Greetings, and welcome to Inogen's Third Quarter 2021 Earnings Release Conference Call. As a reminder, this conference is being recorded. It is now my pleasure to introduce your host, Jason Somer, General Counsel.

Thank you for participating in today's call. Joining me are CEO, Nabil Shabshab; and CFO, Ali Bauerlein. Earlier today, Inogen released financial results for the third quarter of 2021. This earnings release and Inogen's corporate presentation are currently available in the Investor Relations section of the company's website. As a reminder, the information presented today will include forward-looking statements, including, without limitation, statements about our growth prospects and strategies for 2021 and beyond; expectations related to our financial results for the fourth quarter and full year 2021; our expectations with respect to supply challenges and cost inflation related to semiconductor chips, using our batteries and concentrators; our ability to create shareholder value by driving awareness of our products; expectations regarding our international and domestic sales channels; expectations related to our rental channel; expectations related to our prescriber sales organization, including the expansion of the sales team and implementation of healthcare intelligence platforms and tools through our partnership with Ashfield Healthcare; hiring expectations; expectations regarding reimbursement and regulatory changes; our expectations regarding the market for our products and the impact of the COVID-19 pandemic on our business of supplies and demand for our products in both the short term and the long term. The forward-looking statements in this call are based on information currently available to us as of today's date. These forward-looking statements are only predictions and involve risks and uncertainties that are set forth in more detail in our most recent periodic reports filed with the Securities and Exchange Commission. Actual results may vary, and we disclaim any obligation to update these forward-looking statements, except as may be required by law. We have posted historical financial statements and our investor presentations in the Investor Relations section of the company's website. Please refer to these files for more detailed information. During the call, we will also present certain financial information on a non-GAAP basis. Management believes that non-GAAP financial measures, taken in conjunction with U.S. GAAP financial measures, provide useful information for both management and investors by excluding certain noncash items and other expenses that are not indicative of Inogen's core operating results. Management uses non-GAAP measures internally to understand, manage and evaluate our business and make operating decisions. Reconciliations between U.S. GAAP and non-GAAP results are presented in tables within our earnings release. With that, I will turn the call over to Inogen's President and CEO, Nabil Shabshab.

Thanks, Jason. Good afternoon, and thank you for joining our third quarter 2021 conference call. We continue to make progress to revise and begin implementing a clinically informed approach through innovation, product development and our go-to-market strategy. Over the last several weeks, we announced an important new partnership with Ashfield to strengthen our commercial capabilities, and we appointed Dr. Stan Glezer as EVP and Chief Technology Officer, to lead our R&D and Engineering in addition to his previous responsibilities for Medical Affairs and Regulatory Affairs. At the same time, like others in the industry, we are navigating challenges posed by the supply chain disruptions that are limiting our ability to meet demand and creating an inflationary cost environment, which was partially offset by price increases across all sales channels that were effective in September 2021. In the third quarter of 2021, we saw total revenue growth of 25.3% from the third quarter of 2020, primarily driven by sustained demand, improved average selling prices and the reduced impact of the COVID-19 pandemic and related public health emergency versus the comparative period in the previous year. In addition, we believe oxygen therapy patient diagnosis rates are returning to historical levels due to the increased interaction with pulmonologists that were reduced during the COVID-19 public health emergency. Due to supply chain constraints and in an effort to optimize financial results, we intentionally focused our available capacity on supplying our direct-to-consumer sales and rental channels and our international business-to-business sales channels, which you will see reflected in those results while attempting to fulfill critical orders for our domestic business-to-business partners. We are pleased with our strong rental revenue growth and our improved direct-to-consumer sales revenue in the third quarter of 2021 compared to the third quarter of 2020. Direct-to-consumer sales increased due to relatively strong demand, improved sales representative productivity and average revenue per order versus the third quarter of 2020 when these metrics experienced a decline from prior periods associated with the COVID-19 pandemic. We believe that the improved metrics we observed in direct-to-consumer sales and rentals compared to the same period last year were primarily due to higher vaccination rates, resulting in an increased desire for mobility, coinciding with the relaxation of closure orders related to the public health emergency as well as improved consumer confidence. While in the short term, our outlook is impacted by certain supply chain constraints, we are proud of the actions we have taken to make structural improvements in our business, including our investments in our subscriber organization and other areas, productivity improvement in our direct-to-consumer channel and increases in our average selling prices. In the last two quarters, demand for our products increased versus the comparative period in 2020, which led to improved revenue growth rates as we were also able to enhance gross margin and adjusted EBITDA returns. We believe, over the long term, our strategy to optimize the commercial infrastructure and drive productivity while investing in clinical research and research and development will assist us in working towards our plan to return to sustainable double-digit revenue growth and profitability. Before we go through the third quarter financial results in more detail, I would like to provide an update on the impact of the supply chain disruptions primarily associated with the semiconductor chips used in our portable oxygen concentrators and batteries. Since our second quarter 2021 earnings call, we have continued to see this impact as shortages persist and cost trials. While we have been diligently working to mitigate the impact of these shortages, it has and likely will continue to have a negative effect on our ability to fulfill demand in the upcoming quarters as these chips are necessary for all of our POCs in both batteries and printed circuit boards. We are continuing to collaborate with our OEM partners and leverage, to the extent possible, open market avenues to procure the necessary semiconductor chips. The cost of these chips from third parties has trended significantly higher in the third quarter of 2021 than the cost seen in the second quarter of 2021 due to the high demand for these components, and the costs are expected to continue to increase if supply becomes available during this shortage. As a result, we noted inflated costs related to the acquisition of semiconductor chips beginning to negatively impact our cost of goods sold in the third quarter of 2021, and we expect this to have an increased impact on our material costs in the fourth quarter of 2021 and continuing into 2022 until supply and demand reach a closer equilibrium. Even though we incurred significant costs in the third quarter of 2021 associated with these components, most of these costs increased our prepaid expenses and inventory given that these components were not yet included in the finished products sold during the period. We still believe, based on our assessment and industry feedback, that these supply shortages and increased costs may likely persist through the second quarter of 2022. Furthermore, the increased cost of goods sold per unit in the first and second quarter of 2022 is expected to exceed the increase expected in the fourth quarter of 2021 based on the information currently available. This is a dynamic situation where component cost increases have exceeded our initial projections and open market availability of components are not guaranteed, which may lead to additional limitations on production if components are not available at agreeable prices. We expect demand to exceed supply for our products in the interim but have taken the necessary measures to partially offset these rising costs by implementing price increases across products as of September 1, 2021. In addition to the semiconductor chip constraint, we are still experiencing supply chain challenges for other components used in our products, albeit to a lesser extent. Thus far, we have been able to navigate through these challenges with increased inventory levels and enhanced supplier management and communications. With that, I will now provide details for our third quarter 2021 revenue by channel. For the third quarter of 2021, we generated total revenue of $93.1 million compared to $74.3 million in the third quarter of 2020. As I referenced earlier, this represents a robust increase of 25.3% over the comparative period in 2020. Domestic business-to-business sales in the third quarter of 2021 decreased by 1.1% to $22.8 million compared to $23.1 million in the third quarter of 2020, primarily due to supply chain constraints with limited product availability in this channel. International business-to-business sales in the third quarter of 2021 increased by 49.7% or 46.9% on a constant currency basis to $21.8 million compared to $14.6 million in the third quarter of 2020. The increase was primarily driven by increased ambulation of patients in Europe and improved operational capacity of certain European respiratory assessment centers compared to the normal level as improving COVID-19 vaccination rates enabled patients to return to more normalized activity levels and seek treatments. Domestic direct-to-consumer sales increased by 24.6% to $36.3 million in the third quarter of 2021 from $29.2 million in the third quarter of 2020. The increase was primarily driven by increased demand for POCs due to higher COVID-19 vaccination rates and the relaxation of closure orders related to the COVID-19 public health emergency, leading to increased ambulation as well as improved consumer confidence compared to the third quarter of 2020. Inside sales representative productivity was strong in the quarter despite a lower average inside sales representative headcount, which was down approximately 8% from the comparative period from the previous year as attrition outpaced hiring. In addition, sales in this channel were impacted by lower battery accessory sales during the period due to supply chain constraints. We continue to look to add new inside sales representatives while maintaining our hiring standards and being mindful of the supply chain constraints we face. We expect minimal net new inside sales representative hires in the near term due to the size and quality of the candidate pool and expected attrition. However, as part of our growth plans, we are increasing our focus on improving the productivity of our existing inside sales force. Despite the lower headcount, we are pleased with the performance of our inside sales team in the third quarter as we saw improved direct-to-consumer sales productivity and increased average revenue per order compared to the third quarter of 2020, including the price increase effective September 1, 2021. Rental revenue in the third quarter of 2021 increased by 61.3% to $12.1 million from $7.5 million in the same period in 2020, primarily due to increased patients on service, higher billable patients as a percentage of total patients on service, and higher Medicare reimbursement rates. As of September 30, 2021, we had approximately 40,400 patients on service, which was up 8.9% sequentially compared to June 30, 2021, and up 36.9% compared to September 30, 2020. The increase in patients on service was primarily driven by greater utilization of patient leads for rental opportunities and physician-facing initiatives to increase prescriber awareness by our sales force as well as the relaxed Medicare criteria for oxygen therapy reimbursement due to the COVID-19 public health emergency. Despite the supply chain challenges, we remain cautiously optimistic that our performance in both direct-to-consumer sales and rental channels is a positive indicator for improving market conditions of our products overall. I also want to provide an update on the recently announced agreement with Ashfield, our contract sales organization, to enhance our go-to-market capabilities in the U.S. The plan to add approximately 20 dedicated sales representatives to our prescriber sales organization is now underway. Additionally, Ashfield will provide access to its best-in-class data-driven sales management disciplines, proprietary prescriber insights and analytics to support our growth strategy and drive performance in the clinician sales channel. We are still in the early stages of ramping up this collaboration, but we expect to have these sales representatives hired and trained during the first half of 2022, including the rollout of new and enhanced processes, tools and sales support teams across our entire prescriber sales organization to help drive productivity and efficiency. We look forward to providing more updates around our clinical strategy and our investments as we move forward. Now turning to the latest from CMS. On September 27, 2021, CMS announced a final ruling on the home use of Oxygen National Coverage Determination and removed the national coverage determination for home oxygen use to treat cluster headaches, largely in line with the proposed rule issued in July 2021. We support these changes and believe that expanded coverage for patients who would benefit from oxygen therapy, reduced administrative burdens and greater physician decision-making authority on proper patient care can improve access for patients in need of oxygen therapy. Briefly, I'd like to also update you on the recently released Medicare traditional fee-for-service market data for the full year 2020. While the Medicare information has certain limitations when used to estimate the size and makeup of the oxygen therapy market, such as the absence of brand or manufacturer information, we believe that the information can approximate the long-term oxygen therapy market in the United States. Based on the data set, we estimate that the share of POCs in the traditional Medicare long-term oxygen therapy market grew from 18% in 2019 to 20.9% in 2020. However, this estimate does not include patient cash sales or private insurance transactions. Thus, we believe that this data from CMS may represent a conservative estimate of actual POC market penetration. POCs remain the fastest-growing modality in oxygen therapy based on CMS data, and we still believe this category has significant growth opportunities ahead. The data also showed a continued trend of a decreasing share of stationary concentrators, transferring devices, systems, liquid systems and oxygen tanks. Due to the trend of a higher percentage of patients receiving both stationary and ambulatory oxygen, we have increased our estimate of our target for penetration of total long-term oxygen therapy patients utilizing POCs from approximately 70% to 72%. This is based on our estimate that 90% of the ambulatory long-term oxygen therapy patients could be served by POCs over time. As we look ahead, despite some near-term challenges, the underlying demand for our offerings remains strong, and we are confident in our commitment and focus on increasing POC market penetration and improving patient access. To that effect, we remain focused on strengthening patient awareness of our best-in-class POC offerings and expanding our efforts in market development to increase awareness and advocacy among clinicians in support of POC-based oxygen therapy. We recently announced that Dr. Stan Glezer, Inogen's EVP and Chief Medical Officer, has been appointed to the role of EVP and Chief Technology Officer, responsible for R&D and Engineering, Medical Affairs and Regulatory Affairs. Dr. Glezer brings extensive expertise in development and commercialization of combination drug-device innovations, chemical development, medical and regulatory affairs as well as market access across various disease states. In his new role, Stan will partner with the leadership team to drive clinically informed disciplines in innovation, product development and go-to-market strategies. We also announced that Brenton Taylor, previously Inogen's EVP of Engineering, will be leaving Inogen after the transition period ending April 1, 2022. We are very grateful for Brenton's leadership and the significant role he has played in the founding of Inogen and bringing it to what it is today. In the meantime, we remain committed to working through the ongoing supply challenges while continuing to invest in our infrastructure and enhance our clinical evidence, R&D and commercial capabilities to strengthen our market leadership position in portable oxygen therapy. While we are still early in these efforts, I believe that we are on the right path to create long-term sustainable and profitable growth and value creation. With that, I will now turn the call to our CFO, Ali Bauerlein.

Thanks, Nabil. As Nabil noted, total revenue for the third quarter of 2021 was $93.1 million, representing an increase of 25.3% over the comparative period in 2020. Turning to gross margin, total gross margin for the third quarter of 2021 was 51.2% compared to 44.4% in the third quarter of 2020. Our sales revenue gross margin increased to 50.1% in the third quarter of 2021 versus 43.5% in the same period of 2020. The increase was primarily due to increased average selling prices. This increase was partially offset by a higher cost of goods sold per unit in the quarter, primarily due to increased labor, overhead and material costs. The third quarter of 2021 included $0.9 million of higher material costs associated with open market purchases of semiconductor chips used in our batteries and POCs. Rental revenue gross margin increased to 58.9% in the third quarter of 2021 versus 52% in the third quarter of 2020, primarily due to higher billable patients as a percentage of total patients on service, higher Medicare reimbursement rates and lower service expense per patient on service, partially offset by higher depreciation expense per patient on service. As for operating expenses, total operating expenses increased to $41.3 million in the third quarter of 2021 versus $35 million in the third quarter of 2020, primarily due to increased personnel-related expenses and increased advertising costs. These increases were partially offset by a $1.9 million noncash decrease in the change in fair value of the New Aera earnout liability versus the comparative period. Research and development expenses increased to $3.8 million in the third quarter of 2021 compared to $3.5 million in the same period of 2020, primarily associated with increased personnel-related expenses. Sales and marketing expenses increased to $28.3 million in the third quarter of 2021 versus $22.9 million in the comparative period of 2020, primarily due to increased advertising costs, personnel-related expenses and other direct-to-consumer sales and marketing expenses. Media and advertising costs were $9.4 million in the third quarter of 2021 compared to $7.7 million in the third quarter of 2020. General and administrative expenses increased to $9.3 million in the third quarter of 2021 versus $8.6 million in the third quarter of 2020, primarily due to increased personnel-related expenses and increased consulting and legal expenses, partially offset by a noncash decrease in the change in fair value of the New Aera earnout liability compared to the previous period. In the third quarter of 2021, we reported operating income of $6.4 million, adjusted EBITDA of $12.2 million, net income of $12.2 million and income per diluted common share of $0.53. Our tax provision or benefit from income taxes for the interim period has been historically determined using an estimate of our annual effective tax rate adjusted for discrete items, if any. We considered that the annual effective tax rate method would not provide a reliable estimate for the period. Therefore, we utilized the discrete method, which treats the year-to-date period as if it were the annual period and determines the income tax expense or benefit on that basis. This resulted in recording a $6.2 million income tax benefit in the period. Finally, we concluded the third quarter of 2021 with cash, cash equivalents and marketable securities of $245.1 million with no debt outstanding. As Nabil mentioned, we incurred significant additional costs in the third quarter of 2021 for the semiconductor chips purchased on the open market but not yet sold in finished products, which increased our prepaid expense and other current assets and inventory as of September 30, 2021, by $12.1 million and $1.1 million, respectively. Now turning to our outlook. We continue to face a number of uncertainties caused by supply chain disruptions and increased costs of critical components previously discussed, as well as the ongoing and varying impact of the COVID-19 pandemic. As a result, we are still not providing detailed guidance for the full year 2021, including our revenue, revenue mix, operating income or loss and adjusted EBITDA estimates for such period. However, we can provide some general context to our expectations for the fourth quarter of 2021. Due to the anticipated supply chain constraints impacting semiconductor chip supply, we expect total revenue in the fourth quarter of 2021 to be similar to revenue in the fourth quarter of 2020. While we expensed $0.9 million of higher material costs associated with open market purchases of semiconductor chips used in our batteries and POCs in the third quarter of 2021, we expect this cost to increase significantly in the fourth quarter of 2021 due to material and labor cost inflation throughout the supply chain, primarily related to the semiconductor chips, which have exceeded our initial expectations. We expect $5 million to $7 million of higher material costs associated with open market purchases of semiconductor chips used in our batteries and POCs for full year 2021, including the costs incurred in the third quarter of 2021, which will vary based on total systems and batteries sold with semiconductor chips activated on the open market. At the same time, we remain committed to making multiyear investments in clinical research, research and development, and building the necessary infrastructure to support future revenue growth and predictability as well as margin expansion. Given such investment initiatives, we anticipate increased operating expenses for the full year 2021 compared to 2020. In addition, while we incurred minimal expenses related to bonuses and performance-based stock compensation in 2020, we expect such costs to rise in 2021, along with some expenses related to the previously announced officer transitions and additions. In summary, we expect negative adjusted EBITDA, operating losses and net losses in the fourth quarter of 2021 and for the full year 2021, reflecting the anticipated decrease in constrained revenue, increased cost of goods sold per unit and higher operating expenses in the period compared to the first nine months of 2021. To reiterate what Nabil stated earlier, while our outlook is impacted by certain supply constraints in the short term, we are proud of the actions we have implemented to make structural improvements in our business, including our investments in our subscriber organizations, productivity enhancements in our direct-to-consumer channel and increases in our average selling prices. In the last two quarters, demand for our products increased compared to the same periods in 2020, which led to improved revenue growth rates, and we were able to enhance gross margin and adjusted EBITDA returns. We believe, over the long term, our strategy to optimize commercial infrastructure and drive productivity while investing in clinical research and research and development will help us move toward our plan to return to sustainable double-digit revenue growth and profitability. With that, we'll be happy to take your questions.

Our first question comes from Robbie Marcus with JPMorgan. Please go ahead with your question.

I was wondering if you could start by providing any sense of where demand would be if you didn't have supply issues now? And is there any way to quantify the demand side? We know what the supply side is, but I'm trying to figure out what's going on with the underlying demand and what the delta is?

Yes, sure, Robbie. I can take that question. We're not quantifying the specific backlog that we had as of the end of the quarter, but the backlog definitely was the largest in our domestic business-to-business channel. We are prioritizing our direct-to-consumer business. So that channel had minimal backlog as of the end of the quarter. Of course, that channel was impacted by the lower availability of batteries for sales. But outside of that, there was minimal impact to that channel. Our international business-to-business channel also had a backlog at the end of the quarter, but it was smaller than our domestic business-to-business backlog. One challenge we have in providing that number is that it appears to be an industry-wide issue with shortages of oxygen therapy products. We believe that this has led customers to place orders with multiple manufacturers to see which products would be filled first, which may overstate the actual demand just given the backlog and lead times in fulfilling orders across the industry. But the backlog was quite substantial at the end of the quarter, and we've continued to see strong demand going into the fourth quarter as well.

So you were able to manage expenses quite well this year to account for some of the top line. Do you plan to wait until the second quarter to restart direct-to-consumer advertising and start that sales engine again preemptively? Or are you going to wait to see when demand starts to catch up again? I'm just trying to understand how we can look forward to a recovery once supply resumes.

So Robbie, I'll take that one. Thanks for the question. As we said, the situation is evolving slowly. We are actually continuing to observe strong and healthy underlying demand. We will be monitoring things very closely and make decisions accordingly. We're not stopping advertising; we will continue to nurture that growth we are seeing, but we are cautious about managing supply on a week-by-week basis, and we will make decisions accordingly.

Our next question comes from the line of Margaret Kaczor with William Blair. Please proceed with your question.

This is Maggie Boeye on for Margaret today. I wanted to ask a question following up on what Robbie asked. Based on what you're observing today, do you expect that the current demand will be sustainable through next year? Given the supply constraints, what are patients doing when they are unable to get a POC?

So most patients, Maggie, if they cannot get a POC, are receiving tank-based oxygen therapy today. Of course, that also constitutes the vast majority of the market, as we discussed in the market specifics. This limitation hinders the ability to switch to POCs from the tank-based systems, and new patients are still receiving more tank-based systems than we would like. That's really what most patients are accessing today.

And then I wanted to ask about the partnership with Ashfield you announced. How does this help accelerate your efforts to focus on prescribers? Can this have a material impact on 2022? And why is this the right time to do it given the supply chain constraints limiting your ability to meet some of the demand?

I can address that one. As we said, we expect to staff the team and have them trained in the first half of next year. We also acknowledge that there will be a ramp-up in terms of productivity, so this is indeed the right time to do it. We believe that simultaneously, the supply chain concerns will begin to ease as we approach the second half of the year. So it is a timely investment with the salespeople who will be established in the field and getting to productivity, which typically takes over nine months. So it is absolutely the right time to make this investment. We also believe it will have a material impact in the years to come, starting in 2022 and the latter half of the year as people reach the productivity levels we expect. The ability to scale, coupled with higher discipline and insights-driven targeting will yield positive results compared to our current methods.

Our next question comes from the line of Danielle Antalffy with SVB Leerink. Please proceed with your question.

Congrats on a solid quarter despite the supply constraint issues. I had a question on the B2B domestic side. How do you see this evolving when we hopefully emerge from COVID in the near future? Many service providers are cash constrained, and the dynamics of investing in the infrastructure to transition to a POC versus stationary model are present. If you could comment on how we should think about the B2B business ramping back up on the domestic side post-COVID?

Yes, thanks, Danielle. I'll respond to that. Let me provide a little context first. We believe that the B2B sector is currently experiencing backlog not only from our end but from multiple suppliers facing the same situation. As one of the major suppliers, we anticipate being in a better position to start replenishing that channel before other suppliers as the situation normalizes, aiming to return to previous contribution levels to our overall sales.

We've seen improving reimbursement rates in oxygen therapy as well as the new national coverage determination, which expands patient access to oxygen therapy. So, I believe these are two positive trends for us and our partners in the B2B sector that will encourage interest in the oxygen therapy space and expand the patient population. The inflation adjustment for oxygen therapy is usually announced in December, and that's something to watch for as well.

I apologize if I missed this part, but regarding direct-to-consumer and cash sales and rental businesses, could you speak to the rep productivity and trends in lead generation, specifically lead closure rates?

Danielle, I can handle that. We've seen improved productivity from the direct-to-consumer team as we have lapped the COVID headwinds. During COVID, there was a reduction in close rates and interest in accessories and lifetime warranties. These trends rebounded starting in late Q1 2021 and continued strongly in Q2. As you know, our business typically has seasonality; thus, we saw the normal pattern where Q3 saw a drop from Q2 in close rates. However, both Q2 and Q3 closed rates showed significant improvements year-on-year for that channel.

Additionally, as we noted in the prepared remarks, this is a significant focus for us. We are currently implementing a combination of insights, tools, and enhanced sales management discipline to boost productivity. We believe focusing on these areas with rigor and discipline will lead to growth.

Our next question comes from the line of Mike Matson with Needham & Company. Please proceed with your question.

Yes. I wanted to ask about pricing. I joined the call a little late, so perhaps this was covered earlier, but I think on the last call, you talked about raising prices in response to cost pressures. One, did you implement that? Two, what was the timing? And three, how has it been received across the different sales channels?

Mike, thanks for the question. We did exactly what we outlined on last quarter's call. We raised prices in September, implementing a low double-digit increase across all channels. We anticipated that about 70% of it would stick due to contractual commitments and/or timing, and we have seen that become a reality. Additionally, we observed that several competitors followed suit with price increases as they also contend with similar pressures as we have.

Regarding the forecast for around $74 million in the fourth quarter, is that a reasonable capacity-constrained run rate? Should we expect to model something similar for early 2022?

Yes. We're not providing guidance for 2022 today due to the uncertainty during the supply chain; it's still very fluid. However, we do expect that the fourth quarter represents a low point in terms of our expectations, and we anticipate returning to growth in 2022.

While our results reflect a slow pace, we are managing through it. It warrants weekly check-ins with suppliers. As these issues are resolved, we anticipate returning to our prior performance levels in guidance.

Our next question comes from the line of Matthew Mishan with KeyBanc. Please proceed with your question.

To clarify regarding material costs in prepaid expenses, how are they impacting profitability from 3Q to 4Q? When you say there will be $5 million to $7 million of higher material costs for semiconductors and batteries, does that mean the remainder is allocable to Q4? How does this relate to the $12 million in prepaid expenses?

Great question. In the third quarter, we incurred $0.9 million of higher material costs related to the semiconductor chips. For the full year, we expect $5 million to $7 million of higher material costs, so you could expect the balance to occur in the fourth quarter. The prepaid expenses are partly linked to our purchase of semiconductor chips for usage in 2022, and these costs will also be recognized in higher cost in the P&L for 2022.

Regarding the agreement with Ashfield, you already had direct-to-physician reps in the system. How are you prioritizing demand to support this sales force as it develops in the coming quarters? What is the recovery in patient diagnosis and how is that important for Inogen's future?

Yes. As you've pointed out, addressing demand is crucial as we've discussed earlier. The referrals will primarily be filled from a rental perspective. Our present sales team, along with the additional 20, will prioritize that channel to accommodate demand. Our strategy includes ensuring coverage of about one-third of prescribers, particularly pulmonologists and cardiologists. This positions us for significant growth as we continue with our existing sales force and new additions, treating them as significant pillars for our growth.

Our next question comes from the line of Mathew Blackman with Stifel. Please proceed with your question.

I apologize in advance, as I may overlap with previous questions, but I would like to know how dynamic the supply chain environment is. Does it change daily or weekly? How much visibility do you have now compared to several months ago?

I will respond to that one. I don't want to dramatize; I'll say it changes weekly. We also have ongoing conversations daily about sourcing authenticity and shipment commitments. While the dynamics have not altered with regular supply channels, there has been slightly increased transparency in open market availability of quantities recently. We are diligently working on this front.

I appreciate your details on that. Regarding rental gross margins, where do you think they will ultimately go?

Yes. We're proud of the continued improvement in rental gross margin percentage. Given the current rates, I expect small incremental improvements ahead, but we will need to evaluate potential changes driven by inflation adjustments and pricing once the public health emergency ends. Overall, we expect future improvements there.

There are no further questions in the queue. I'd like to hand the call back to management for closing remarks.

Thank you. I'm encouraged by the revenue growth we observed in the third quarter of 2021. I am confident that the strong underlying demand for our industry-leading solutions, paired with the multiyear investments that we are executing, will position us to reach our vision of becoming a global market leader in innovative, evidence-based chronic respiratory care solutions. Thank you for your time today. I look forward to engaging conversations with our investors as we progress on our strategy to build a stronger Inogen. Have a good day.

Ladies and gentlemen, this concludes today's teleconference. Thank you for your participation. You may disconnect your lines at this time, and have a wonderful day.