##### 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, 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
    
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ




---



##### 



Page NumberPART I. FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (Unaudited)
    
    
    3Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009
    
    
    3Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2010 and 2009
    
    
    4Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2010 and 2009
    
    
    5Notes to Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    18Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    30Item 4. Controls and Procedures
    
    
    30PART II. OTHER INFORMATION
    
    
    30Item 1. Legal Proceedings
    
    
    30Item 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
    
    
    33EX-31.1EX-31.2EX-32.1EX-32.2
 NOTE REGARDING REFERENCES TO US AND OUR COMMON STOCK
   2




---



##### Table of Contents



PART I-FINANCIAL INFORMATION
 
  
   June 30, 2010
    
    
    December 31, 2009ASSETSCurrent assets:Cash and cash equivalents
    
    $
    30,765,504
    
    
    $
    38,617,977Marketable securities, current
    
    
    124,962
    
    
    
    196,995Trade receivables
    
    
    13,920
    
    
    
    87,019Other receivables
    
    
    521,939
    
    
    
    679,034Prepaid assets
    
    
    692,045
    
    
    
    560,144Total current assets
    
    
    32,118,370
    
    
    
    40,141,169Property, plant and equipment, net
    
    
    2,731,229
    
    
    
    2,856,695Other assets, non-current
    
    
    2,537,500
    
    
    
    2,525,185Goodwill
    
    
    1,823,039
    
    
    
    2,019,679Other intangible assets, net
    
    
    3,183,502
    
    
    
    3,647,596Total assets
    
    $
    42,393,640
    
    
    $
    51,190,324LIABILITIES AND STOCKHOLDERS EQUITYCurrent liabilities:Accounts payable
    
    $
    605,011
    
    
    $
    890,582Accrued expenses and other current liabilities
    
    
    2,368,791
    
    
    
    3,760,438Accrued wind-down expenses, current
    
    
    1,571,384
    
    
    
    1,449,810Deferred revenue, current
    
    
    91,252
    
    
    
    119,542Capital lease obligation, current
    
    
    64,547
    
    
    
    68,000Deferred rent, current
    
    
    55,123
    
    
    
    80,392Bonds payable, current
    
    
    168,750
    
    
    
    161,250Total current liabilities
    
    
    4,924,858
    
    
    
    6,530,014Capital lease obligation, non-current
    
    
    52,749
    
    
    
    85,826Bonds payable, non-current
    
    
    613,750
    
    
    
    698,750Fair value of warrant liability
    
    
    5,720,249
    
    
    
    9,676,968Deposits and other long-term liabilities
    
    
    466,211
    
    
    
    466,211Accrued wind-down expenses, non-current
    
    
    2,515,767
    
    
    
    3,056,675Deferred rent, non-current
    
    
    16,113
    
    
    
    50,600Deferred revenue, non-current
    
    
    121,800
    
    
    
    130,213Total liabilities
    
    
    14,431,497
    
    
    
    20,695,257Commitments and contingencies (Note 8)Stockholders equity:Common stock, $0.01 par value; 250,000,000
shares authorized; issued and outstanding
127,160,886 at June 30, 2010 and 118,349,587
at December 31, 2009
    
    
    1,271,609
    
    
    
    1,183,495Additional paid-in capital
    
    
    323,536,882
    
    
    
    314,944,784Accumulated deficit
    
    
    (296,762,357
    )
    
    
    (286,027,935
    )Accumulated other comprehensive income
    
    
    (83,991
    )
    
    
    394,723Total stockholders equity
    
    
    27,962,143
    
    
    
    30,495,067Total liabilities and stockholders equity
    
    $
    42,393,640
    
    
    $
    51,190,324
  3




---



##### Table of Contents



Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Revenue:Revenue from licensing agreements and grants
    
    $
    171,550
    
    
    $
    144,851
    
    
    $
    285,399
    
    
    $
    201,453Revenue from product sales
    
    
    72,581
    
    
    
    120,600
    
    
    
    189,005
    
    
    
    120,600Total revenue
    
    
    244,131
    
    
    
    265,451
    
    
    
    474,404
    
    
    
    322,053Cost of product sales
    
    
    24,862
    
    
    
    59,525
    
    
    
    68,624
    
    
    
    59,525Gross profit
    
    
    219,269
    
    
    
    205,926
    
    
    
    405,780
    
    
    
    262,528Operating expenses:Research and development
    
    
    4,858,228
    
    
    
    5,054,600
    
    
    
    9,895,742
    
    
    
    9,290,389Selling, general and administrative
    
    
    2,286,678
    
    
    
    2,201,974
    
    
    
    4,871,420
    
    
    
    4,740,886Wind-down expenses
    
    
    125,833
    
    
    
    340,064
    
    
    
    291,168
    
    
    
    545,500Total operating expenses
    
    
    7,270,739
    
    
    
    7,596,638
    
    
    
    15,058,330
    
    
    
    14,576,775Loss from operations
    
    
    (7,051,470
    )
    
    
    (7,390,712
    )
    
    
    (14,652,550
    )
    
    
    (14,314,247
    )Other income (expense):Realized gain on sale of marketable securities
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    397,866Change in fair value of warrant liability
    
    
    2,440,370
    
    
    
    102,517
    
    
    
    3,956,719
    
    
    
    (2,652,931
    )Interest income
    
    
    13,309
    
    
    
    8,338
    
    
    
    13,903
    
    
    
    50,285Interest expense
    
    
    (25,054
    )
    
    
    (29,074
    )
    
    
    (50,554
    )
    
    
    (57,250
    )Other income (expense)
    
    
    12,498
    
    
    
    (57,424
    )
    
    
    (1,940
    )
    
    
    (71,634
    )Total other income (expense), net
    
    
    2,441,123
    
    
    
    24,357
    
    
    
    3,918,128
    
    
    
    (2,333,664
    )Net loss
    
    $
    (4,610,347
    )
    
    $
    (7,366,355
    )
    
    $
    (10,734,422
    )
    
    $
    (16,647,911
    )Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.09
    )
    
    $
    (0.17
    )Shares used to compute basic and diluted loss
per share
    
    
    119,905,731
    
    
    
    104,776,073
    
    
    
    119,435,048
    
    
    
    100,436,291
  4




---



##### Table of Contents



Six months endedJune 30,2010
    
    
    2009Cash flows from operating activities:Net loss
    
    $
    (10,734,422
    )
    
    $
    (16,647,911
    )Adjustments to reconcile net loss to net cash used in operating activities:Depreciation and amortization
    
    
    789,911
    
    
    
    754,863Stock-based compensation
    
    
    2,122,513
    
    
    
    2,038,757Gain on sale of marketable securities
    
    
    
    
    
    
    (397,868
    )Loss on disposal of fixed assets
    
    
    1,766
    
    
    
    Write-down of fixed assets
    
    
    62,807
    
    
    
    Change in fair value of warrant liability
    
    
    (3,956,719
    )
    
    
    2,652,931Changes in operating assets and liabilities:Other receivables
    
    
    (10,016
    )
    
    
    236,805Trade receivables
    
    
    260,139
    
    
    
    231,182Prepaid and other current assets
    
    
    (134,510
    )
    
    
    (199,428
    )Other assets, non-current
    
    
    (14,616
    )
    
    
    (16,070
    )Accounts payable and accrued expenses
    
    
    (1,636,661
    )
    
    
    (551,038
    )Accrued wind-down expenses
    
    
    (413,798
    )
    
    
    (200,406
    )Deferred revenue
    
    
    (22,811
    )
    
    
    (118,140
    )Deferred rent
    
    
    (59,756
    )
    
    
    (166,501
    )Net cash used in operating activities
    
    
    (13,746,173
    )
    
    
    (12,382,824
    )Cash flows from investing activities:Proceeds from the sale of marketable securities
    
    
    
    
    
    
    4,512,750Payment of advances under notes receivable
    
    
    
    
    
    
    (79,829
    )Purchases of property, plant and equipment
    
    
    (509,064
    )
    
    
    (379,732
    )Acquisition of other assets
    
    
    
    
    
    
    (15,000
    )Net cash provided by (used in) investing activities
    
    
    (509,064
    )
    
    
    4,038,189Cash flows from financing activities:Proceeds from issuance of common stock, net of issuance costs
    
    
    7,015,322
    
    
    
    14,987,348Proceeds from the exercise of stock options
    
    
    18,936
    
    
    
    175,992Proceeds from the exercise of warrants
    
    
    
    
    
    
    331,501Payments related to net share issuance of stock based awards
    
    
    (476,559
    )
    
    
    (380,548
    )Proceeds from (repayment of) capital lease obligations
    
    
    (36,530
    )
    
    
    166,659Repayment of bonds payable
    
    
    (77,500
    )
    
    
    (72,500
    )Net cash provided by financing activities
    
    
    6,443,669
    
    
    
    15,208,452Increase (decrease) in cash and cash equivalents
    
    
    (7,811,568
    )
    
    
    6,863,817Effects of foreign exchange rate changes on cash
    
    
    (40,905
    )
    
    
    (146,333
    )Cash and cash equivalents, beginning of period
    
    
    38,617,977
    
    
    
    30,042,986Cash and cash equivalents, end of period
    
    $
    30,765,504
    
    
    $
    36,760,470Supplemental disclosure of cash flow information:Interest paid
    
    $
    50,554
    
    
    $
    57,250Supplemental 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)
    
    
    
    
    
    $
    709,076
 
 (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




---



##### Table of Contents



Notes to Condensed Consolidated Financial Statements (Unaudited)
 June 30, 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




---



##### Table of Contents



Financial Instruments
 Cash and Cash Equivalents
  Marketable Securities
   Trade and Other Receivables
  Warrant Liability
  Goodwill and Other Intangible Assets
  Revenue Recognition
  7




---



##### Table of Contents



Stock-Based Compensation
   Net Loss per Share
   Three months ended June 30,
    
    
    Six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    (4,610,347
    )
    
    $
    (7,366,355
    )
    
    $
    (10,734,422
    )
    
    $
    (16,647,911
    )Weighted average shares outstanding
used to compute basic and diluted
net loss per share
    
    
    119,905,731
    
    
    
    104,776,073
    
    
    
    119,435,048
    
    
    
    100,436,291Basic and diluted net loss per share
    
    $
    (0.04
    )
    
    $
    (0.07
    )
    
    $
    (0.09
    )
    
    $
    (0.17
    )
  2010
    
    
    2009Options
    
    
    11,498,991
    
    
    
    9,380,197Restricted stock units
    
    
    4,888,388
    
    
    
    2,303,068Warrants
    
    
    14,344,828
    
    
    
    10,344,828Total
    
    
    30,732,207
    
    
    
    22,028,093
 Comprehensive Loss
   Three months ended June 30,
    
    
    Six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Net loss
    
    $
    (4,610,347
    )
    
    $
    (7,366,355
    )
    
    $
    (10,734,422
    )
    
    $
    (16,647,911
    )Net change in
unrealized gains
and losses on
marketable
securities
    
    
    (31,769
    )
    
    
    83,279
    
    
    
    (72,034
    )
    
    
    133,760Net change in
unrealized gains
and losses on
foreign currency
translations
    
    
    (96,462
    )
    
    
    (225,638
    )
    
    
    (406,680
    )
    
    
    (225,638
    )Comprehensive loss
    
    $
    (4,738,578
    )
    
    $
    (7,508,714
    )
    
    $
    (11,213,136
    )
    
    $
    (16,739,789
    )
 Recent Accounting Pronouncements
 Fair Value Measurements and Disclosures.
 8




---



##### Table of Contents



Revenue RecognitionMilestone
Method,
 Note 2. Financial Instruments
  Gross
    
    
    GrossAmortized
    
    
    Unrealized
    
    
    UnrealizedCost
    
    
    Gains
    
    
    (Losses)
    
    
    Fair ValueJune 30, 2010Cash
    
    $
    6,461,873
    
    
    $
    
    
    
    $
    
    
    
    $
    6,461,873Cash equivalents
    
    
    24,303,631
    
    
    
    
    
    
    
    
    
    
    
    24,303,631Marketable equity securities, current
    
    
    74,456
    
    
    
    50,506
    
    
    
    
    
    
    
    124,962Total cash, cash equivalents, and marketable securities
    
    $
    30,839,960
    
    
    $
    50,506
    
    
    $
    
    
    
    $
    30,890,466December 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
   9




---



##### Table of Contents



Note 3. Fair Value Measurement
  Level 1  Observable inputs that reflect quoted prices (unadjusted) for identical assets or
liabilities in active markets.Level 2  Directly or indirectly observable inputs other than in Level 1, that include quoted
prices for similar assets or liabilities in active markets or quoted prices for identical or
similar assets or liabilities in markets that are not active.Level 3  Unobservable inputs which are supported by little or no market activity that reflects
the reporting entitys own assumptions about the assumptions that market participants would use
in pricing the asset or liability.
     Fair Value Measurementat Reporting Date UsingQuoted Prices
    
    
    Significantin Active Markets
    
    
    Otherfor
    
    
    Observable
    
    
    As ofIdentical Assets
    
    
    Inputs
    
    
    June 30,(Level 1)
    
    
    (Level 2)
    
    
    2010Financial assetsCash equivalents:Money market funds
    
    $
    30,765,504
    
    
    $
    
    
    
    $
    30,765,504Marketable securities:Equity securities
    
    
    124,962
    
    
    
    
    
    
    
    124,962Total financial assets
    
    $
    30,890,466
    
    
    
    
    
    
    
    30,890,466Financial liabilitiesBond payable
    
    $
    
    
    
    $
    782,500
    
    
    $
    782,500Warrant liability
    
    $
    
    
    
    
    5,720,249
    
    
    
    5,720,249Total financial liabilities
    
    $
    
    
    
    $
    6,502,749
    
    
    $
    6,502,749
 Note 4. Acquisition of Stem Cell Sciences Plc (SCS) Operations
  10




---



##### Table of Contents



Estimated life ofAllocated purchase
    
    
    intangible assetsprice
    
    
    in yearsNet tangible assets
    
    $
    36,000Intangible assets:Customer relationships and developed technology
    
    
    1,310,000
    
    
    
    6 to 9In process research and development
    
    
    1,340,000
    
    
    
    13 to 19Trade name
    
    
    310,000
    
    
    
    15Goodwill
    
    
    2,139,000
    
    
    
    N/ATotal
    
    $
    5,135,000
 Note 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
    
    
    (149,266
    )Balance as of June 30, 2010
    
    $
    1,823,039
  Net CarryingOther Intangible Asset Class
    
    AmountCustomer relationships and developed technology
    
    $
    1,141,914In-process research and development
    
    
    1,274,949Trade name
    
    
    294,920Patents
    
    
    380,652License agreements
    
    
    91,067Total other intangible assets
    
    $
    3,183,502
  Note 6. Stock-Based Compensation
   Three months ended
    
    
    Six months endedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Research and development expense
    
    $
    613,330
    
    
    $
    556,145
    
    
    $
    1,159,938
    
    
    $
    1,048,732Selling, general and administrative expense
    
    
    490,212
    
    
    
    501,597
    
    
    
    962,576
    
    
    
    990,025Total employee stock-based compensation
expense and effect on net loss
    
    $
    1,103,542
    
    
    $
    1,057,742
    
    
    $
    2,122,514
    
    
    $
    2,038,757Effect on basic and diluted net loss per share
    
    $
    (0.01
    )
    
    $
    (0.01
    )
    
    $
    (0.02
    )
    
    $
    (0.02
    )
 11




---



##### Table of Contents



Stock Options
   Weighted-averageNumber of options
    
    
    exercise price ($)Balance at March 31, 2010
    
    
    9,830,870
    
    
    
    2.20Granted
    
    
    1,883,000
    
    
    
    1.03Exercised
    
    
    (30,000
    )
    
    
    0.61Cancelled
    
    
    (184,879
    )
    
    
    2.21Outstanding options at June 30, 2010
    
    
    11,498,991
    
    
    
    2.02
  Three months ended June 30,
    
    
    Six months ended June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Expected life (years)(1)
    
    
    7.4
    
    
    
    7.4
    
    
    
    7.2
    
    
    
    7.4Risk-free interest rate(2)
    
    
    2.9
    %
    
    
    2.8
    %
    
    
    2.9
    %
    
    
    2.7
    %Expected volatility(3)
    
    
    88.2
    %
    
    
    93.5
    %
    
    
    88.4
    %
    
    
    94.2
    %Expected dividend yield(4)
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
    
    
    0
    %
 
 (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 March 31, 2010
    
    
    2,921,743
    
    
    
    1.36Granted
    
    
    1,883,000
    
    
    
    0.81Vested
    
    
    (542,228
    )
    
    
    1.56Cancelled
    
    
    (7,708
    )
    
    
    1.36Unvested options at June 30, 2010
    
    
    4,254,807
    
    
    
    1.09
 12




---



##### Table of Contents



Restricted Stock Units
   Weighted-average grantNumber of RSUs
    
    
    date fair value ($)Balance at March 31, 2010
    
    
    1,777,151
    
    
    
    1.58Granted
    
    
    3,365,000
    
    
    
    1.03Vested and converted to common shares
    
    
    (253,763
    )
    
    
    1.09Balance unvested at June 30, 2010 (1)
    
    
    4,888,388
    
    
    
    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. 2,580,754 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. 2,092,634 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. Stock Appreciation Rights
    Number of SARsOutstanding at March 31, 2010
    
    
    1,422,853Granted
    
    
    Exercised
    
    
    Forfeited and expired
    
    
    (68,765
    )Outstanding SARs at June 30, 2010
    
    
    1,354,088SARs exercisable at June 30, 2010
    
    
    1,325,872
   13




---



##### Table of Contents



Note 7. Wind-Down Expenses
 Rhode Island
   January 1 to
    
    
    April 1 to
    
    
    January 1 to
    
    
    January 1 toMarch 31,
    
    
    June 30,
    
    
    June 30,
    
    
    December 31,2010
    
    
    2010
    
    
    2010
    
    
    2009Accrued wind-down reserve at beginning of period
    
    $
    3,572,000
    
    
    $
    3,422,000
    
    
    $
    3,572,000
    
    
    $
    4,448,000Less actual expenses recorded against estimated reserve during the
period
    
    
    (315,000
    )
    
    
    (280,000
    )
    
    
    (595,000
    )
    
    
    (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
    
    
    
    3,268,000
    
    
    
    3,572,000Add deferred rent at period-end
    
    
    809,000
    
    
    
    758,000
    
    
    
    758,000
    
    
    
    861,000Total accrued wind-down expenses at period-end (current and non
current)
    
    $
    4,231,000
    
    
    $
    4,026,000
    
    
    $
    4,026,000
    
    
    $
    4,433,000Accrued wind-down expenses, current
    
    $
    1,443,000
    
    
    $
    1,510,000
    
    
    $
    1,510,000
    
    
    $
    1,376,000Accrued wind-down expenses, non-current
    
    
    2,788,000
    
    
    
    2,516,000
    
    
    
    2,516,000
    
    
    
    3,057,000Total accrued wind-down expenses
    
    $
    4,231,000
    
    
    $
    4,026,000
    
    
    $
    4,026,000
    
    
    $
    4,433,000
 Australia
  April 1 toJune 30,2010Accrued wind-down reserve at March 31, 2010
    
    $
    70,000Less actual expenses recorded against estimated reserve during the period
    
    
    (3,000
    )Foreign currency translation
    
    
    (6,000
    )Accrued wind-down reserve at June 30, 2010
    
    $
    61,000
 Note 8. Commitments and Contingencies
 Leases
 Capital Leases
  14




---



##### Table of Contents



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




---



##### Table of Contents



Note 9. Warrant Liability
    To CalculateFair Value of WarrantLiability atJune 30, 2010
    
    
    March 31, 2010Expected life (years)
    
    
    3.9
    
    
    
    4.1Risk-free interest rate
    
    
    1.7
    %
    
    
    1.9
    %Expected volatility
    
    
    80.0
    %
    
    
    79.9
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
 At June 30,
    
    
    At March 31,
    
    
    Change in Fair Value2010
    
    
    2010
    
    
    of Warrant LiabilityFair value of warrant liability
    
    $
    3,755,689
    
    
    $
    5,441,379
    
    
    $
    (1,685,690
    )
  16




---



##### Table of Contents



To CalculateFair Value of Warrant Liability atJune 30,
    
    
    March 31,2010
    
    
    2010Expected life (years)
    
    
    4.8
    
    
    
    5.1Risk-free interest rate
    
    
    2.1
    %
    
    
    2.4
    %Expected volatility
    
    
    76.2
    %
    
    
    76.7
    %Expected dividend yield
    
    
    0
    %
    
    
    0
    %
 At June 30,
    
    
    At March 31,
    
    
    Change in Fair Value2010
    
    
    2010
    
    
    of Warrant LiabilityFair value of warrant liability
    
    $
    1,964,560
    
    
    $
    2,719,240
    
    
    $
    (754,680
    )
 Note 10. Common Stock
   17




---



##### Table of Contents



Overview
 The Company
 ®
 18




---



##### Table of Contents



in vitro
    19




---



##### Table of Contents



Significant Events
       Critical Accounting Policies and the Use of Estimates
  Stock-Based Compensation
  20




---



##### Table of Contents



Wind-down expenses  Rhode Island
    Wind-down expenses  Australia
  21




---



##### Table of Contents



Business Combinations
  Results of Operations
   Revenue and Cost of Product Sales
  Three months ended,
    
    
    
    
    
    
    
    
    
    
    Six months ended,June 30
    
    
    Change in 2010 versus 2009
    
    
    June 30
    
    
    Change in 2010 versus 20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Revenue:Licensing agreements and grants
    
    $
    171,550
    
    
    $
    144,851
    
    
    $
    26,699
    
    
    
    18
    %
    
    $
    285,399
    
    
    $
    201,453
    
    
    $
    83,946
    
    
    
    42
    %Product sales
    
    
    72,581
    
    
    
    120,600
    
    
    
    (48,019
    )
    
    
    (40
    %)
    
    
    189,005
    
    
    
    120,600
    
    
    
    68,405
    
    
    
    57
    %Total revenue
    
    
    244,131
    
    
    
    265,451
    
    
    
    (21,320
    )
    
    
    (8
    %)
    
    
    474,404
    
    
    
    322,053
    
    
    
    152,351
    
    
    
    47
    %Cost of product sales
    
    
    24,862
    
    
    
    59,525
    
    
    
    34,663
    
    
    
    (58
    %)
    
    
    68,624
    
    
    
    59,525
    
    
    
    (9,099
    )
    
    
    15
    %Gross Profit
    
    $
    219,269
    
    
    $
    205,926
    
    
    $
    13,343
    
    
    
    6
    %
    
    $
    405,780
    
    
    $
    262,528
    
    
    $
    143,252
    
    
    
    55
    %
  Second quarter ended June 30, 2010 versus second quarter ended June 30, 2009.
 22




---



##### Table of Contents



Six-month period ended June 30, 2010 versus six-month period ended June 30, 2009
 Operating Expenses
  Three months ended,
    
    
    Change in 2010 versus
    
    
    Six months ended,
    
    
    Change in 2010 versusJune 30
    
    
    2009
    
    
    June 30
    
    
    20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Operating expenses:Research & development
    
    $
    4,858,228
    
    
    $
    5,054,600
    
    
    $
    (196,372
    )
    
    
    (4
    )%
    
    $
    9,895,742
    
    
    $
    9,290,389
    
    
    $
    605,353
    
    
    
    7
    %Selling, general & administrative
    
    
    2,286,678
    
    
    
    2,201,974
    
    
    
    84,704
    
    
    
    4
    %
    
    
    4,871,420
    
    
    
    4,740,886
    
    
    
    130,534
    
    
    
    3
    %Wind-down expenses
    
    
    125,833
    
    
    
    340,064
    
    
    
    (214,231
    )
    
    
    (63
    )%
    
    
    291,168
    
    
    
    545,500
    
    
    
    (254,332
    )
    
    
    (47
    )%Total operating expenses
    
    $
    7,270,739
    
    
    $
    7,596,638
    
    
    $
    (325,899
    )
    
    
    (4
    )%
    
    $
    15,058,330
    
    
    $
    14,576,775
    
    
    $
    481,555
    
    
    
    3
    %
 Research and Development Expenses
   23




---



##### Table of Contents



Second quarter ended June 30, 2010 versus second quarter ended June 30, 2009.
  Six-month period ended June 30, 2010 versus six-month period ended June 30, 2009.
 Selling, General and Administrative Expenses
   Second quarter ended June 30, 2010 versus second quarter ended June 30, 2009
  Six-month period ended June 30, 2010 versus six-month period ended June 30, 2009
 Wind-down Expenses
 Three months ended,
    
    
    Six months ended,June 30
    
    
    June 302010
    
    
    2009
    
    
    2010
    
    
    2009Rhode Island
    
    $
    125,833
    
    
    $
    29,795
    
    
    $
    291,168
    
    
    $
    235,231Australia
    
    
    
    
    
    
    310,269
    
    
    
    
    
    
    
    310,269Total wind-down expenses
    
    $
    125,833
    
    
    $
    340,064
    
    
    $
    291,168
    
    
    $
    545,500
 24




---



##### Table of Contents



Rhode Island
  Australia
  Other Income (Expense)
  Three months ended,
    
    
    Change in 2010 versus
    
    
    Six months ended,
    
    
    Change in 2010 versusJune 30
    
    
    2009
    
    
    June 30
    
    
    20092010
    
    
    2009
    
    
    $
    
    
    %
    
    
    2010
    
    
    2009
    
    
    $
    
    
    %Other income (expense):Gain on sale of marketable securities
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    
    
    
    
    $
    
    
    
    $
    397,866
    
    
    $
    (397,866
    )
    
    
    *Change in fair value of warrant liability
    
    
    2,440,370
    
    
    
    102,517
    
    
    
    2,337,853
    
    
    
    2,280
    %
    
    
    3,956,719
    
    
    
    (2,652,931
    )
    
    
    6,609,650
    
    
    
    (249
    )%Interest income
    
    
    13,309
    
    
    
    8,338
    
    
    
    4,971
    
    
    
    60
    %
    
    
    13,903
    
    
    
    50,285
    
    
    
    (36,382
    )
    
    
    (72
    )%Interest expense
    
    
    (25,054
    )
    
    
    (29,074
    )
    
    
    4,020
    
    
    
    (14
    )%
    
    
    (50,554
    )
    
    
    (57,250
    )
    
    
    6,696
    
    
    
    (12
    )%Other income (expense), net
    
    
    12,498
    
    
    
    (57,424
    )
    
    
    69,922
    
    
    
    (122
    )%
    
    
    (1,940
    )
    
    
    (71,634
    )
    
    
    69,694
    
    
    
    (97
    )%Total other income
    
    $
    2,441,123
    
    
    $
    24,357
    
    
    $
    2,416,766
    
    
    
    9,922
    %
    
    $
    3,918,128
    
    
    $
    (2,333,664
    )
    
    $
    6,251,792
    
    
    
    (268
    )%
 
 *
    
    Calculation is not meaningful. Gain on Sale of Marketable Equity Securities
 25




---



##### Table of Contents



Change in Fair Value of Warrant Liability
  Interest Income
  Interest Expense
  Liquidity and Capital Resources
  June 30,
    
    
    December 31,
    
    
    Change2010
    
    
    2009
    
    
    $
    
    
    %Cash and cash equivalents
    
    $
    30,765,504
    
    
    $
    38,617,977
    
    
    $
    (7,852,473
    )
    
    
    (20
    )%
  Six months ended June 30,
    
    
    Change in 2010 versus 20092010
    
    
    2009
    
    
    $
    
    
    %Net cash used in operating activities
    
    $
    (13,746,173
    )
    
    $
    (12,382,824
    )
    
    $
    (1,363,349
    )
    
    
    11
    %Net cash provided by (used in) investing activities
    
    $
    (509,064
    )
    
    $
    4,038,189
    
    
    $
    (4,547,253
    )
    
    
    (113
    )%Net cash provided by financing activities
    
    $
    6,443,669
    
    
    $
    15,208,452
    
    
    $
    (8,764,783
    )
    
    
    (58
    )%
 Net Cash Used in Operating Activities
  26




---



##### Table of Contents



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.
   27




---



##### Table of Contents



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




---



##### Table of Contents



Contractual Obligations
  Total
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Payable inObligations
    
    
    Payable in (July to
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2015at June
    
    
    December)
    
    
    Payable in
    
    
    Payable in
    
    
    Payable in
    
    
    Payable in
    
    
    and30, 2010
    
    
    2010
    
    
    2011
    
    
    2012
    
    
    2013
    
    
    2014
    
    
    BeyondOperating lease payments(1)
    
    $
    6,363,015
    
    
    $
    1,773,531
    
    
    $
    2,685,187
    
    
    $
    1,171,875
    
    
    $
    732,422
    
    
    $
    
    
    
    $
    Capital lease (equipment)
    
    
    128,416
    
    
    
    36,696
    
    
    
    73,391
    
    
    
    18,329
    
    
    
    
    
    
    
    
    
    
    
    Bonds Payable (principal & interest)(2)
    
    
    978,784
    
    
    
    121,352
    
    
    
    242,321
    
    
    
    240,666
    
    
    
    237,593
    
    
    
    136,852
    
    
    
    Total contractual cash obligations
    
    $
    7,470,215
    
    
    $
    1,931,579
    
    
    $
    3,000,899
    
    
    $
    1,430,870
    
    
    $
    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.
 29




---



##### Table of Contents



Revenue RecognitionMilestone
Method,
 
    
    
 PART II-OTHER INFORMATION
 
   30




---



##### Table of Contents



ex parte
 
   
   
   
    31




---



##### Table of Contents



(a)
    
    Each of the two nominees to serve as Class I Directors for a three-year term expiring
at the 2013 Annual Meeting were elected.
 Nominee
    
    Votes For
    
    Votes Withheld
    
    Broker Non-VotesEric Bjerkholt
    
    
    16,390,960
    
    
    
    1,587,821
    
    
    
    73,869,358John Schwartz, Ph.D.
    
    
    15,976,736
    
    
    
    2,002,045
    
    
    
    73,869,358
 (b)
    
    The appointment of Grant Thornton LLP as the Companys independent registered public
accounting firm for the fiscal year ending December 31, 2010 was ratified.
 Votes For
    
    Votes Against
    
    Abstentions
    
    Broker Non-Votes88,145,229
    
    2,804,641
    
    898,269
    
    0
 
   
  Exhibit 31.1 
 Exhibit 31.2 
 Exhibit 32.1 
 Exhibit 32.2 
 32




---



##### Table of Contents



STEMCELLS, INC.
(name of Registrant)August 9, 2010
    /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