
    $
    13,842,915
    
    
    $
    733,860
    
    
    
    5
    %
 Research and Development Expenses
   22




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##### Table of Contents



Second quarter ended June 30, 2009 versus second quarter ended June 30, 2008.
 Six-month period ended June 30, 2009 versus six-month period ended June 30, 2008.
  General and Administrative Expenses
  Second quarter ended June 30, 2009 versus second quarter ended June 30, 2008.
 Six-month period ended June 30, 2009 versus six-month period ended June 30, 2008.
 Wind-down Expenses
 Three months ended,
    
    
    Six months ended,June 30
    
    
    June 302009
    
    
    2008
    
    
    2009
    
    
    2008Rhode Island
    
    $
    29,795
    
    
    $
    167,250
    
    
    $
    235,231
    
    
    $
    327,500Australia
    
    
    310,269
    
    
    
    
    
    
    
    310,269
    
    
    
    Total wind-down expenses
    
    $
    340,064
    
    
    $
    167,250
    
    
    $
    545,500
    
    
    $
    327,500
 Rhode Island
  23




---



##### Table of Contents



Australia
 Accounting for Costs
Associated with Exit or Disposal Activities
 Other Income (Expense)
  Three months ended,
    
    
    Change in 2009 versus
    
    
    Six months ended,
    
    
    Change in 2009 versusJune 30
    
    
    2008
    
    
    June 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
    
    
    102,517
    
    
    
    
    
    
    
    102,517
    
    
    
    *
    
    
    
    (2,652,931
    )
    
    
    
    
    
    
    (2,652,931
    )
    
    
    *Interest income
    
    
    8,338
    
    
    
    216,109
    
    
    
    (207,771
    )
    
    
    (96
    )%
    
    
    50,285
    
    
    
    599,774
    
    
    
    (549,489
    )
    
    
    (92
    )%Interest expense
    
    
    (29,074
    )
    
    
    (28,970
    )
    
    
    (104
    )
    
    
    0
    %
    
    
    (57,250
    )
    
    
    (57,161
    )
    
    
    (89
    )
    
    
    0
    %Other expense, net
    
    
    (57,424
    )
    
    
    (3,736
    )
    
    
    (53,688
    )
    
    
    1,437
    %
    
    
    (71,634
    )
    
    
    (7,345
    )
    
    
    (64,289
    )
    
    
    875
    %Total other income
    
    $
    24,357
    
    
    $
    183,403
    
    
    $
    (159,046
    )
    
    
    (87
    )%
    
    $
    (2,333,664
    )
    
    $
    535,268
    
    
    $
    (2,868,932
    )
    
    
    (536
    )%
 
 *
    
    Calculation is not meaningful. Gain on Sale of Marketable Equity Securities
  Change in fair value of warrant liability
  24




---



##### Table of Contents



Fair value of warrant liability at December 31, 2008
    
    $
    8,439,931Change in fair value at March 31, 2009
    
    
    2,755,448Fair value of warrant liability at March 31, 2009
    
    $
    11,195,379Change in fair value at June 30, 2009
    
    $
    (102,517
    )Fair value of warrant liability at June 30, 2009
    
    $
    11,092,862
 Interest Income
  Interest Expense
  Liquidity and Capital Resources
  June 30,
    
    December 31,
    
    Change2009
    
    2008
    
    $
    
    %Cash, cash equivalents and marketable debt securities
    
    $
    36,760,470
    
    
    $
    34,037,775
    
    
    $
    2,722,695
    
    
    
    8
    %
  Change in2009Six months ended June 30,
    
    Versus 20082009
    
    2008
    
    $
    
    %Net cash used in operating activities
    
    $
    (12,382,825
    )
    
    $
    (12,226,271
    )
    
    $
    (156,554
    )
    
    
    1
    %Net cash provided by investing activities
    
    $
    4,038,189
    
    
    $
    21,010,191
    
    
    $
    (16,972,002
    )
    
    
    (81
    )%Net cash provided by financing activities
    
    $
    15,208,452
    
    
    $
    49,634
    
    
    $
    15,158,818
    
    
    
    30,541
    %
 Net Cash Used in Operating Activities
  Net Cash Provided by Investing Activities
  Net Cash Provided by Financing Activities
  25




---



##### Table of Contents




    
    In June 2009, we sold a total of 275,000 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 $1.79 per share for gross proceeds of
approximately $491,000. 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 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 2007, a warrant issued as part of our June 2004 financing was exercised to
purchase an aggregate of 575,658 shares of our common stock at $1.90 per share. We issued
575,658 shares of our common stock and received proceeds of approximately $1,094,000.
    
    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.
    
    In March 2006, a warrant issued as part of our June 2004 financing was exercised to
purchase an aggregate of 526,400 shares of our common stock at $1.89 per share. We issued
526,400 shares of our common stock and received proceeds of approximately $995,000.
   26




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##### Table of Contents



Commitments
  Off-Balance Sheet Arrangements
  Operating Leases
  Operating Leases  California
  Operating Leases  Rhode Island
  Operating Leases  United Kingdom
  Operating Leases  Australia
  27




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##### Table of Contents



Contractual Obligations
  Recent Accounting Pronouncements
 The FASB
Accounting Standards Codification and the Hierarchy of Generally Accepted Accounting Principles 
a replacement of FASB Statement No. 162 )
 Subsequent Events
  
    
    FASB Staff Position No. 107-1 (FSP 107-1) and Accounting Principles Board (APB) Opinion
No. 28-1 (APB 28-1), Interim Disclosures about Fair Value of Financial Instruments,which
amends FASB Statement No. 107, Disclosures about Fair Value of Financial Instruments(SFAS
107) and APB Opinion No. 28, Interim Financial Reporting(APB 28),to require disclosures
about the fair value of financial instruments for interim as well as in annual financial
statements. FSP 107-1 and APB 28-1 will be effective for interim reporting periods ending
after June 15, 2009. The adoption of this accounting standard did not have a material impact
on our consolidated financial statements.
    
    FASB Staff Position No. FAS 157-4, Determining Fair Value When the Volume and Level of
Activity for the Asset or Liability Have Significantly Decreased and Identifying
Transactions That Are Not Orderly(FSP 157-4). FSP 157-4 provides additional guidance for
estimating fair value in accordance with SFAS No. 157, Fair Value Measurements, when the
volume and level of activity for the asset or liability have significantly decreased. FSP
157-4 will be applied prospectively and will be effective for interim and annual reporting
periods ending after June 15, 2009. The adoption of FSP 157-4 did not have a material impact
on our consolidated financial statements.
    
    FASB Staff Position No. 115-2, (FSP 115-2) and FASB Staff Position No. 124-2 (FSP124-2),
Recognition and Presentation of Other-Than-Temporary Impairments,which amends the
other-than-temporary impairment guidance for debt and equity securities. FSP 115-2 and FSP
124-2 shall be effective for interim and annual reporting periods ending after June 15,
2009. The adoption of FSP 115-2 and FSP 124-2 did not have a material impact on our
consolidated financial statements.
 28




---



##### Table of Contents




    
    FASB Staff Position No. FAS 141(R)-1, Accounting for Assets Acquired and Liabilities
Assumed in a Business Combination That Arise from Contingencies(FSP 141 (R)-1). FSP 141
(R)-1 amends and clarifies FASB statement No. 141 (R), Business Combinations(SFAS 141
(R)),to address issues related to the recognition and measurement of assets and liabilities
arising from contingencies in a business combination. Assets and liabilities assumed in a
business combination that arise from contingencies should be recognized at fair value on the
acquisition date if fair value can be reasonably estimated during the measurement period. If
fair value cannot be reasonably estimated, companies should typically account for the
acquired contingencies using existing guidance. We adopted SFAS 141(R) and FSP 141(R)-1 on
January 1, 2009. We expect SFAS 141(R) and FSP 141(R) -1 will have an impact on our
consolidated financial statements; however, the nature and magnitude of the impact will
depend upon the nature, terms and size of the acquisition we consummate after the effective
date.
 29




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30




---



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PART IIOTHER INFORMATION
 
    
   
   
   
   31




---



##### Table of Contents



AuthorityFor
    
    Withheld
    
    Against
    
    AbstainElection of Martin McGlynn,
as director
    
    
    74,847,727
    
    
    
    5,007,593
    
    
    
    
    
    
    
    Election of Roger Perlmutter,
M.D., Ph.D., as director
    
    
    75,766,424
    
    
    
    4,088,896
    
    
    
    
    
    
    
    Ratification of Grant Thornton
LLP as independent accountants for 2009
    
    
    77,551,202
    
    
    
    
    
    
    
    1,721,152
    
    
    
    582,966
 
    
  Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32.1 
 Exhibit 32.2 
 32




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##### Table of Contents



STEMCELLS, INC.
(name of Registrant)August 7, 2009
    /s/ Rodney K. B. YoungRodney K. B. YoungChief Financial Officer 33




---



##### Table of Contents



Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32.1 
 Exhibit 32.2 
 34