PACIFIC BIOSCIENCES OF CALIFORNIA, INC. 10-K

ITEM 1. BUSINESS Overview We develop solutions that allow scientists to fundamentally transform how data from living systems are acquired, processed, and interpreted. Our products provide the most accurate and complete views of the genetic code of all living things, empowering scientists to improve the human condition – from curing diseases, to feeding a hungry world, to conserving our planet’s ecosystems. Based on our novel Single Molecule, Real-Time (SMRT®) sequencing technology, our products enable: de novo genome assembly to finish genomes in order to more fully identify, annotate and decipher genomic structures; full-length transcript analysis to improve annotations in reference genomes, characterize alternatively spliced isoforms in important gene families, and find novel genes; targeted sequencing to more comprehensively characterize genetic variations; and real-time kinetic information for epigenome characterization. Our technology provides highly accurate, long reads, otherwise referred to as HiFi reads, with uniform coverage and the ability to simultaneously detect epigenetic changes. PacBio® sequencing systems, including associated consumables and software, provide a simple and fast end-to-end workflow for SMRT sequencing. Our current products include our Sequel II and Sequel IIe instruments, which when used together with our SMRT Cell 8M, are capable of sequencing up to approximately eight million DNA molecules simultaneously, and our previous generation Sequel instrument, which when used together with our SMRT Cell 1M, are capable of sequencing up to approximately one million DNA molecules simultaneously. Our customers and our scientific collaborators have published over 8000 peer-reviewed articles in journals including Nature, Science, Cell, PNAS and The New England Journal of Medicine highlighting the power and applications of SMRT sequencing in projects such as finishing genomes, structural variation discovery, isoform transcriptome characterization, rare mutation discovery and the identification of chemical modifications of DNA related to virulence and pathogenicity. Our research and development efforts are focused on developing new products and further improving our existing products including continuing chemistry and sample preparation improvements to increase throughput and expand our supported applications. Pacific Biosciences of California, Inc., formerly Nanofluidics, Inc., was incorporated in the State of Delaware in 2000. Our executive offices are located at 1305 O’Brien Drive, Menlo Park, California 94025, and our telephone number is (650) 521-8000. The Underlying Science Genetic inheritance in living systems is conveyed through a naturally occurring information storage system known as deoxyribonucleic acid, or DNA. DNA stores information in linear chains of the chemical bases adenine, cytosine, guanine and thymine, represented by the symbols A, C, G and T respectively. In humans, the human genome is comprised of approximately three billion DNA base-pairs, which, are divided into 23 chromosomes ranging in size from 50 million to 250 million bases. Within these chromosomes are approximately 23,000 smaller regions, called genes, which contain the blueprints for protein production. The proteins synthesized from these blueprints essentially underlie the operation of all biological systems. The first few whole-genome sequencing studies of disease have shown that rare mutations play a critical role in human disease, which has contributed to the burgeoning field of genomics. Since then, recent discoveries have highlighted additional complexities in the building blocks of DNA and ribonucleic acid, or RNA, including the presence of modified bases, the discovery of new modified bases, and the processing of RNA, molecules after such molecules are transcribed from the genome, thereby affecting the synthesis of proteins. Recent advances in our understanding of biological complexity have highlighted the need for advanced tools, such as our Sequel® System, Sequel II System, and Sequel IIe System, to study DNA, RNA, and proteins. Incremental technological advances in nucleic acid sequencing have provided novel insights into the structure and function of the genome. With our technology, we hope to help scientists to one day fully characterize genomes in both humans and other living organisms. Evolution of Sequencing In order to understand the limitations of current nucleic acid sequencing technologies, it is important to understand the sequencing process. This process consists of three phases: sample preparation, physical sequencing, and analysis. In the sample preparation phase, the target genome is broken into multiple small fragments and, depending on the amount of sample DNA available, these fragments may be copied multiple times through a process known as amplification, using a variety of molecular methods. In the physical sequencing phase, the individual bases in each fragment are identified in order, creating individual reads. The number of individual bases identified contiguously is defined as read length. In the analysis phase, bioinformatics software is used to align overlapping reads, which allows the original genome to be assembled into contiguous sequence. The longer the read length, the easier it is to accurately assemble the genome. Sanger Sequencing The first automated sequencing methodology, often referred to as “Sanger sequencing,” was developed by Frederick Sanger in 1977. With this technology, during sample preparation, scientists first make different sized fragments of DNA each starting from the same location. Each fragment ends with a particular base that is labeled with one of four fluorescent dyes corresponding to that particular 1 base. Then all of the fragments are distributed in order of their length by driving them through a gel. Information regarding the last base is used to determine the original sequence. Under standard conditions, this method results in a read length that is approximately 700 bases on average, but may be extended to 1,000 bases. These are relatively long read lengths compared with many next-generation sequencing methods. However, Sanger sequencing is limited by the small amounts of data that can be processed per unit of time, referred to as throughput. Short-read Sequencing Several commercial DNA sequencing tools emerged in 2005 in response to the low throughput of Sanger sequencing. Now commonly referred to as “short-read sequencing”, these methods achieve much higher throughput by sequencing a large number of DNA molecules in parallel, but with the tradeoff of shorter read lengths. In most short-read sequencing methodologies, tens of thousands of identical strands are anchored to a given location to be read in a process consisting of successive flushing and scanning operations. The “flush and scan” sequencing process involves sequentially flushing in reagents, such as labeled nucleotides, incorporating nucleotides into the DNA strands, stopping the incorporation reaction, washing out the excess reagent, scanning to identify the incorporated base and finally treating that base so that the strand is ready for the next “flush and scan” cycle. This cycle is repeated until the reaction is no longer viable. Due to the large number of flushing, scanning and washing cycles required, the time to result for short-read sequencing methods can be longer, sometimes taking days. This repetitive process also limits the average read length produced by most of these systems under standard sequencing conditions to approximately 35 to 600 bases. The short-read sequencing technologies require a large number of DNA molecules during the sequencing process. To generate enough DNA molecules, a copying method called PCR amplification is required during the sample preparation phase. This amplification process can introduce errors known as amplification bias. The effect of this bias is that resulting copies are not uniformly representative of the original template DNA. In cases where the original template DNA contains regions of relatively high G-C content or relatively high A-T content, the PCR amplification process tends to under-represent these regions. As a result, these regions, which may contain entire genes, can be completely missed. In summary, while short-read sequencing methods can offer very high throughput and low cost per identified base, their disadvantages can include limited read length, variation in sequence coverage with regard to representation bias and accuracy, dependence on amplification, long time to result, and/or a need for many samples to justify machine operation . The PacBio Solution — Single Molecule, Real-Time Technology We have developed our SMRT technology, which enables single molecule, real-time detection of nucleic acid sequences, to address many of the limitations of previous sequencing technologies. By providing long read lengths, elimination of the dependence on amplification during sample preparation (which can result in amplification bias), very high consensus accuracy, and the ability to detect DNA base modifications, PacBio’s systems can provide more comprehensive and higher quality information of DNA and RNA sequence as well as epigenetic regulation and DNA damage. Pacific Biosciences’ SMRT Technology SMRT technology enables the observation of DNA synthesis as it occurs in real time by harnessing the natural process of DNA replication, which in nature is a highly efficient and accurate process actuated by DNA polymerases, enzymes measuring approximately 15 nanometers (nm) in diameter. DNA polymerases attach themselves to a strand of DNA to be replicated, examines the individual base at the point it is attached, and then determines which of four building blocks, or nucleotides, is required to complement that individual base. After determining which nucleotide is required, the polymerases incorporate that nucleotide into the growing strand being produced. After incorporation, the enzyme advances to the next base to be replicated and the process is repeated. To overcome the challenges inherent in real-time observation of the natural activity of the DNA polymerase, we offer and support four key innovations:  The SMRT Cell  Phospholinked nucleotides  The Sequel, Sequel II, or Sequel IIe instruments  Circular Consensus Sequencing or “HiFi Reads” The SMRT Cell One of the fundamental challenges with observing a single DNA polymerase molecule working in real time is the ability to detect the incorporation of a single nucleotide, taken from a large pool of potential nucleotides, during DNA synthesis. To resolve this problem, we utilize our nanoscale innovation, the zero-mode waveguide, or ZMW. The ZMWs in our SMRT Cells consist of holes in an opaque layer, measuring only tens of nanometers in diameter forming nanoscale wells. The small size of the ZMW causes the intensity of visible laser light, which has a wavelength of approximately 600nm, to decay exponentially in the ZMW. Therefore, laser light shined into the ZMW from below is blocked from reaching the sequencing 2 solution above the ZMW, providing selective illumination of only the bottom portion of the nanoscale well. DNA polymerases are anchored to the bottom of the glass surface of the nanoscale wells using proprietary techniques. Nucleotides, each type labeled with a different colored fluorophore, are then flooded above an array of ZMWs at the required concentration. When the labeled nucleotides diffuse into the bottom portion of the nanoscale wells, which contain the anchored DNA polymerases, their fluorescence can be monitored. When the correct nucleotide is detected by the polymerase, it is incorporated into the growing DNA strand in a process that takes milliseconds in contrast to simple diffusion which takes microseconds. This difference in time results in higher signal intensity for incorporated versus unincorporated nucleotides, which creates a high signal-to-noise ratio. Thus, the ZMW provides the ability to detect a single incorporation event against the background of fluorescently labeled nucleotides at biologically relevant concentrations. Our DNA sequencing is performed on proprietary SMRT Cells, each having an array of ZMWs. The SMRT Cells for the Sequel System each contain approximately one million ZMWs and the SMRT Cells for the Sequel II or IIe System contain approximately eight million ZMWs. Each ZMW is capable of containing a DNA polymerase molecule bound to a single DNA template. Currently, our immobilization process randomly distributes polymerases into ZMWs across the SMRT Cell, typically resulting in approximately one-third to two-thirds of the ZMWs having a single template. Phospholinked Nucleotides Our proprietary phospholinked nucleotides have a fluorescent dye attached to the phosphate chain of the nucleotide rather than to the base. As a natural step in the synthesis process, the phosphate chain is cleaved when the nucleotide is incorporated into the DNA strand. Thus, upon incorporation of a phospholinked nucleotide, the DNA polymerase naturally frees the dye molecule from the nucleotide when it cleaves the phosphate chain. Upon cleaving, the label quickly diffuses away, leaving a natural piece of DNA without evidence of labeling. The Sequel, Sequel II and Sequel IIe Instruments The Sequel, Sequel II and Sequel IIe instruments conduct, monitor, and analyze single molecule biochemical reactions in real time. The instruments use extremely sensitive imaging systems to collect the light pulses emitted by fluorescent reagents allowing the observation of biological processes. Computer algorithms are used to translate the information that is captured by the optics system. Using the recorded information, light pulses are converted into either an A, C, G or T base call with associated quality metrics. Once sequencing is started, the real-time data is delivered to the system’s primary analysis pipeline, which outputs base identity and quality values, or QVs. HiFi Reads We enable our customers to achieve very high accuracy on long, individual DNA fragments using our Circular Consensus Sequencing method, whereby the same DNA fragment is repetitively read to overcome random errors that can occur on each pass. This proprietary method of producing what we call “HiFi reads” differentiates PacBio sequencing from other long-read technologies. Users who generate HiFi reads with PacBio systems can sequence single molecule DNA fragments up to 25,000 base pairs in length with an average accuracy of 99.9%. SMRT Sequencing Advantages Sequencing based on our SMRT technology offers the following key benefits:  Longer read lengths SMRT technology has been demonstrated to produce read lengths that are significantly longer than those of previous sequencing technologies . With reads of tens of kilobases in length, users can assemble complete genomes and sequence full-length transcripts. Long read lengths are an important factor in enabling a comprehensive view of the genome, as they can reveal multiple types of genetic variation such as structural variants.  High accuracy Users of SMRT technology can achieve very high accuracy due to the attributes of SMRT sequencing, including accurate mapping of long reads, lack of reliance on amplification during sample preparation (which can result in amplification bias), and lower systematic bias. In addition, using PacBio’s proprietary Circular Consensus Sequencing method, our customers can generate HiFi reads on single molecule DNA fragments up to 25,000 base pairs in length with an average accuracy of 99.9%. This accuracy provides the information users need to confidently call and detect all types of variants.  More uniformity and less systematic error The sample preparation step for SMRT sequencing is compatible with but does not require amplification; when amplification is not used during sample preparation, the reads are not subject to amplification bias. Importantly, this allows for uniform identification of all bases present in a DNA sample and uniform sequence coverage. As a result, SMRT sequencing can detect and identify regions and entire genes that may be missed by short-read sequencing technologies. In addition, SMRT sequencing can achieve high accuracy when sequencing through complex and highly repetitive regions, whereas other sequencing methods are unable to resolve such regions, which can often result in poor accuracy.  Ability to observe and capture kinetic information 3 The ability to observe the activity of a DNA polymerase in real time enables the PacBio RS II, Sequel, and Sequel II Systems to collect, measure and assess the dynamics and timing of nucleotides being added to a growing DNA strand, referred to as kinetics. It is well established in the scientific community that chemical modification of DNA such as the addition of a methyl group, known as methylation, can alter the biological activity of the affected nucleotide. The Sequel and Sequel II Systems detect changes in kinetics automatically by capturing and recording changes in the duration of, and time period between, each of the fluorescent pulses during a typical sequencing analysis. Integrated software can then translate these kinetic signatures into uniquely characterized modified bases such as 6-mA, 4-mC and 5-mC. Other sequencing systems, which rely on a sample preparation amplification step or are limited by signal resolution, are unable to directly measure this type of kinetic data.  Flexibility Our sequencing systems have the ability to scale the throughput and cost of sequencing across a range of small to large projects. They can be used with a variety of sample types and can output a range of DNA lengths. Our Products We entered the market with our first commercial product, the PacBio RS System, during the second quarter of 2011 and launched the higher performance PacBio RS II System during the second quarter of 2013. In September 2015, we announced the Sequel System, which is based on the same underlying SMRT technology as the PacBio RS II System, but the Sequel System can achieve up to approximately seven times the throughput using the SMRT Cell 1M chip. In April 2019, we introduced the Sequel II System, which can achieve approximately eight times the throughput of the Sequel System, utilizing our new SMRT Cell 8M chip. Coupled with chemistry and software improvements for the Sequel II System released during the fourth quarter of 2019, customers commonly generate up to 15 times as much throughput on Sequel II Systems, compared with the throughput generated on Sequel systems. Our sequencing systems provide access to a wide range of applications and are designed for expandable improvements to performance capability and new application capabilities through chemistry and software enhancements without necessitating changes to instrument hardware. In October 2020, we launched the Sequel IIe System, which has increased computational capacity, and is designed to enable customers to generate PacBio HiFi reads more efficiently. PacBio’s Systems The PacBio RS II, Sequel, Sequel II and Sequel IIe Systems conduct, monitor, and analyze biochemical sequencing reactions. PacBio systems are integrated units that include high performance optics, automated liquid handling, a touchscreen control interface and computational hardware and software. Each instrument’s high performance optics monitor the ZMWs in a SMRT Cell in real time. The automated liquid handling system performs reagent mixing and prepares SMRT Cells. Each instrument’s touchscreen control interface is the user’s primary control center to design and monitor experiments. The computational hardware and software in each instrument is responsible for processing the sequencing data produced by the SMRT Cells. The PacBio Systems have been designed to allow for performance improvements to be easily integrated into the systems. We no longer manufacture the PacBio RS II instrument. Consumables Customers must purchase proprietary consumable products to run their PacBio Systems. Our consumable products include our proprietary SMRT Cells and reagent kits. One SMRT Cell is consumed per sequencing reaction, and scientists can choose the number of SMRT Cells they use per experiment. SMRT Cells are individually and hermetically sealed, then packaged together into a streamlined four-pack tray. We offer several reagent kits, each designed to address a specific step in the workflow. A template preparation kit is used to convert DNA into SMRTbell ® double-stranded DNA library formats and includes typical molecular biology reagents, such as ligase, buffers and exonucleases. Our binding kits include our modified DNA polymerase, and are used to bind SMRTbell libraries to the polymerase in preparation for sequencing. Our sequencing kits contain reagents required for on-instrument, real-time sequencing, including the phospholinked nucleotides. Product Enhancements Since the introduction of our products in 2011, we have continued to significantly enhance the performance of PacBio sequencing systems through a combination of sample preparation protocol enhancements, software releases, and new sequencing reagent chemistries. By providing an increasing number of longer reads per instrument run, the new chemistries have enabled users to assemble more genomes to a high quality. We have continually improved our software to expand the number of supported applications such as large genome assembly, structural variant analysis, variant detection, sequencing of transcript isoforms produced from genes, metagenomics, and phasing of haplotypes in large amplicons. Market for Our Products Our customers use our products for sequencing genomes and transcriptomes across a wide range of organisms. Initially, customers in research, government and commercial markets used PacBio Systems to generate more complete assemblies of small and medium size genomes, such as bacteria and fungi, and for sequencing targeted regions of larger genomes such as humans and plants. As throughput and read lengths have increased, the complexity and size of genomes being resolved with SMRT sequencing have grown. Scientists now use SMRT sequencing to generate genome assemblies of numerous plant, human and other animal genes, including characterization of 4 transcriptomes through full-length isoform sequencing, and phase complex genomic regions like full-length human leukocyte antigen, or HLA, genes. With continued performance improvements of our products, we anticipate increasing both mindshare and market share within research, government and commercial markets such as human biomedical research, plant and animal sciences, microbiology & infectious disease, and immunogenomics. There are a number of emerging markets for sequencing-based tests, including molecular diagnostics, which represent significant potential opportunities for our products. The development of these markets is subject to variability driven by ongoing changes in the competitive landscape, evolving regulatory requirements, government funding of research and development activities, and macroeconomic conditions. Introductions of new technologies and products, while positive to the overall development of these markets, may result in greater competition for the limited financial resources available. As we continue to expand into these emerging markets, the development of our business will be impacted by the variability of the factors affecting the growth of these markets. Marketing, Sales, Service and Support We market our products through a direct sales force in North America and parts of Europe and through distribution partners in Asia, certain other parts of Europe, the Middle East and Africa, and Latin America. Our sales strategy involves the use of a combination of sales personnel and field application scientists. The role of our sales personnel is to educate customers on the advantages of SMRT technology and the applications that our technology makes possible. The role of our field application scientists is to provide on-site training and scientific technical support to prospective and existing customers and to encourage customer utilization of our SMRT sequencing technology. Our field application scientists are technical experts, often with advanced degrees, and generally have extensive experience in academic research and core sequencing lab experience. Service for our instruments is performed by field service engineers. These field service engineers are trained by experienced personnel to test, trouble-shoot, and service instruments installed at customer sites. In addition, we maintain an applications lab team in Menlo Park, California composed of scientific experts who can transfer knowledge from the research and development team to the field application scientists. The applications lab team also runs foundational scientific collaborations and proof of principle studies, which help demonstrate the value of our product offering to prospective customers. Our business is subject to seasonal trends. See “Risk Factors— Seasonality may cause fluctuations in our revenue and results of operations ” for additional information. Customers Our customers include research institutions, commercial laboratories, genome centers, clinical, government and academic institutions, genomics service providers, pharmaceutical companies and agricultural companies. In general, our customers will isolate, prepare and analyze genetic samples using PacBio sequencing systems in their own research labs, or they will send their genetic samples to third party service providers who in turn will sequence the samples with PacBio systems and provide the sequence data back to the customer for further analysis. For example, customers in academic research institutions may have bacteria, animal, or human DNA samples isolated from various sources while agricultural biology companies may have DNA samples isolated from different strains of rice, corn or other crops. For the years ended December 31, 2020, 2019 and 2018, one customer, Gene Company Limited, our primary distributor for China and Hong Kong, accounted for approximately 14%, 17% and 26% of our total revenue, respectively. We believe that the majority of our current customers are early adopters of sequencing technology. By focusing our efforts on high-value applications, and developing whole product solutions around these applications, we seek to drive the adoption of our products across a broader customer base and into numerous large-scale projects. In general, the broader adoption of new technologies by mainstream customers can take a number of years. We currently sell our products to a number of customers outside the United States, including customers in other areas of North America, Europe, Middle East, Africa, Asia Pacific and South America. Revenue from customers outside the United States totaled $43.1 million, or 55% of our total revenue during fiscal 2020, compared to $48.1 million, or 53% of our total revenue during fiscal 2019 and $44.7 million, or 57% of our total revenue during fiscal 2018. Backlog As of December 31, 2020, our instrument backlog was approximately $10.1 million, compared to $6.6 million as of December 31, 2019. We define backlog as purchase orders or signed contracts from our customers which we believe are firm and for which we have not yet recognized revenue. We expect to convert this backlog to revenue during 2021; however, our ability to do so is subject to customers who may seek to cancel or delay their orders even if we are prepared to fulfill them. Manufacturing Our principal manufacturing activities are performed at our headquarters in Menlo Park, California. We currently perform some of the manufacturing and all of the final integration of our instruments in-house, while outsourcing most sub-assemblies to third-party manufacturers. With respect to the manufacture of SMRT Cells, we subcontract wafer fabrication and processing to semiconductor processing facilities, but conduct critical surface treatment processes internally. We also subcontract the packaging of SMRT Cells, and bring them back in-house for final testing. In addition, we manufacture critical reagents in-house, including our phospholinked nucleotides and our DNA polymerase. 5 We purchase both custom and off-the-shelf components from a large number of suppliers and subject them to significant quality specifications. We periodically conduct quality audits of most critical suppliers and have established a supplier certification program. Some of the components required in our products are currently either sole sourced or single sourced. If the capabilities of our suppliers and component manufacturers are limited or stopped, due to disasters, quality, regulatory, or other reasons, it could negatively impact our ability to manufacture our products. Research and Development Our SMRT technology requires the blending of a number of unique disciplines, namely nanofabrication, physics, photonics, optics, molecular biology, engineering, signal processing, high performance computing, and bioinformatics. Our research and development team is a blend of these disciplines creating a single, cross-functional /operating unit. We have also established productive working relationships with technology industry leaders, as well as leading academic centers, to augment and complement our internal research and development efforts. We plan to continue our investment in research and development to enhance the performance and expand the application of our current products, and introduce additional products based on our SMRT technology. Our goals include further improvements in sequencing read length and mappable data per SMRT Cell, chemistry and software enhancements, and enhancements in sample preparation and bioinformatics tools that take advantage of the capabilities of our products. In addition, our engineering teams will continue their focus on increasing instrument component and system reliability, reducing costs, and implementing additional system flexibility and versatility through the enhancement of existing products and development of new products. Intellectual Property Developing and maintaining a strong intellectual property position is an important element of our business. We have sought, and will continue to seek, patent protection for our SMRT technology, for improvements to our SMRT technology, as well as for any of our other technologies where we believe such protection will be advantageous. Our current patent portfolio, including patents exclusively licensed to us, is directed to various technologies, including SMRT nucleic acid sequencing and other methods for analyzing biological samples, ZMW arrays, surface treatments, phospholinked nucleotides and other reagents for use in nucleic acid sequencing, optical components and systems, processes for identifying nucleotides within nucleic acid sequences and processes for analysis and comparison of nucleic acid sequence data. Some of the patents and applications that we own, as well as some of the patents and applications that we have licensed from other parties, are subject to U.S. government march-in rights, whereby the U.S. government may disregard our exclusive patent rights on its own behalf or on behalf of third parties by imposing licenses in certain circumstances, such as if we fail to achieve practical application of the U.S. government funded technology, because action is necessary to alleviate health or safety needs, to meet requirements of federal regulations, or to give preference to U.S. industry. In addition, U.S. government funded inventions must be reported to the government and U.S. government funding must be disclosed in any resulting patent applications. As of December 31, 2020, we own or hold exclusive licenses to 332 issued U.S. patents, 64 pending U.S. patent applications, 220 granted foreign patents and 63 pending foreign patent applications, including foreign counterparts of U.S. patent and patent applications. The full term of the issued U.S. patents will expire between 2021 and 2038. We also have non-exclusive patent licenses with various third parties to supplement our own large and robust patent portfolio. Of our exclusively licensed patent applications, 6 issued U.S. patents are licensed to us by the Cornell Research Foundation, which manages technology transfers on behalf of Cornell University. Other Sequencing Solutions There are a significant number of companies offering nucleic acid sequencing equipment or consumables. These include, but are not limited to, Illumina, Inc. (“Illumina”), BGI Genomics, Thermo Fisher Scientific Inc. (“Thermo”), Oxford Nanopore Technologies Ltd. (“ONT Ltd.”) , Roche, and Qiagen N.V. (“Qiagen”). Many of these companies currently have greater financial, technical, research and/or other resources than we do. They also have larger and more established manufacturing capabilities and marketing, sales and support functions. We expect the competition to intensify within the overall nucleic acid sequencing market as there are also several companies developing new sequencing technologies, products and/or services. Increased competition may result in pricing pressures, which could harm our sales, profitability or share of supply. In order for us to maintain and increase our sales, we will need to demonstrate that our products deliver superior performance and value as a result of our key differentiators, including single molecule, real-time resolution, the combination of very high consensus accuracy and long read lengths with the ability to detect real-time kinetic information, fast time to result and flexibility, as well as the breadth and depth of current and future products and applications. Government Regulation Our products are not currently subject to U.S. Food and Drug Administration (FDA) clearance or approval since they are not intended or labeled for use in the diagnosis, prevention, or treatment of any disease, and are labeled and promoted as “For Research Use Only” (RUO) products. However, in the future, certain of our products or related applications , such as those that may be developed for clinical uses, could be subject to FDA regulation, or the FDA’s regulatory jurisdiction could be expanded to include our products. As we expand product lines to potentially address clinical applications including the diagnosis of disease, regulation by governmental authorities in the United States and other countries may become an increasingly significant factor in development, testing, 6 production, and marketing. In the future, products that we develop in the molecular diagnostic markets, depending on their intended use, may be regulated as medical devices or in vitro diagnostic products (IVDs) by the FDA and comparable agencies in other countries. Obtaining the requisite regulatory approvals can be expensive and may involve considerable delay. Some countries have regulatory review processes that are substantially longer than U.S. processes. Failure to obtain regulatory approval in a timely manner and meet all of the local requirements including language and specific safety standards in any foreign country in which we plan to market our products could prevent us from marketing products in such countries or subject us to sanctions and fines. Changes to the current regulatory framework, including the imposition of additional or new regulations, could arise at any time during the development or marketing of our products. If our products that are labeled as RUO are or could be used for the diagnosis of disease, the regulatory requirements related to marketing, selling, and supporting such products could be uncertain. This is true even if such use by our customers occurs without our consent. If the FDA or other regulatory authorities assert that any of our RUO products are subject to regulatory clearance or approval, our business, financial condition , or results of operations could be adversely affected. Certain of our products are currently available through laboratories that are certified under the Clinical Laboratory Improvements Amendments (CLIA) of 1988. These products are commonly called “laboratory developed tests” (LDTs). For a number of years, the FDA has exercised its regulatory enforcement discretion not to regulate LDTs as medical devices if created and used within a single laboratory. However, the FDA is continually reexamining this regulatory approach and changes to the agency’s handling of LDTs could impact our business in ways that we cannot predict at this time. We cannot predict the nature or extent of the FDA's final guidance or regulation of LDTs, in general, or with respect to our or our customers’ LDTs, in particular. Certification of CLIA laboratories includes standards in the areas of personnel qualifications, administration, and participation in proficiency testing, patient test management, and quality control procedures. CLIA also mandates that, for high complexity labs such as ours, to operate as a lab, we must have an accreditation by an organization recognized by CLIA such as the College of American Pathologists (CAP), which we have obtained and must maintain . If we were to lose our CLIA certification or CAP accreditation, our business, financial condition, or results of operations could be adversely affected. In addition, state laboratory licensing and inspection requirements may also apply to our products, which, in some cases, are more stringent than CLIA requirements. We are committed to the protection of our employees and the environment. Our operations require the use of hazardous materials that subject us to various federal, state, and local environmental and safety laws and regulations. We believe that we are in material compliance with current applicable laws and regulations. However, we could be held liable for damages and fines should contamination of the environment or individual exposures to hazardous substances occur. In addition, we cannot predict how changes in these laws and regulations, or the development of new laws and regulations, will affect our business operations or the cost of compliance. Additionally, we must comply with complex foreign and U.S. laws and regulations, such as the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act, and other local laws prohibiting corrupt payments to governmental officials, anti-competition regulations and sanctions imposed by the U.S. Office of Foreign Assets Control and other similar laws and regulations. Violations of these laws and regulations could result in fines and penalties, criminal sanctions, restrictions on our business conduct and on our ability to offer our products in one or more countries, and could also materially affect our brand, our ability to attract and retain employees, our international operations, our business and our operating results. Although we have implemented policies and procedures designed to ensure compliance with these laws and regulations, there can be no assurance that our employees, contractors, or agents will not violate our policies. As we continue to expand our business into multiple international markets, our success will depend, in large part, on our ability to anticipate and effectively manage these and other risks associated with our international operations. Any of these risks could harm our international operations and negatively impact our sales, adversely affecting our business, results of operations, financial condition and growth prospects. Human Capital As of December 31, 2020, we had 412 full-time employees. Of these employees, 158 were in research and development, 94 were in operations and service, 101 were in marketing, sales and customer support, and 59 were in general and administration. With the exception of our field-based sales, marketing and service teams, the majority of our employees are based out of our headquarters in Menlo Park, California. None of our employees are represented by labor unions or are covered by a collective bargaining agreement with respect to their employment. We have not experienced any work stoppages, and we consider our relationship with our employees to be good. Talent Acquisition and Retention We recognize that our employees largely contribute to our success. To this end, we support business growth by seeking to attract and retain best-in-class talent. Our talent acquisition team uses internal and external resources to recruit highly skilled candidates globally. In 2020, we have been successful in hiring key positions throughout the organization that will help advance the company’s growth. This includes an appointment of a new Chief Executive Officer, Chief Financial Officer, Chief Operating Officer, and Chief Commercial Officer. We continue to attract and retain superior talent as measured by our minimal turnover rate and high employee service tenure. Total Rewards Our total rewards philosophy has been to create investment in our workforce by offering competitive compensation and benefits package. We provide employees with compensation packages that include base salary, annual incentive bonuses, and long-term equity 7 awards. We also offer comprehensive employee benefits, which vary by country and region, such as life, disability, and health insurance, health savings and flexible spending accounts, paid time off, paid parental leave, Employee Stock Purchase Program, and a 401(k) plan. It is our expressed intent to be an employer of choice in our industry by providing market-competitive compensation and benefits package. Health, Safety, and Wellness The health, safety, and wellness of our employees is a priority in which we have always invested and will continue to do so. We provide our employees and their families with access to a variety of innovative, flexible, and convenient health and wellness programs. Program benefits are intended to provide protection and security, so employees can have peace of mind concerning events that may require time away from work or that may impact their financial well-being. These programs are highlighted regularly in our monthly human resources newsletters. These investments and the prioritization of employee health, safety, and wellness took on particular significance in 2020 in light of COVID-19. To protect and support our essential team members, we have implemented health and safety measures that included maximizing personal workspaces, changing shift schedules, providing personal protective equipment (PPE), instituting mandatory screening before accessing buildings and performing asymptomatic COVID-19 testing regularly for employees who work on site. We have also supported access to testing by holding on-site testing clinics available to employees and their family members. In response to local stay-at-home orders and in alignment with CDC recommendations, we have limited our manufacturing and commercial operations based in Menlo Park, California. To aid in containing the spread of COVID-19, we have implemented remote-work options and are limiting employee travel. We are monitoring this rapidly evolving situation and will continue to seek programs to educate and assist employees whenever possible. Diversity, Equity, and Inclusion We believe a diverse workforce is critical to our success. Our mission is to value differences in races, ethnicities, religions, nationalities, genders, ages, sexual orientations, as well as education, skill sets and experience. In 2020, we implemented a global training program on diversity awareness to help employees understand, recognize, respond, and prevent bias at all levels of our organization. This is the first of our multi-pronged approach in building an inclusive culture. We are focused on inclusive hiring practices, fair and equitable treatment, organizational flexibility, and training and resources. Training and Development We believe in encouraging employees in becoming lifelong learners by providing ongoing learning and leadership training opportunities. We provide a scaled learning platform of on-demand and virtual classroom learning focused on personal and professional development. While we strive to provide real-time recognition of employee performance, we have a formal annual review process not only to determine pay and equity adjustments tied to individual contributions, but to identify areas where training and development may be needed. Available Information Our website is located at www.pacb.com. The information posted on or that can be accessed through our website is not incorporated by reference into this Annual Report on Form 10-K , and the inclusion of our website address is an inactive textual reference only . Our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 10-K and amendments to reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934, as amended, are available free of charge through the “Investors” section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the SEC. The SEC also maintains a website that contains our SEC filings. The address of the site is www.sec.gov. Additionally, we use our website as a channel of distribution for important company information. Important information, including press releases, analyst presentations and financial information regarding us, as well as corporate governance information, is routinely posted and accessible on the “Investor Relations” section of the website, which is accessible by clicking on the tab labeled “About Us - Investors” on our website home page. In addition, important information is routinely posted and accessible on the blog section of our website, which is accessible through our website at www.pacb.com/blog, as well as our Twitter account (@pacbio). Information on or that can be accessed through our website or our Twitter account is not incorporated by reference into this Annual Report on Form 10-K, and the inclusion of our website address is an inactive textual reference only .