##### 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: March 31, 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 March 31, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2010
and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009
    
    
    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
    
    
    28Item 4. Controls and Procedures
    
    
    28PART II. OTHER INFORMATION
    
    
    28Item 1. Legal Proceedings
    
    
    28Item 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
    
    
    31EX-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
 
  
   March 31, 2010
    
    
    December 31, 2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    31,336,987
    
    
    $
    38,617,977Marketable securities, current
    
    
    156,730
    
    
    
    196,995Trade receivables
    
    
    41,522
    
    
    
    87,019Other receivables
    
    
    406,702
    
    
    
    679,034Prepaid assets
    
    
    695,446
    
    
    
    560,144Total current assets
    
    
    32,637,387
    
    
    
    40,141,169Property, plant and equipment, net
    
    
    2,637,181
    
    
    
    2,856,695Other assets, non-current
    
    
    2,541,086
    
    
    
    2,525,185Goodwill
    
    
    1,852,189
    
    
    
    2,019,679Other intangible assets, net
    
    
    3,330,750
    
    
    
    3,647,596Total assets
    
    $
    42,998,593
    
    
    $
    51,190,324LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    1,017,848
    
    
    $
    890,582Accrued expenses and other current liabilities
    
    
    1,979,764
    
    
    
    3,760,438Accrued wind-down expenses, current
    
    
    1,512,062
    
    
    
    1,449,810Deferred revenue, current
    
    
    186,119
    
    
    
    119,542Capital lease obligation, current
    
    
    64,620
    
    
    
    68,000Deferred rent, current
    
    
    41,273
    
    
    
    80,392Bonds payable, current
    
    
    165,000
    
    
    
    161,250Total current liabilities
    
    
    4,966,686
    
    
    
    6,530,014Capital lease obligation, non-current
    
    
    69,494
    
    
    
    85,826Bonds payable, non-current
    
    
    656,250
    
    
    
    698,750Fair value of warrant liability
    
    
    8,160,619
    
    
    
    9,676,968Deposits and other long-term liabilities
    
    
    466,211
    
    
    
    466,211Accrued wind-down expenses, non-current
    
    
    2,788,815
    
    
    
    3,056,675Deferred rent, non-current
    
    
    40,281
    
    
    
    50,600Deferred revenue, non-current
    
    
    126,007
    
    
    
    130,213Total liabilities
    
    
    17,274,363
    
    
    
    20,695,257Commitments and contingencies (Note 8)Stockholders equity:.Common
stock, $0.01 par value;
250,000,000 shares authorized; issued and
outstanding 119,622,033 at March 31, 2010 and
118,349,587 at December 31, 2009
    
    
    1,196,219
    
    
    
    1,183,495Additional paid-in capital
    
    
    316,635,781
    
    
    
    314,944,784Accumulated deficit
    
    
    (292,152,010
    )
    
    
    (286,027,935
    )Accumulated other comprehensive income
    
    
    44,240
    
    
    
    394,723Total stockholders equity
    
    
    25,724,230
    
    
    
    30,495,067Total liabilities and stockholders equity
    
    $
    42,998,593
    
    
    $
    51,190,324
  3




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##### Table of Contents



Three months endedMarch 31,2010
    
    
    2009Revenue:Revenue from licensing agreements and grants
    
    $
    113,849
    
    
    $
    56,603Revenue from product
sales
    
    
    116,424
    
    
    
    Total revenue
    
    
    230,273
    
    
    
    56,603Cost of product sales
    
    
    (43,762
    )
    
    
    Gross profit
    
    
    186,511
    
    
    
    56,603Operating expenses:Research and development
    
    
    5,037,514
    
    
    
    4,235,788Selling, general and
administrative
    
    
    2,584,742
    
    
    
    2,538,913Wind-down expenses
    
    
    165,335
    
    
    
    205,436Total operating expenses
    
    
    7,787,591
    
    
    
    6,980,137Loss from operations
    
    
    (7,601,080
    )
    
    
    (6,923,534
    )Other income (expense):Realized gain on sale of marketable securities
    
    
    
    
    
    
    397,866Change in fair value of warrant
liability
    
    
    1,516,349
    
    
    
    (2,755,448
    )Interest income
    
    
    594
    
    
    
    41,947Interest expense
    
    
    (25,500
    )
    
    
    (28,175
    )Other expense
    
    
    (14,438
    )
    
    
    (14,210
    )Total other income (expense), net
    
    
    1,477,005
    
    
    
    (2,358,020
    )Net loss
    
    $
    (6,124,075
    )
    
    $
    (9,281,554
    )Basic and diluted net loss per share
    
    $
    (0.05
    )
    
    $
    (0.10
    )Shares used to compute basic and diluted loss per
share
    
    
    118,959,136
    
    
    
    96,048,288
  4




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Three months endedMarch 31,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (6,124,075
    )
    
    $
    (9,281,554
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    418,307
    
    
    
    298,347Stock-based compensation
    
    
    1,018,972
    
    
    
    981,015Gain on sale of marketable securities
    
    
    
    
    
    
    (397,868
    )Change in fair value of warrant liability
    
    
    (1,516,349
    )
    
    
    2,755,448Changes in operating assets and liabilities:Trade receivables
    
    
    41,568
    
    
    
    Other receivables
    
    
    300,765
    
    
    
    54,976Prepaid and other current assets
    
    
    (138,508
    )
    
    
    250,236Other assets, non-current
    
    
    (17,588
    )
    
    
    6,020Accounts payable and accrued expenses
    
    
    (1,614,964
    )
    
    
    (180,823
    )Accrued wind-down expenses
    
    
    (201,175
    )
    
    
    (176,779
    )Deferred revenue
    
    
    74,198
    
    
    
    (14,362
    )Deferred rent
    
    
    (49,437
    )
    
    
    (76,287
    )Net cash used in operating activities
    
    
    (7,808,286
    )
    
    
    (5,781,631
    )Cash flows from investing activities:Proceeds from the sale of marketable securities
    
    
    
    
    
    
    3,612,750Payment of advances under notes receivable
    
    
    
    
    
    
    (415,000
    )Purchases of property, plant and equipment
    
    
    (78,871
    )
    
    
    (277,436
    )Net cash provided by (used in) investing activities
    
    
    (78,871
    )
    
    
    2,920,314Cash flows from financing activities:Proceeds from issuance of common stock, net of issuance
costs
    
    
    1,044,907
    
    
    
    6,744,958Proceeds from the exercise of stock options
    
    
    636
    
    
    
    75,064Proceeds from the exercise of warrants
    
    
    
    
    
    
    331,501Payments related to net share issuance of stock based
awards
    
    
    (360,793
    )
    
    
    (380,548
    )Proceeds from (repayment of) capital lease
obligations
    
    
    (19,713
    )
    
    
    140,658Repayment of bonds payable
    
    
    (38,750
    )
    
    
    (36,250
    )Net cash provided by financing activities
    
    
    626,287
    
    
    
    6,875,383Increase (decrease) in cash and cash equivalents
    
    
    (7,260,870
    )
    
    
    4,014,066Effects of foreign exchange rate changes on cash
    
    
    (20,120
    )
    
    
    Cash and cash equivalents, beginning of period
    
    
    38,617,977
    
    
    
    30,042,986Cash and cash equivalents, end of period
    
    $
    31,336,987
    
    
    $
    34,057,052Supplemental disclosure of cash flow information:Interest paid
    
    $
    25,500
    
    
    $
    28,175
  5




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Notes to Condensed Consolidated Financial Statements (Unaudited)
March 31, 2010 and 2009
 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 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).
 6




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




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Net Loss per Share
   Three months ended March 31,2010
    
    
    2009Net
loss
    
    $
    (6,124,075
    )
    
    $
    (9,281,554
    )Weighted average shares outstanding used to
compute basic and diluted net loss per
share
    
    
    118,959,136
    
    
    
    96,048,288Basic and diluted net loss per
share
    
    $
    (0.05
    )
    
    $
    (0.10
    )
  2010
    
    
    2009Options
    
    
    9,830,870
    
    
    
    8,355,287Restricted stock
units
    
    
    1,777,151
    
    
    
    1,350,000Warrants
    
    
    14,344,828
    
    
    
    11,425,354Total
    
    
    25,952,849
    
    
    
    21,130,641
 Comprehensive Loss
   Three months ended March 31,2010
    
    
    2009Net
loss
    
    $
    (6,124,075
    )
    
    $
    (9,281,554
    )Net change in unrealized gains and losses
on marketable securities
    
    
    (40,265
    )
    
    
    50,484Net change in unrealized gains and losses
on foreign currency translations
    
    
    (310,218
    )
    
    
    Comprehensive
loss
    
    $
    (6,474,558
    )
    
    $
    (9,231,070
    )
 Recent Accounting Pronouncements
 Fair Value Measurements and
Disclosures.
 Revenue RecognitionMilestone Method,
 8




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Note 2. Financial Instruments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    (Losses)
    
    
    Fair ValueMarch 31, 2010Cash
    
    $
    383,733
    
    
    $
    
    
    
    $
    
    
    
    $
    383,733Cash equivalents
    
    
    30,953,254
    
    
    
    
    
    
    
    
    
    
    
    30,953,254Marketable equity securities, current
    
    
    74,456
    
    
    
    82,274
    
    
    
    
    
    
    
    156,730Total cash, cash equivalents, and marketable securities
    
    $
    31,411,443
    
    
    $
    82,274
    
    
    $
    
    
    
    $
    31,493,717December 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
    Note 3. Fair Value Measurement
    9




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Fair Value Measurementat Reporting Date UsingQuoted Prices
    
    
    Significantin Active Markets
    
    
    Otherfor
    
    
    Observable
    
    
    As ofIdentical Assets
    
    
    Inputs
    
    
    March 31,(Level 1)
    
    
    (Level 2)
    
    
    2010AssetsCash Equivalents:Money market funds
    
    $
    30,953,254
    
    
    $
    
    
    
    $
    30,953,254Marketable Securities:Equity securities
    
    
    156,730
    
    
    
    
    
    
    
    156,730Total assets
    
    $
    31,109,984
    
    
    
    
    
    
    
    31,109,984LiabilitiesBond payable
    
    $
    
    
    
    $
    821,250
    
    
    $
    821,250
 Note 4. Acquisition of Stem Cell Sciences Plc (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
 Note 5. Goodwill and Other Intangible Assets
  10




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Balance as of December 31, 2009
    
    $
    2,019,679Reductions (R&D credit as described above)
    
    
    (47,374
    )Foreign currency translation
    
    
    (120,116
    )Balance as of March 31, 2010
    
    $
    1,852,189
  Net CarryingOther Intangible Asset Class
    
    AmountCustomer
relationships and developed technology
    
    $
    1,204,401In-process
research and development
    
    
    1,318,857Trade name
    
    
    305,084Patents
    
    
    394,604License agreements
    
    
    107,804Total other intangible assets
    
    $
    3,330,750
  Note 6. Stock-Based Compensation
   Three months endedMarch 31,2010
    
    
    2009Research and development expense
    
    $
    546,608
    
    
    $
    492,587General and administrative expense
    
    
    472,364
    
    
    
    488,428Total employee stock-based compensation expense and effect on net loss
    
    $
    1,018,972
    
    
    $
    981,015Effect on basic and diluted net loss per common share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
  Stock Options
   Weighted-averageNumber of options
    
    
    exercise price ($)Balance at December 31, 2009
    
    
    9,260,812
    
    
    
    2.28Granted
    
    
    692,500
    
    
    
    1.20Exercised
    
    
    (1,042
    )
    
    
    0.61Cancelled
    
    
    (121,400
    )
    
    
    2.02Outstanding options at March 31, 2010
    
    
    9,830,870
    
    
    
    2.20
  11




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Three months ended March 31,2010
    
    2009Expected life(years)(1)
    
    
    6.9
    
    
    
    7.6Risk-free interest rate(2)
    
    
    3.1
    %
    
    
    2.4
    %Expected volatility(3)
    
    
    88.8
    %
    
    
    96.5
    %Expected dividend yield(4)
    
    
    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 December 31, 2009
    
    
    2,613,057
    
    
    
    1.53Granted
    
    
    692,500
    
    
    
    0.93Vested
    
    
    (298,246
    )
    
    
    1.78Cancelled
    
    
    (85,568
    )
    
    
    1.53Unvested options at March 31, 2010
    
    
    2,921,743
    
    
    
    1.36
  Restricted Stock Units
   Weighted-average grantNumber of RSUs
    
    
    date fair value ($)Balance at December 31, 2009 (1)
    
    
    2,437,901
    
    
    
    1.49Granted (2)
    
    
    30,667
    
    
    
    1.18Vested and converted to common shares
    
    
    (650,750
    )
    
    
    1.22Cancelled
    
    
    (40,667
    )
    
    
    1.63Balance unvested at March 31, 2010
    
    
    1,777,151
    
    
    
    1.58
 
 (1)
    
    1,061,500 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. 1,046,401 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. 30,000 of these restricted
stock units vest and convert into shares of our common stock after one
year from the date of grant. 300,000 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. 12




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##### Table of Contents



(2)
    
    20,667 of these restricted stock units vest and convert into shares of
our common stock in May 2010. 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
    Number of SARsOutstanding at December 31, 2009
    
    
    1,430,849Granted
    
    
    Exercised
    
    
    Forfeited and expired
    
    
    (7,996
    )Outstanding SARs at March 31, 2010
    
    
    1,422,853SARs exercisable at March 31, 2010
    
    
    1,310,008
   Note 7. Wind-Down Expenses
 Rhode Island
   January to
    
    
    January toMarch 31,
    
    
    December 31,2010
    
    
    2009Accrued wind-down reserve at beginning of period
    
    $
    3,572,000
    
    
    $
    4,448,000Less actual expenses recorded against estimated reserve during the period
    
    
    (315,000
    )
    
    
    (1,216,000
    )Additional expense recorded to revise estimated reserve at period-end
    
    
    165,000
    
    
    
    340,000Revised reserve at period-end
    
    
    3,422,000
    
    
    
    3,572,000Add deferred rent at period-end
    
    
    809,000
    
    
    
    861,000Total accrued wind-down expenses at period-end (current and non current)
    
    $
    4,231,000
    
    
    $
    4,433,000Accrued wind-down expenses, current
    
    $
    1,443,000
    
    
    $
    1,376,000Accrued wind-down expenses, non-current
    
    
    2,788,000
    
    
    
    3,057,000Total accrued wind-down expenses
    
    $
    4,231,000
    
    
    $
    4,433,000
 13




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##### Table of Contents



Australia
  January toMarch 31,2010Accrued wind-down reserve at December 31, 2009
    
    $
    74,000Less actual expenses recorded against estimated reserve during the period
    
    
    (6,000
    )Additional expense recorded to revise estimated reserve at period-end
    
    
    2,000Accrued wind-down reserve at March 31, 2010
    
    $
    70,000
 Note 8. Commitments and Contingencies
 Leases
 Capital Leases
  Operating
Leases
  Operating Leases  California
  14




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Operating Leases  Rhode Island
  Operating Leases  United Kingdom
  Contingencies
    15




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Note 9. Warrant Liability
    To CalculateFair Value of WarrantLiability atMarch 31, 2010
    
    
    December 31, 2009Expected life (years)
    
    
    4.1
    
    
    
    4.4Risk-free interest rate
    
    
    1.9
    %
    
    
    2.0
    %Expected volatility
    
    
    79.9
    %
    
    
    79.1
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
 At March 31,
    
    
    At December 31,
    
    
    Change in Fair Value2010
    
    

2009
    
    
    of Warrant LiabilityFair value of warrant liability
    
    $
    5,441,379
    
    
    $
    6,295,448
    
    
    $
    (854,069
    )
   16




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##### Table of Contents



To CalculateFair Value of Warrant Liability atMarch 31,
    
    
    December 31,2010
    
    
    2009Expected life (years)
    
    
    5.1
    
    
    
    5.3Risk-free interest rate
    
    
    2.4
    %
    
    
    2.5
    %Expected volatility
    
    
    76.7
    %
    
    
    85.9
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
 At March 31,
    
    
    At December 31,
    
    
    Change in Fair Value2010
    
    
    2009
    
    
    of Warrant LiabilityFair value of warrant liability
    
    $
    2,719,240
    
    
    $
    3,381,520
    
    
    $
    (662,280
    )
 Note 10. Common Stock
  
 ITEM 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
  17




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##### Table of Contents



Overview
 The Company
 ®
   in vitro
  18




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##### Table of Contents



Significant Events
      19




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##### Table of Contents



Critical Accounting Policies and the Use of Estimates
  Stock-Based Compensation
   Wind-down expenses  Rhode Island
    20




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##### Table of Contents



Wind-down expenses  Australia
  Business Combinations
  Results of Operations
  Revenue and Cost of Product Sales
  Three months ended,March 31
    
    
    Change in 2010 versus 20092010
    
    
    2009
    
    
    $
    
    
    %Revenue:Licensing agreements and
grants
    
    $
    113,849
    
    
    $
    56,603
    
    
    $
    57,246
    
    
    
    101
    %Product
sales
    
    
    116,424
    
    
    
    
    
    
    
    116,424
    
    
    
    *Total
revenues
    
    
    230,273
    
    
    
    56,603
    
    
    
    173,670
    
    
    
    307
    %Cost of product
sales
    
    
    (43,762
    )
    
    
    
    
    
    
    (43,762
    )
    
    
    *Gross
Profit
    
    $
    186,511
    
    
    $
    56,603
    
    
    $
    129,908
    
    
    
    230
    %
 
 *
    
    Calculation is not meaningful 21




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##### Table of Contents



First quarter ended March 31, 2010 versus first quarter ended March 31, 2009.
 Operating Expenses
  Three months ended,
    
    
    Change in 2010 versusMarch 31
    
    
    20092010
    
    
    2009
    
    
    $
    
    
    %Operating expenses:Research & development
    
    $
    5,037,514
    
    
    $
    4,235,788
    
    
    $
    801,726
    
    
    
    19
    %Selling, general & administrative
    
    
    2,584,742
    
    
    
    2,538,913
    
    
    
    45,829
    
    
    
    2
    %Wind-down expenses
    
    
    165,335
    
    
    
    205,436
    
    
    
    (40,101
    )
    
    
    (20
    )%Total operating expenses
    
    $
    7,787,591
    
    
    $
    6,980,137
    
    
    $
    807,454
    
    
    
    12
    %
 Research and Development Expenses
    22




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##### Table of Contents



First
quarter ended March 31, 2010 versus first quarter ended
March 31, 2009.
 Selling, General and Administrative Expenses
   First quarter ended March 31, 2010 versus first quarter ended March 31, 2009
 Wind-down Expenses
 Three months ended,March 312010
    
    
    2009Rhode
Island
    
    $
    165,335
    
    
    $
    205,436Australia
    
    
    
    
    
    
    Total wind-down
expenses
    
    $
    165,335
    
    
    $
    205,436
 Rhode Island
  23




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##### Table of Contents



Australia
  Other Income (Expense)
  Three months ended,
    
    
    Change in 2010 versusMarch 31
    
    
    20092010
    
    
    2009
    
    
    $
    
    
    %Other income (expense):Gain on sale of marketable
securities
    
    $
    
    
    
    $
    397,866
    
    
    $
    (397,866
    )
    
    
    (100
    )%Change in fair value of warrant
liability
    
    
    1,516,349
    
    
    
    (2,755,448
    )
    
    
    4,271,797
    
    
    
    (155
    )%Interest
income
    
    
    594
    
    
    
    41,947
    
    
    
    (41,353
    )
    
    
    (99
    )%Interest expense
    
    
    (25,500
    )
    
    
    (28,175
    )
    
    
    2,675
    
    
    
    (9
    )%Other
expense, net
    
    
    (14,438
    )
    
    
    (14,210
    )
    
    
    (228
    )
    
    
    2
    %Total other income (expense),
net
    
    $
    1,477,005
    
    
    $
    (2,358,020
    )
    
    $
    3,835,025
    
    
    
    (163
    )%
 
 *
    
    Calculation is not meaningful. Gain on Sale of Marketable Equity Securities
  Change
in Fair Value of Warrant Liability
  Interest Income
  24




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##### Table of Contents



Interest Expense
  Liquidity and Capital Resources
  March 31,
    
    
    December 31,
    
    
    Change2010
    
    
    2009
    
    
    $
    
    
    %Cash and cash equivalents
    
    $
    31,336,987
    
    
    $
    38,617,977
    
    
    $
    (7,280,990
    )
    
    
    (19
    )%
  Three months ended March 31,
    
    
    Change in 2010 versus 20092010
    
    
    2009
    
    
    $
    
    
    %Net cash used in operating activities
    
    $
    (7,808,286
    )
    
    $
    (5,781,631
    )
    
    $
    (2,026,655
    )
    
    
    35
    %Net cash provided by (used in) investing activities
    
    $
    (78,871
    )
    
    $
    2,920,314
    
    
    $
    (2,999,185
    )
    
    
    (103
    )%Net cash provided by financing activities
    
    $
    626,287
    
    
    $
    6,875,383
    
    
    $
    (6,249,096
    )
    
    
    (91
    )%
 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 an effective 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 our
sales agent Cantor. 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 2009, we sold a total of 1,830,000 shares of our common stock
under this June 2009 sales agreement with Cantor at an average price per share of $1.80 for
gross proceeds of
 25




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##### Table of Contents



approximately $3,291,000. Cantor is paid compensation equal to 3.0% of the
gross proceeds pursuant to the terms of the agreement.
    
    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 Securities and
Exchange Commission. We received total proceeds net of offering expenses and placement
agency fees of approximately $18,637,000.
    
    In December 2006, we filed a prospectus supplement announcing the entry of a sales
agreement with Cantor under which up to 10,000,000 shares may be sold from time to time
under a shelf registration statement. In 2007, 2008 and 2009, we sold a total of
10,000,000 shares of our common stock under this agreement at an average price per share of
$2.06 for gross proceeds of approximately $20,555,000. Cantor is paid compensation equal to
5.0% of the gross proceeds pursuant to the terms of the agreement.
    Commitments
  Off-Balance Sheet Arrangements
  26




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##### Table of Contents



Operating Leases
  Operating Leases  California
  Operating Leases  Rhode Island
  Operating Leases  United Kingdom
   Contractual Obligations
  Recent Accounting Pronouncements
 Fair Value Measurements and
Disclosures.
 Revenue RecognitionMilestone Method,
 27




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##### Table of Contents



ITEM 3.
    
    QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
   
 ITEM 4.
    
    CONTROLS AND PROCEDURES
   
 PART II-OTHER INFORMATION
 
     28




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29




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##### Table of Contents



ITEM 1A.
    
    RISK FACTORS
  
 ITEM 2.
    
    UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
  
 ITEM 3.
    
    DEFAULTS UPON SENIOR SECURITIES
  
 ITEM 4.
    
    SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
  
 ITEM 5.
    
    OTHER INFORMATION
  
 ITEM 6.
    
    EXHIBITS
 Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32.1 
 Exhibit 32.2 
 30




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##### Table of Contents



STEMCELLS, INC.
(name of Registrant)May 3, 2010
    /s/ Rodney K. B. YoungRodney K. B. YoungChief Financial Officer 31




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Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32.1 
 Exhibit 32.2 
 32