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Maxim Group LLC 405 Lexington Avenue New York, NY 10174 www.maximgrp.com

SEE PAGES 6 - 8 FOR IMPORTANT DISCLOSURES AND DISCLAIMERS

EQUITY RESEARCH

COMPANY UPDATE

Biotechnology

2/13/2013

Closing Price 2.12.2013 $1.99

Target Price $2.50

52-Week Range: $0.59-$2.67

Market Cap (M): $60

Shares O/S (M): 30,168

Float (M): 28,660

Avg. Vol. (000) 910

Debt (M) $0

Dividend/Yield: $0.00/0.00%

Risk Profile:

FYE: December EPS P/E2012 ($1.06) nm

2013 ($0.34) nm

2014 ($0.41) nm

(STEM)

Source: bigcharts.com as of 02/12/201 3

Jason Kolbert (212) 895-3516

[email protected]

High

StemCells, Inc. Buy(STEMNASDAQ$1.99)

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 afavorable safety profile and showed that the gains in sensoryfunction observed in two of the three patients at the six-monthassessment persisted to 12 months. The third patient remains stable.

In addition, between the six- and 12-month evaluations, onepatient converted from a complete to an incomplete injury, orASIA-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 lessseverely paralyzed patients (ASIA-Bs and Cs).

STEM is pioneering the first spinal cord injury (SCI) trial inman. The first cohort (n=3 of 12) of the most severely injuredpatients (ASIA-A: 3 total paralysis) has completed, and the nextcohort (ASIA-4-Bs, followed by ASIA-5-Cs patientswho are lessseverely paralyzed and have more to lose if the therapy negativelyimpacts their remaining function) are now set to be treated (which iswhy ASIA-A patients were treated first). We are encouraged by thestrong 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 thiswork and not restricting the research based on the politics of churchand state, but rather science. We believe that the allogeneic modelmakes worlds of sense from the ability to have product readilyavailable (acute injury) to commercializing at pharma/biologic-likeCOGS. CIRM agrees and has pledged $20 million in non-dilutivefunding over four years. STEM is working to move the field beyondthe trophic effects of MSCs (mesenchymal cells) in CNS disorders.

STEMs approach is careful, thorough, and makes sense. Ourevaluation of the preclinical models, cell types, mechanisms ofaction, and clinical trials (other myelination disorders conducted bySTEM) 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 itsprogram.

Valuation. We use a high discount rate in our models, which go outto 2022. We factor in funding (dilution) and triangulate FCF,discounted EPS (2022), and sum-of-the-parts modelsaveragingand equally weightingto derive a NPV of $2.50, which is wherewe set our target price. We believe this is very conservative,especially as the data builds.

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StemCells, Inc. (STEM)

Maxim Group LLC 2

Exhibit 1. Upcoming Events for STEMUpcoming MilestonesProduct Indication Event Timing Significance

Human CNS-SC Spinal Trial Ongoing enrollment and Development Ongoing +

Human CNS-SC Spinal Trial Top Line Results of the A Cohort 2H-2012 complete

Human CNS-SC Spinal Trial Start of the "B" Cohort 1H-2013 ++

Human CNS-SC Spinal Trial Start of the C Cohort 2H-2013 ++

Human CNS-SC Spinal Trial Results of the B Cohort 1H-2014

Human CNS-SC Spinal Trial Results of the C Cohort 2H2014

Human CNS-SC Pelizaue_Merzbacher Disease (PMD) Start of the PII Trial 1H-2013 +

Human CNS-SC Retinal (Dry AMD) Enrollment completion of the Phase I/II (N=-16) trial 2H-2013 +

Human CNS-SC Retinal (Dry AMD) Top Line data from PI/II trial 4Q-2013 +++

Source: Company reports and Maxim Group estimates

Source: Company reports and Maxim Group estimateDiseases and Disorders of the Spinal Cord:

The company is embarking on an N=12, phase I clinical trial in Switzerland for chronic spinalcord injury, including both complete and incomplete injuries.

The company has demonstrated in vivo proof of principle by showing (in a mouse model forspinal 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); ando

become specialized oligodendrocytes and neurons.

The trial is exploring three cohorts of patientsthe first cohort (ASIA-A) represents the mostseverely injured group, with total paralysis. This group actually has a lot to gain and little tolose versus the B and C groups, who have partial paralysis. In these groups, if the interventionhas adverse events and any function is lost, the tragedy is expanded. As such, the clinicalstrategy has been to demonstrate safety in the most severely injured patients and migrate thetherapy to the less severely injured, where the probabilities of restoring elements of functionare 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: 3-12months post-injury and a broad range of classifications (ASIA A, B, and C). The dose of allogeneiccells is set to 20 million. Clinical endpoints will be sensation motor function and bowel/bladderdysfunction. The first group (ASIA-A) has now reported positive 12 months data.

Source: Stem Cells, Inc.

The preclinical science that supportsSTEMs approach around

myelination is robust, and proof ofconcept around the functional value ofmyelination has been demonstrated inhuman clinical models that thecompany has conducted.

By comparison, we do not see asimilar approach in Neuralstem, wheremice models are not relative norpredictive in man; and a contusionmodel is not relative to a paralysismodel in man.

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Maxim Group LLC 3

VALUATION

Valuation Methods:Its extremely difficult to predict probabilities of success from phase I data. Assuch, we use aggressively high discount rates in our models, which go out to 2022. We model bothspine and macular degeneration as we see strong scientific rational and active clinical trials that areprogressing 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 modelto derive an NPV of $2.50, which is where we set our target price. Investors should recognize that thismodeling exercise, which goes out 10 years, is limited in its ability to predict a 12-month target. Theprice of the stock should be driven near term by news flow, early trial data, and cyclic concerns offinancings (dilution).

Exhibit 3.Free Cash Flow ModelAverage 2.5$

2$

Year 2012

DCF Valuation Using FCFF (mln):

units (millions - $) 2012E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

EBIT (17,302) (13,604) (20,250) (28,678) (31,104) (33,730) (36,572) 146,810 357,245$ 553,864$ 877,294$

Tax Rate 0% 0% 0% 0% 0% 0% 0% 13% 21% 29% 36%

EBIT(1-t) (17,302) (13,604) (20,250) (28,678) (31,104) (33,730) (36,572) 127,725 282,223 392,953 565,500

CapEx (2,079) - - - - - - - - - -

Depreciation 521 - - - - - - - - - -

Share based compensation 7,500 7,382 7,682 10,151 10,563 14,211 16,242 20,302 28,423 32,483 33,802

Change in NWC 12,232 (0) - - - (0) 0 0 - - -

FCFF 872 (6,222) (12,568) (18,527) (20,541) (19,519) (20,331) 148,027 310,646 425,437 599,302

PV of FCFF 872 (4,779) (7,414) (8,394) (7,148) (5,217) (4,173) 23,338 37,616 39,567 42,809

Discount Rate 30%

Long Term Growth Rate 1%

Terminal Cash Flow 2,072,928

Terminal Value YE2012 148,073

NPV 255,150

NPV-Net Debt -

Dilluted Shares out (M) 119,800 2022E

NPV Per Share 2.1

Source: Maxim estimates

Exhibit 4.Discounted EPS ModelCurrent Year 2012

En te r Ye ar EPS e sti mate i s s el ected fr om 20 22 2022 EPS

Earnings Multiple 10 2.7 5% 10% 15% 20% 25% 30%Discount Factor 30% 0 $0.00 $0.00 $0.00 $0.00 $0.00 -$

Selected Year EPS $4.79 5 $13.99 $8.39 $5.14 $3.22 $2.06 1.34$

NPV $2.67 10 $27.98 $16.77 $10.29 $6.44 $4.11 2.67$

Source: Maxim estimates 15 $41.97 $25.16 $15.43 $9.66 $6.17 4.01$

20 $55.96 $33.55 $20.57 $12.88 $8.22 5.34$

25 $69.95 $41.93 $25.72 $16.10 $10.28 6.68$

30 $83.94 $50.32 $30.86 $19.32 $12.33 8.01$

35 $97.93 $58.71 $36.00 $22.54 $14.39 9.35$

Discount Rate and Earnings Multiple Varies, Year is Constant

Earnings

Multiple

StemCells, Inc Sum of the Parts LT Gr Discount Rate Yrs . to Mkt % Success Peak Sales MM's Term Val

Spine 1% 30% 7 20% $3,000 $10,345

NPV $1.84

Eye 1% 30% 5 20% $500 $1,724

NPV $0.52

Other (CNS) - PMD/Batten 1% 30% 7 20% $500 $1,724

NPV $0.31

Other(s) 1% 30% 10% $0 $0

NPV $0.00

Net Margin 67%

Shares Outstanding (M) 2012E Fully Dilluted Share Count 120

Total $2.66

Source: Maxim estimates

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Maxim Group LLC 4

FUNDAMENTALRISKS

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 thetechnology 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 theresearch into man and ultimately a commercial product.

Regulatory risk. StemCells must be able to obtain the approval of the FDA (and/or the EU) beforecommercial sales of the product candidates commence in the United States (or Europe). Solid resultsare critical, but so is proper filing and interaction with the regulatory agencies. We see STEM as asmall company with limited regulatory experience embarking on long and complex clinical programs.

Commercial risk. StemCells lacks a commercial infrastructure to support its product launch andcommercialization. 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, ofdollars in damages.

Competitive landscape. StemCells is not alone in its pursuit of the indications in maculardegeneration and even spinal repair. Other companies with more robust business models, bettermanufacturing, 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 acompetitor, and additional challenges can come at any time. This has happened among companiesnow 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 financingrounds. The companys ability to successfully finance itself over the next seven years will be criticalto its success.

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Maxim Group LLC 5

StemCells Inc.Income Statement

Stem CellsI nc. Income Statement ($ MM'sexcept per share data)

($ in thousands except per share data) 2011A 1Q12A 2Q12A 3Q12A 4Q12E 2012E 1Q13E 2Q13E 3Q13E 4Q13E 2013E 2014E 2015E 2016E 2017E 2018E 2019E 2020E 2021E 2022E

Revenues:

Future Product Revenues $0 $0 $0 $234,747 $475,556 $ 722,580 $1,126,868

Total Sales -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ $0 $0 234,747$ $475,556 $722,580 $1,126,868

Revenue from Licenses and Grants - 373 38 61 61 532 250 250 250 250 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,000 1,750 3,250

Reveneu from Product (lab) sales - 271 211 203 203 889

Total Revenues -$ 644$ 249$ 264$ 264$ 1,421$ 250$ 250$ 250$ 250$ 1,000$ 1,000$ 1,000$ 1,000$ 1,000$ 1,000$ 235,747$ 476,556$ $722,580 $1,126,868

Operating expenses:

COGS (including royalties to others) $72 $64 $72 $66 $274 $63 $63 $63 $63 $250 $250 $250 $250 $250 $250 $58,937 $95,311 $144,716 $225,574

COGS (%) 11.2% 25.8% 27.2% 25.0% 19.3% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.0% 25.1% 20.0% 20.0% 20.0%

Gross Profit -$ 572$ 185$ 192$ 198$ 1,147$ 188$ 188$ 188$ 188$ 750$ 750$ 750$ 750$ $750 750$ 176,810$ 381,245$ $ 5 77 ,8 64 9 01 ,2 94$

Research & Development 3,938 3,749 3,478 3,500 14,666 3,535 3,570 3,606 3,642 14,354 21,000 29,428 31,854 $34,480 $37,322 $30,000 $24,000 $24,000 $24,000

Sales, General & Adminastrative 1,924 1,775 1,636 1,800 7,136 1,818 1,836 1,855 1,873 7,382 7,682 10,151 10,563 14,211 16,242 20,302 28,423 $32,483 $33,802

Wind Down Expenses 35 10 155 200 - - - - 0 0 0 0 $0 $0 $0 0 $0 $0

Total costs & operating expenses $5,970 $5,534 $5,341 $3,566 $20,411 $3,598 $3,633 $3,669 $3,705 $14,604 $21,250 $29,678 $32,104 $34,730 $37,572 $88,937 $119,311 $168,716 $249,574

Operating Income (5,326)$ (5,350)$ (5,077)$ (3,302)$ (19,055)$ (3,348)$ (3,383)$ (3,419)$ (3,455)$ (13,604)$ (20,250)$ (28,678)$ (31,104)$ (33,730)$ (36,572)$ 146,810$ 357,245$ 553,864$ 877,294$

Other Income (expense)

Change in fair value of warrant liability (4,941) 6,206 (11,239) - (9,975) - - - - - - - - - - - - $0 $0

Interest Income - 4 3 2 2 12 2 2 2 2 10 10 11 11 11 12 12 13 13 14

Interest Expense (14) (14) (11) (11) (51) - - - - - - - -

Other income (expense) 48 (11) (11) (9) 16 2 2 2 2 10 10 11 11 11 12 12 13 13 14

Income Before Taxes -$ (4,904)$ 6,183$ (11,260)$ (18)$ (9,998)$ (3,345)$ (3,380)$ (3,416)$ (3,452)$ (13,594)$ (20,240)$ (28,668)$ (31,093)$ (33,719)$ (36,560)$ 146,823$ 357,258$ 553,877$ 877,308$

Income Tax Expense - 0 0 0 0 -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ -$ 19,087$ 75,024$ 160,914$ 311,799$

Tax Rate 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 0.0% 13.0% 21.0% 29.1% 35.5%

Net Income (loss) (10,229)$ 833$ (16,337)$ (3,320)$ (29,053)$ (3,345)$ (3,380)$ (3,416)$ (3,452)$ (13,594)$ (20,240)$ (28,668)$ (31,093)$ (33,719)$ (36,560)$ 127,736$ 282,234$ 392,963$ 565,509$

Basic EPS ($0.45) $0.03 ($0.54) ($0.11) (1.06)$ ($0.08) ($0.08) ($0.08) ($0.09) (0.34)$ (0.41)$ (0.44)$ (0.34)$ (0.29)$ (0.31)$ 1.09$ 2.40$ 3.33$ 4.77$

Fully Dilluted EPS ($0.45) $0.03 ($0.54) ($0.11) (1.06)$ ($0.08) ($0.08) ($0.08) ($0.09) (0.34)$ (0.41)$ (0.44)$ (0.34)$ (0.29)$ (0.31)$ 1.09$ 2.40$ 3.33$ 4.77$

Weighted avg. shares, basic (000) 22,958 24,807 30,168 30,199 27,033 40,229 40,269 40,309 40,350 40,289 47,958 65,680 90,981 116,383 116,849 117,317 117,787 118,965 120,155

Weighted avg. shares, diluted (000) - 22,958 24,807 30,168 30,199 27,033 40,229 40,269 40,309 40,350 40,289 47,958 65,680 90,981 116,383 116,849 117,317 117,787 118,965 120,155

Source: Company reports and MaximGroup est imates

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Maxim Group LLC 6

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 servicesfrom Stem Cells, Inc. in the next 3 months.

I, Jason Kolbert, attest that the views expressed in this research report accurately reflect my personal viewsabout the subject security and issuer. Furthermore, no part of my compensation was, is, or will be directlyor 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 receivedcompensation based upon various factors, including the firms total revenues, a portion of which isgenerated 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 maculardegeneration, as we see strong scientific rational and active clinical trials that are progressing forward inthese areas. We do not model any revenues from these programs until 2019. Our models also factor infunding (dilution) using a 2022 share count. We triangulate FCFF, discounted EPS (2022), and sum of theparts models. We then average and equally weight each model to derive an NPV of $2.50, which is wherewe set our target price. Investors should recognize that this modeling exercise, which goes out 10 years, islimited in its ability to predict a 12-month target. The price of the stock will be driven near term by newsflow, early trial data, and cyclic concerns of financings (dilution).

Price target and Investment risks: Aside from general market and other economic risks, risks particular toour price target and rating for Stem Cells, Inc. include: The company will likely need to raise significantadditional capital to develop the therapeutic pipeline and investors concerns regarding dilution represent an

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Maxim Group LLC 7

obstacle around share appreciation. Other risks to our price target are clinical results, clinical progress, andthe competitive landscape as well as the financing environment.

RISK RATINGS

Risk ratings take into account both fundamental criteria and price volatility.

SpeculativeFundamental 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 isexpected to be significantly above the industry.Price Volatility: Because of the inherent fundamental criteria of the companies falling within this riskcategory, the price volatility is expected to be significant with the possibility that the investment couldeventually be worthless.Speculative stocks may not be suitable for a significant class of individual investors.

HighFundamental Criteria: This is a risk rating assigned to companies having below-average revenue andearnings visibility, negative cash flow, and low market cap or public float. Accordingly, fundamental risk isexpected to be above the industry.Price volatility: The price volatility of companies falling within this category is expected to be above theindustry.High-risk stocks may not be suitable for a significant class of individual investors.

MediumFundamental Criteria: This is a risk rating assigned to companies that may have average revenue andearnings visibility, positive cash flow, and is fairly liquid.Accordingly, both price volatility and fundamental risk are expected to approximate the industry average.

LowFundamental 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.

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Maxim Group LLC 8

DISCLAIMERS

Some companies that Maxim Group LLC follows are emerging growth companies whose securities

typically involve a higher degree of risk and more volatility than the securities of more established

companies. The securities discussed in Maxim Group LLC research reports may not be suitable for someinvestors. Investors must make their own determination as to the appropriateness of an investment in anysecurities referred to herein, based on their specific investment objectives, financial status and risktolerance.This communication is neither an offer to sell nor a solicitation of an offer to buy any securities mentionedherein. This publication is confidential for the information of the addressee only and may not be reproducedin whole or in part, copies circulated, or disclosed to another party, without the prior written consent ofMaxim Group, LLC (Maxim).

Information and opinions presented in this report have been obtained or derived from sources believed byMaxim to be reliable, but Maxim makes no representation as to their accuracy or completeness. Theaforementioned sentence does not apply to the disclosures required by NASD Rule 2711. Maxim accepts no

liability for loss arising from the use of the material presented in this report, except that this exclusion ofliability does not apply to the extent that such liability arises under specific statutes or regulations

applicable to Maxim. This report is not to be relied upon in substitution for the exercise of independentjudgment. Maxim may have issued, and may in the future issue, other reports that are inconsistent with, andreach different conclusions from, the information presented in this report. Those reports reflect the differentassumptions, views and analytical methods of the analysts who prepared them and Maxim is under noobligation to ensure that such other reports are brought to the attention of any recipient of this report.

Past performance should not be taken as an indication or guarantee of future performance, and norepresentation or warranty, express or implied, is made regarding future performance. Information, opinionsand estimates contained in this report reflect a judgment at its original date of publication by Maxim and aresubject to change without notice. The price, value of and income from any of the securities mentioned in

this report can fall as well as rise. The value of securities is subject to exchange rate fluctuation that mayhave a positive or adverse effect on the price or income of such securities. Investors in securities such as

ADRs, the values of which are influenced by currency volatility, effectively assume this risk. Securitiesrecommended, offered or sold by Maxim: (1) are not insured by the Federal Deposit Insurance Company;(2) are not deposits or other obligations of any insured depository institution; and 3) are subject toinvestment risks, including the possible loss of principal invested. Indeed, in the case of some investments,the potential losses may exceed the amount of initial investment and, in such circumstances, you may berequired to pay more money to support these losses.

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stem 2 13 2013

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