EQUITY RESEARCH

COMPANY UPDATE
StemCells, Inc.
(STEM NASDAQ $1.99)
$1.99 $2.50 $0.59-$2.67 $60 30,168 28,660 910 $0 $0.00/0.00% High EPS ($1.06) ($0.34) ($0.41) P/E nm nm nm

Biotechnology
2/13/2013 Closing Price 2.12.2013 Target Price 52-Week Range: Market Cap (M): Shares O/S (M): Float (M): Avg. Vol. (000) Debt (M) Dividend/Yield: Risk Profile: FYE: December 2012 2013 2014

Buy

Spine repair; One ASIA-A converts to ASIA-B

STEM announced 12-month data from the first patient cohort in the phase I/II clinical trial of its proprietary allogeneic (cells in a bottle) HuCNS-SC product candidate (purified human neural stem cells) for chronic spinal cord injury. The cells continued to demonstrate a favorable safety profile and showed that the gains in sensory function observed in two of the three patients at the six-month assessment persisted to 12 months. The third patient remains stable. In addition, between the six- and 12-month evaluations, one patient converted from a complete to an incomplete injury, or ASIA-A to ASIA-B. According to the clinicians we spoke with, this is a very big deal. In fact, if an ASIA-A patient can benefit, the hope is that an even more pronounced effect may be possible in less severely paralyzed patients (ASIA-Bs and Cs). STEM is pioneering the first spinal cord injury (SCI) trial in man. The first cohort (n=3 of 12) of the most severely injured patients (ASIA-A: 3 total paralysis) has completed, and the next cohort (ASIA-4-Bs, followed by ASIA-5-Cs patientswho are less severely paralyzed and have more to lose if the therapy negatively impacts their remaining function) are now set to be treated (which is why ASIA-A patients were treated first). We are encouraged by the strong safety demonstrated thus far. While the clinical road is long, we believe the reported results are encouraging. Its allogeneic, fetal-derived. We applaud Stem for pioneering this work and not restricting the research based on the politics of church and state, but rather science. We believe that the allogeneic model makes worlds of sense from the ability to have product readily available (acute injury) to commercializing at pharma/biologic-like COGS. CIRM agrees and has pledged $20 million in non-dilutive funding over four years. STEM is working to move the field beyond the trophic effects of MSCs (mesenchymal cells) in CNS disorders. STEMs approach is careful, thorough, and makes sense. Our evaluation of the preclinical models, cell types, mechanisms of action, and clinical trials (other myelination disorders conducted by STEM) makes perfect logical and scientific sense, in our opinion. We are in fact confounded by the approach of others which lack the same connect the dots models to de-risk the outcome of its program. Valuation. We use a high discount rate in our models, which go out to 2022. We factor in funding (dilution) and triangulate FCF, discounted EPS (2022), and sum-of-the-parts modelsaveraging and equally weightingto derive a NPV of $2.50, which is where we set our target price. We believe this is very conservative, especially as the data builds.

(ST EM)

Source: bigcharts.com as of 02/12/2013

Jason Kolbert

(212) 895-3516

jkolbert@maximgrp.com

Maxim Group LLC 405 Lexington Avenue New York, NY 10174 www.maximgrp.com
SEE PAGES 6 - 8 FOR IMPORTANT DISCLOSURES AND DISCLAIMERS

StemCells, Inc. (STEM)

Exhibit 1. Upcoming Events for STEM
Upcoming Milestones
Product Human CNS-SC Human CNS-SC Human CNS-SC Human CNS-SC Human CNS-SC Human CNS-SC Human CNS-SC Human CNS-SC Human CNS-SC Spinal Trial Spinal Trial Spinal Trial Spinal Trial Spinal Trial Spinal Trial Pelizaue_Merzbacher Disease (PMD) Retinal (Dry AMD) Retinal (Dry AMD) Indication Event Ongoing enrollment and Development Top Line Results of the A Cohort Start of the "B" Cohort Start of the C Cohort Results of the B Cohort Results of the C Cohort Start of the PII Trial Enrollment completion of the Phase I/II (N=-16) trial Top Line data from PI/II trial Timing Ongoing 2H-2012 1H-2013 2H-2013 1H-2014 2H2014 1H-2013 2H-2013 4Q-2013 + + +++ Significance + complete ++ ++

Source: Company reports and Maxim Group estimates

Source: Company reports and Maxim Group estimate

Diseases and Disorders of the Spinal Cord: The company is embarking on an N=12, phase I clinical trial in Switzerland for chronic spinal cord injury, including both complete and incomplete injuries. The company has demonstrated in vivo proof of principle by showing (in a mouse model for spinal cord injury) that transplanted HuCNS-SC cells can: o restore motor function in injured animals; o directly contribute to functional recovery (and that when human cells are ablated, restored function is lost); and o become specialized oligodendrocytes and neurons.

The trial is exploring three cohorts of patientsthe first cohort (ASIA-A) represents the most severely injured group, with total paralysis. This group actually has a lot to gain and little to lose versus the B and C groups, who have partial paralysis. In these groups, if the intervention has adverse events and any function is lost, the tragedy is expanded. As such, the clinical strategy has been to demonstrate safety in the most severely injured patients and migrate the therapy to the less severely injured, where the probabilities of restoring elements of function are greater. This has now been accomplished.

Exhibit 2. The Tragedy of Spinal Injury A 12-patient study is being conducted in Switzerland. Patients will have had a chronic injury: 3-12 months post-injury and a broad range of classifications (ASIA A, B, and C). The dose of allogeneic cells is set to 20 million. Clinical endpoints will be sensation motor function and bowel/bladder dysfunction. The first group (ASIA-A) has now reported positive 12 months data.
The preclinical science that supports STEMs approach around myelination is robust, and proof of concept around the functional value of myelination has been demonstrated in human clinical models that the company has conducted. By comparison, we do not see a similar approach in Neuralstem, where mice models are not relative nor predictive in man; and a contusion model is not relative to a paralysis model in man. Source: Stem Cells, Inc.

Maxim Group LLC

StemCells, Inc. (STEM)

VALUATION Valuation Methods: Its extremely difficult to predict probabilities of success from phase I data. As such, we use aggressively high discount rates in our models, which go out to 2022. We model both spine and macular degeneration as we see strong scientific rational and active clinical trials that are progressing forward in these areas. We do not model any revenues from these programs until 2019. Our models also factor in funding (dilution) using a 2022 share count. We triangulate FCFF, discounted EPS (2022), and sum of the parts models. We then average and equally weight each model to derive an NPV of $2.50, which is where we set our target price. Investors should recognize that this modeling exercise, which goes out 10 years, is limited in its ability to predict a 12-month target. The price of the stock should be driven near term by news flow, early trial data, and cyclic concerns of financings (dilution). Exhibit 3. Free Cash Flow Model
Average $ $ Year DCF Valuation Using FCFF (mln): units (millions - $) EBIT Tax Rate EBIT(1-t) CapEx Depreciation Share based compensation Change in NWC FCFF PV of FCFF Discount Rate Long Term Growth Rate Terminal Cash Flow Terminal Value YE2012 2.5 2 2012

2012E (17,302) 0% (17,302) (2,079) 521 7,500 12,232 872 872 30% 1% 2,072,928 148,073

2013E (13,604) 0% (13,604) 7,382 (0) (6,222) (4,779)

2014E (20,250) 0% (20,250) 7,682 (12,568) (7,414)

2015E (28,678) 0% (28,678) 10,151 (18,527) (8,394)

2016E (31,104) 0% (31,104) 10,563 (20,541) (7,148)

2017E (33,730) 0% (33,730) 14,211 (0) (19,519) (5,217)

2018E (36,572) 0% (36,572) 16,242 0 (20,331) (4,173)

2019E 146,810 $ 13% 127,725 20,302 0 148,027 23,338

2020E 357,245 $ 21% 282,223 28,423 310,646 37,616

2021E

2022E

553,864 $
29% 392,953 32,483 425,437 39,567

877,294
36% 565,500 33,802 599,302 42,809

NPV NPV-Net Debt Dilluted Shares out (M) NPV Per Share
Source: Maxim estimates

255,150 119,800 2.1

2022E

Exhibit 4. Discounted EPS Model

Current Year Enter Year EPS estimate is selected from Earnings Multiple Discount Factor Selected Year EPS NPV Source: Maxim estimates 2012 2022 10 30% $4.79 $2.67 Earnings Multiple 2.7 0 5 10 15 20 25 30 35 Discount Rate and Earnings Multiple Varies, Year is Constant 2022 EPS 5% 10% 15% 20% 25% $0.00 $0.00 $0.00 $0.00 $0.00 $ $13.99 $27.98 $41.97 $55.96 $69.95 $83.94 $97.93 $8.39 $16.77 $25.16 $33.55 $41.93 $50.32 $58.71 $5.14 $10.29 $15.43 $20.57 $25.72 $30.86 $36.00 $3.22 $6.44 $9.66 $12.88 $16.10 $19.32 $22.54 $2.06 $4.11 $6.17 $8.22 $10.28 $12.33 $14.39 $ $ $ $ $ $ $ 30% 1.34 2.67 4.01 5.34 6.68 8.01 9.35

StemCells, Inc Sum of the Parts Spine NPV Eye NPV Other (CNS) - PMD/Batten NPV Other(s) NPV Net Margin Shares Outstanding (M) Total
Source: Maxim estimates

LT Gr 1% 1% 1% 1%

Discount Rate 30% 30% 30% 30%

Yrs. to Mkt 7 5 7

% Success Peak Sales MM's 20% $3,000 20% 20% 10% $500 $500 $0

2012E

Fully Dilluted Share Count

Term Val $10,345 $1.84 $1,724 $0.52 $1,724 $0.31 $0 $0.00 67% 120 $2.66

Maxim Group LLC

StemCells, Inc. (STEM)

FUNDAMENTAL RISKS Developmental risk. The key risk is: Will it work? Phase I data in indications like spinal cord injury (SCI) may not be predictive of what will be seen in larger trials. Predicting the viability of the technology without data is difficult. In the case of Stem Cells, Inc. even the cell therapy successfully can repair myelination defects its not known if that will translate into an improvement in efficacy. The number one risk in our opinion in this company is the ability of the company to translate the research into man and ultimately a commercial product. Regulatory risk. StemCells must be able to obtain the approval of the FDA (and/or the EU) before commercial sales of the product candidates commence in the United States (or Europe). Solid results are critical, but so is proper filing and interaction with the regulatory agencies. We see STEM as a small company with limited regulatory experience embarking on long and complex clinical programs. Commercial risk. StemCells lacks a commercial infrastructure to support its product launch and commercialization. Good results should trigger increased spending to create such an infrastructure. We also remind investors that the sale of pharmaceuticals always carries risks. If side effects emerge at a later date and a product is recalled, class action lawsuits can translate into millions, or billions, of dollars in damages. Competitive landscape. StemCells is not alone in its pursuit of the indications in macular degeneration and even spinal repair. Other companies with more robust business models, better manufacturing, and lower cost of goods represent a real threat to the company. IP risk. While StemCells has a strong patent portfolio, the company is being challenged by a competitor, and additional challenges can come at any time. This has happened among companies now disputing IP violations across multiple nucleosides in development. Financing risk. StemCells is not a profitable company and will likely be dependent on the capital markets for cash. We believe it is likely that there will be multiple additional dilutive financing rounds. The companys ability to successfully finance itself over the next seven years will be critical to its success.

Maxim Group LLC

StemCells, Inc. (STEM)

StemCells Inc. Income Statement

Stem Cells Inc. Income Statement ($ MM's except per share data) ($ in thousands except per share data) 2011A Revenues: Future Product Revenues
Total Sales

1Q12A

2Q12A

3Q12A

4Q12E

2012E

1Q13E

2Q13E

3Q13E

4Q13E

2013E

2014E

2015E

2016E $0

2017E $0 $0 1,000 1,000 $ $250 25.0% $750 $ $34,480 14,211 $0 $34,730 (33,730) $ 11 11 (33,719) $ 0.0% (33,719) (0.29) (0.29) 116,383 116,383 $ $ $ $

2018E $0 $0 $ 1,000 1,000 $ $250 25.0% 750 $ $37,322 16,242 $0 $37,572 (36,572) $ 12 12 (36,560) $ 0.0% (36,560) (0.31) (0.31) 116,849 116,849 $ $ $ $

2019E $234,747 234,747 1,000 235,747 $ $58,937 25.1% 176,810 $ $30,000 20,302 $0 $88,937 146,810 $ 12 12 146,823 $ 19,087 13.0% 127,736 1.09 1.09 117,317 117,317 $ $ $ $

2020E $475,556 $475,556 1,000 476,556 $95,311 20.0% 381,245 $24,000 28,423 0 $119,311 357,245 $ 13 13 357,258 $ 75,024 21.0% 282,234 2.40 2.40 117,787 117,787 $ $ $ $

2021E $722,580 $722,580 1,750 $722,580

2022E $1,126,868 $1,126,868 3,250 $1,126,868

Revenue from Licenses and Grants Reveneu from Product (lab) sales
Total Revenues

- $ - $

- $ 373 271 644 $ $72 11.2% 572 $ 3,938 1,924 35 $5,970 (5,326) $ (4,941) 4 (14) 48 (4,904) $ 0 0.0% (10,229) $ ($0.45) ($0.45) 22,958 22,958

- $ 38 211 249 $ $64 25.8% 185 $ 3,749 1,775 10 $5,534 (5,350) $ 6,206 3 (14) (11) 6,183 $ 0 0.0% 833 $ $0.03 $0.03 24,807 24,807

- $ 61 203 264 $ $72 27.2% 192 $ 3,478 1,636 155 $5,341 (5,077) $ (11,239) 2 (11) (11) (11,260) $ 0 0.0% (16,337) $ ($0.54) ($0.54) 30,168 30,168

- $ 61 203 264 $ $66 25.0% 198 $ 3,500 1,800 $3,566 (3,302) $ 2 (11) (9) (18) $ 0 0.0% (3,320) ($0.11) ($0.11) 30,199 30,199 $ $ $ $

- $ 532 889 1,421 $ $274 19.3% 1,147 $ 14,666 7,136 200 $20,411 (19,055) $ (9,975) 12 (51) 16 (9,998) $ $ 0.0% (29,053) $ (1.06) (1.06) 27,033 27,033

- $ 250 250 $ $63 25.0% 188 $ 3,535 1,818 $3,598 (3,348) $ 2 2 (3,345) $ $ 0.0% (3,345) $ ($0.08) ($0.08) 40,229 40,229

- $ 250 250 $ $63 25.0% 188 $ 3,570 1,836 $3,633 (3,383) $ 2 2 (3,380) $ $ 0.0% (3,380) $ ($0.08) ($0.08) 40,269 40,269

- $ 250 250 $ $63 25.0% 188 $ 3,606 1,855 $3,669 (3,419) $ 2 2 (3,416) $ $ 0.0% (3,416) $ ($0.08) ($0.08) 40,309 40,309

- $ 250 250 $ $63 25.0% 188 $ 3,642 1,873 $3,705 (3,455) $ 2 2 (3,452) $ 0.0% (3,452) ($0.09) ($0.09) 40,350 40,350 $ $ $ $

- $ 1,000 1,000 $ $250 25.0% 750 $ 14,354 7,382 0 $14,604 (13,604) $ 10 10 (13,594) $ 0.0% (13,594) (0.34) (0.34) 40,289 40,289 $ $ $ $

- $ 1,000 1,000 $ $250 25.0% 750 $ 21,000 7,682 0 $21,250 (20,250) $ 10 10 (20,240) $ 0.0% (20,240) (0.41) (0.41) 47,958 47,958 $ $ $ $

- $ 1,000 1,000 $ $250 25.0% 750 $ 29,428 10,151 0 $29,678 (28,678) $ 11 11 (28,668) $ 0.0% (28,668) (0.44) (0.44) 65,680 65,680 $ $ $ $

1,000 1,000 $ $250 25.0% 750 31,854 10,563 0 $32,104 (31,104) $ 11 11 (31,093) $ 0.0% (31,093) (0.34) (0.34) 90,981 90,981 $ $ $ $

Operating expenses: COGS (including royalties to others) COGS (%)

Gross Profit

- $

Research & Development Sales, General & Adminastrative Wind Down Expenses
Total costs & operating expenses Operating Income

$144,716 $225,574 20.0% 20.0% $577,864 $ 901,294 $24,000 $24,000 $32,483 $33,802 $0 $0 $168,716 $249,574 553,864 $ 877,294 $0 13 $0 14

Other Income (expense) Change in fair value of warrant liability Interest Income Interest Expense Other income (expense)
Income Before Taxes

- $ $

13 14 553,877 $ 877,308 160,914 29.1% 392,963 3.33 3.33 118,965 118,965 $ 311,799 35.5% $ 565,509 $ 4.77 $ 4.77 120,155 120,155

Income Tax Expense Tax Rate

Net Income (loss)

Basic EPS Fully Dilluted EPS Weighted avg. shares, basic (000) Weighted avg. shares, diluted (000)
Source: Company reports and Maxim Group estimates

Maxim Group LLC

StemCells, Inc. (STEM)

DISCLOSURES

Source: Investars

Maxim Group makes a market in Stem Cells, Inc. Maxim Group expects to receive or intends to seek compensation for investment banking services from Stem Cells, Inc. in the next 3 months.

I, Jason Kolbert, attest that the views expressed in this research report accurately reflect my personal views about the subject security and issuer. Furthermore, no part of my compensation was, is, or will be directly or indirectly related to the specific recommendation or views expressed in this research report. The research analyst(s) primarily responsible for the preparation of this research report have received compensation based upon various factors, including the firms total revenues, a portion of which is generated by investment banking activities. Valuation Methods: It is difficult to predict probabilities of success from phase I data. As such, we use aggressively high discount rates in our models, which go out to 2022. We model both spine and macular degeneration, as we see strong scientific rational and active clinical trials that are progressing forward in these areas. We do not model any revenues from these programs until 2019. Our models also factor in funding (dilution) using a 2022 share count. We triangulate FCFF, discounted EPS (2022), and sum of the parts models. We then average and equally weight each model to derive an NPV of $2.50, which is where we set our target price. Investors should recognize that this modeling exercise, which goes out 10 years, is limited in its ability to predict a 12-month target. The price of the stock will be driven near term by news flow, early trial data, and cyclic concerns of financings (dilution). Price target and Investment risks: Aside from general market and other economic risks, risks particular to our price target and rating for Stem Cells, Inc. include: The company will likely need to raise significant additional capital to develop the therapeutic pipeline and investors concerns regarding dilution represent an

Maxim Group LLC

StemCells, Inc. (STEM)

obstacle around share appreciation. Other risks to our price target are clinical results, clinical progress, and the competitive landscape as well as the financing environment. RISK RATINGS Risk ratings take into account both fundamental criteria and price volatility. Speculative Fundamental Criteria: This is a risk rating assigned to early-stage companies with minimal to no revenues, lack of earnings, balance sheet concerns, and/or a short operating history. Accordingly, fundamental risk is expected to be significantly above the industry. Price Volatility: Because of the inherent fundamental criteria of the companies falling within this risk category, the price volatility is expected to be significant with the possibility that the investment could eventually be worthless. Speculative stocks may not be suitable for a significant class of individual investors. High Fundamental Criteria: This is a risk rating assigned to companies having below-average revenue and earnings visibility, negative cash flow, and low market cap or public float. Accordingly, fundamental risk is expected to be above the industry. Price volatility: The price volatility of companies falling within this category is expected to be above the industry. High-risk stocks may not be suitable for a significant class of individual investors. Medium Fundamental Criteria: This is a risk rating assigned to companies that may have average revenue and earnings visibility, positive cash flow, and is fairly liquid. Accordingly, both price volatility and fundamental risk are expected to approximate the industry average. Low Fundamental Criteria: This is a risk rating assigned to companies that may have above-average revenue and earnings visibility, positive cash flow, and is fairly liquid. Accordingly, both price volatility and fundamental risk are expected to be below the industry.

Maxim Group LLC

StemCells, Inc. (STEM)

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