Good afternoon. My name is Sarah and I will be your conference operator today. At this time, I would like to welcome everyone to the Intrusion Inc. Second Quarter 2018 Financial Conference Call. All lines have been placed on mute to prevent any background noise. After the speaker's remarks there will be a question-and-answer session. [Operator Instructions] Thank you. I will now turn the conference over to Mr. Mike Paxton Chief Financial Officer, please go ahead, Sir.

Okay, thanks. Welcome to this afternoon’s call to review Intrusion's second quarter 2018 financial results. Also participating on the call today are Ward Paxton, Chairman and Co-Founder, President, and CEO; and Joe Head, Senior VP and Co-Founder. Ward will give a business update. I will discuss financial results and Joe will go over our ongoing projects. We will be glad to answer questions after the prepared remarks. We distributed the earnings release at approximately 3:05 Central Time today. A replay of today's call will be available starting at approximately 6:30 tonight for one-week period. The replay conference call numbers are 855-859-2056. Conference ID number 688-4139. In addition, a live and archived audio webcast is available at our website. Be reminded that during this call, including the question-and-answer session, we maybe making forward-looking statements with respect to financial results, business strategies, industry trends, and certain other matters. Forward-looking statements are based on management's current expectations and are subject to risk and uncertainties. We may be discussing our current outlook based on our own internal projections for the current quarter and fiscal year 2017. Actual, results may differ substantially from internal projections. We are not responsible to update any forward-looking statements. Many factors could cause our projections not to be achieved, including current economic and market conditions and other factors, which can be found in our most recent filings with the SEC, including our most recent Annual Report, on Form 10(k) filed in March of 2018 and previous Form 10-Qs. The second quarter 10-Q was filed today. Now, I'll turn the call over to CEO and President, Ward Paxton.

Thank you, Mike. Welcome to Intrusion's second quarter 2018 conference call. It's good to be with you today to discuss our outstanding second quarter 2018 results. Our revenue and profits have both had sequential growth for the past three quarters and we expect this trend to continue in the future. This trend continues as we have just booked a $5.5 million order for TraceCop related products and services. This new order is scheduled over the next 15 months and should result in quarterly revenue of nearly a $1 million. When it reaches full throttle we will be able to experience that. Doesn't take too long but it takes a little while to get to that. Our business pipeline includes approximately 25 customers, which we expect to do business with over the next 12-months and in addition additional 10 to 15 new customers that we are now developing a relationship with future business. Our net income, for the second quarter of 2018 was just under a $0.5 million, which is up from net income of just over $300,000 for the first quarter. Revenue in the second quarter 2018 was $2.4 million, which is up slightly from the first quarter. As the new business kicks-in, we expect revenue do continue to increase then with the increase in revenue net profit should also increase. Now Mike Paxton, our Chief Financial Officer will review our second quarter financial results that we released a little over an hour ago. Mike?

All right, second quarter financial results our press release here. Revenue for the second quarter was $2.4 million compared to $1.5 million for second quarter of 2017, $2.3 million was Q1 2018. Gross profit margin was 61% for the second quarter compared to 59% second quarter last year in general our goal is 65%. Gross profit margin in the first quarter 2018 was 62%. Intrusion’s second quarter 2018 operating expenses were $0.9 million compared to $1.3 million for the comparable quarter in 2017 and $1 million in Q1 2018. Operating expanse improved mainly because of R&D expenses that shifted to cost of sales, R&D labor cost to direct labor. Net income for the quarter was $474,000 compared to a net loss of $438,000 for the second quarter 2017, $912,000 year-to-year improvement. $346,000 net income Q1 2018. Thank you and now back to Ward.

Thank you Mike. Now Joe Head my partner, Co-founder of Intrusion and Senior Vice President will discuss our outstanding sales results in the marketplace. Joe?

Thanks, Ward. Well we’ve continued to successfully expand our business first to stop losses and achieve profitability last year. Now with our new order we will build those profits to better levels. And for the first time in a while, we won't be able to shuffle our incredible group of software, analytics and big data scientists around to cover all the new business. We’ll be hiring new folks to expand the team. On the sales front the $5.5 million orders the largest we've received in over a decade, our other large customers were all stable and we don't have any we are worried about renewing. So, as promised I'll start having some limited time to move my efforts back to Savant now but 90% of my efforts will be on launching these new projects well and doing more than our customers expect every week, plus working on a number of new business opportunities and growth on a few old ones. An example of this growth on a old one, is that we got good news on a renewal of one of our longest running contracts. It will be moving from a sub-contract to a direct contract. This contract vehicle has already been written and modified to support it's use for both the old existing business and some new business in our pipeline. Ward has given summary counts on the pipeline, so we'll keep working those and growing that list through the year. We have a good reputation in our market and expect a good number of upside opportunities as we go forward from our existing base in this group of prospects. Ward?

Thank you, Joe. The second quarter was a smooth continuation of revenue growth that we have generated in the fourth quarter last year and continued in the first quarter of this year with majority of business coming from the TraceCop family of products and services. We expect this revenue growth to continue in the future. Our team is producing new customers and new services at an outstanding rate. And our engineers and analysts are developing new security solutions for our customers and we're working hard to keep this momentum going. I look forward to future communications with you as we discuss our progress. Thank you.

Okay, Operator can you remind the participants how to queue up for questions.

[Operator Instructions] Our first question comes from line of Howard Brous. Please go ahead.

Thank you. Ward, Mike, Joe congratulations on one a great quarter and secondly congratulations on this large order. I have a couple of tangential question to TraceCop. Special counsel Mueller indicted 12 Russians and got their names, specific names, obviously the e-mail addresses. If you can comment did TraceCop have anything to do with this work that Mueller did.

We actually didn't take part of that one. We've done lots of fun things but that one that particular one wasn't one. But yeah, so we weren’t in on that one. That would have been fun one to announce.

But you have been on others.

Yeah, actually as I say we wouldn’t be in good, because we’ve had Russian parked all around the building.

We’ll send out the National Guard to protect you.

I mean, that’s one of the things that we sort of relish if you think of – one of things we relish is our secrecy. So, as we work with the customers to do stuff, we actually don't want to be in a position where we raise a lot of attention to what things did we do.

But, is it a fair question to ask and you have in the past helped to identify for various agencies the bad guys, if you will, where they are, who they are. Is that your comment?

Yeah, that's the business we're in.

Right just wanted to confirm. Secondly…

No, you're on the right track. That's what we're trying to do, is rip people's cover and see who they really are. And doing the things that are required to build a case like that are right along the line of what we're good at. So, yeah.

I might just come there the fact that we just recently booked this new huge order is a good indication that we're doing a good job in what Joe just discussed.

I guess to extend that a little bit Howard. Because of our TraceCop subscriptions, where we feed all of our data to the customers networks. I was thinking, second guessing my answer. I really have no damned idea, so they could have actually used our TraceCop data in that case and I wouldn't know. So when you start looking at who works where, what IP belongs to who – it would be unusual for them not to consult TraceCop in an investigation like that. So, I guess I’ll have to say I don't actually know with my team of analysts didn't hand that to them.

Well fair enough. In the last conference call you had mentioned despite this very large order that there was an additional $2 million or $3 million one additional $2 million to $3 million order in the pipeline. And you would also imply that there were several others towards the end of the year of similar size $2 million to $3 million. Can you give us a status on where you think we are with those?

Yeah, one of those if I remember talking through it about a year ago, we received a $2.4 million order, which we just completed the work in the last week or so. And there's actually going to be a week or two gap or more before – I did get the news it's going to get renewed. And so, one of the $2.4 was the renewal of that one.

Right.

One of similar size is the one I was hinting at about an add-on to the direct contract. So we’ve got those two and then there's – like Ward mentioned, there's about 10 new ones in addition to the old ones. I mean, I’ve been too focused on the big one that’s – the rest is sort of giblets after you talk about the turkey. So but they're all…

Yes, but $2 million, there are a lot of giblets there.

No, that one bears mention but when you start looking at, I've got a number of [indiscernible] that are in the pipeline to get awarded. And then we have another new start, it'll start in the next quarter that we haven't even started to procurement scope for it yet. But yes, so we're certainly continuing to work the pipeline. The thing that I guess you couldn't tell but what we've said so far except for my general statement about the good reputation is we've had enough wins in enough times that we've surprised the customer on the good side. Customers, if we are starting to see them introduce their friends to us and say, here once you try them on this, try them on that and that's where when Ward talks about the exciting pipeline. It's actually that friends of friends or guys leave one group and leave another group, take you with them. So DoD is a big place so it's nice to wander around there as well as in our commercial customers space well.

What do you think the gross margins on this large order should approach as you get that started?

I think it’s the same as what we've seen at…

60% to 65%?

Mike, is that right?

60% to 65% roughly?

Yes.

Howard, there's kind of two components in all of our business. There's the normal 65% type margin and then a part of the orders are always delivering some data or something that’s not a higher margin deal. And in fact, in some of those cases, we actually deliver some equipment to the customers at no profit. And depending on much of that is in the mix that's the thing that moves the gross margins up and down.

I can appreciate that. I mean, this order alone at 60% gross margin it’s almost $0.30 a share going forward besides your regular business. So I would say it’s a major wins for you and I really…

Absolutely.

I have been following the company for years since. So thank you.

Yes, just to give you an idea, my customer tell me that we were going to get this one in December. And we thought we would have the order in January and we got it last week. My customer said, it sounds it’s like the time you get in the supermarket and you pick the wrong line, he figured he put the money to us in a week or two and he's like damn look at that other line moving and I'm still waiting. So – but it's hard to predict how long an order takes from committed to funds to actually work in. And this was the worst we've seen in a long time in terms duration but the good news is it's a multi-year contract vehicle so that's a good thing.

We also chatted about you’re hiring a financial relations firm, where do you stand on that please?

Well, now that we've moved to a step forward in expanding the business. We're ready to address that. We haven't made any progress to-date, we are at the spot now where it makes a lot of sense to work on that and I will.

All right. Again congratulations, this is the best order you got, would you say in the generation?

In the decade I believe.

About 10 years probably.

I didn't actually check it but that’s been a while.

That's all I have.

All right, thank you.

Thanks Howard.

Fair enough. Thanks again and congratulations, that’s all I have.

[Operator Instructions] Your next question comes from the line of Walter Schenker [MAZ Capital Advisors]. Please go ahead.

Hi, thank you so much, tangentially and congratulations that you don’t hear from me that often. The website looks somewhat different than I noticed on when you go to it, there's two different boxes talking about Savant, which I guess maybe which you can talk about it more. Are you actually getting progress in commercializing Savant?

I haven't worked it much, Howard, I have been working on these new ones. However, I've got three locations that we're talking about but in Savant – for monitoring some ongoing investigations right now. But they're related to these set of customers that we've just announced. So I haven't worked it much other than it's the right tool for doing a number of things that no other tools really useful for. So the way I see that is leveraging relationships with friends to start doing some good deployments. There is some – the largest opportunities that actually see are in the military preparedness roles, protecting our infrastructure and those are large pills but when you start looking at what you read in the news about our advisories up in their game and being able to penetrate this. There's certain networks that don't want to get penetrated and have actually been hired on one of those critical infrastructure protection from a military perspective projects and that one will be was already in full swing. And there's some good opportunities there, we’re not ready to forecast them but I've actually started working that about four months ago.

Walter, we will again try to obtain a partner to be involved with selling the Savant in the marketplace and I believe we’ll be successful in finding somebody.

Okay. You’re always optimistic, Ward, sometimes it actually happens as today.

Yes.

But a couple of other questions the new contract is a: A, a government entity and B, broadly defined as defense oriented?

Yes, this is a DoD contract.

Our customer there is actually a prime contractor. That has the connection directly to the government, so that our customer is not the government, there’s a prime contractor between the government and us.

And given the contractor size from a cash flow standpoint, you will get paid either in advance of or fairly promptly on your realized good gross margins on your expenditures towards that contract, get funded heavily?

Normally we get paid 30 to 45 days after the end of the month that we do the work and so that pace pretty good and that covers all of our expense.

And I think how they adjusted a little bit, your need to since that alone is more than 50 plus percent of what you did in the last year as we take full quarters of it what sort of and how many people do we have to add?

We are in the process of adding a few people right now and over the course of fully getting the coverage that we want. We're probably adding 10 or 12 people, that goes through a period where everybody and our technical staff will be working on the contracts here in the interim. And so therefore that will then be replaced as we fully add the people.

But people are the major part of your expenses in all of these contracts, it isn't like you've got a big manufacturing plant or anything?

That's correct.

So they’re going to the 35% that's not the gross margin on these contracts, 35% to 40%?

That's correct.

Okay. And lastly, as you look at the last big contract and this big contract and Joe has addressed the fact that you’re getting a different level of creditability and people are telling their friends broadly defined, that you have certain capabilities?

All we getting, do you need to be if this thing really gets going materially bigger. I mean, it's sort of a general question about you've got – I mean, I've been there a lot of times, you've got a couple little offices, you've got some very key critical people but your ability to add on multiple additional $2 million, $3 million, $4 million contracts if we're so lucky. I would think it's going to start to strain your ability as a small company.

Well, we'll certainly expand our people as our business grows then both in terms of the direct people working on the contract and also the indirect people relating to selling and marketing and management of the contracts. So that I think we are really on top of that and I hope that we had a problem there, Walter going forward that the business goes up faster than we're able to expand and I don't think so.

And my really last question is although obviously this is an all hands on deck to make sure that contractors that you fulfill and satisfy and more than satisfy and make the customer very happy with you. You would still expect within the pipeline to sign some additional contracts over the next two to three months as we end the government's fiscal year and there might be stuff floating around like a September period you could pick up some additional business?

Yes, we certainly hope so.

Okay, again congratulations.

Thank you.

Walter, on your – just to add a few comments here as we started this one, it turned out to be $5.5 million. I originally quoted the core piece of that at about $2.4 million and the customer came back and expanded the scope. And he said, hey Joe, I'm stretching you on this one. I want to make you grow and I know this is a big chunk for you but I think ya'll can handle it because I've got other vendors that are bigger than you that don't deliver like you do. And I want to see you guys be larger so you can support us when we need you on bigger harder problems and so they're – part of that is too way. It's not from the perspective of our people aren’t trust us to grow they actually want to make us grow because they like what we do and how we execute.

Well, that’s a pretty strong recommendation. Thanks Joe.

You bet. Thanks. Thanks for the questions.

I’m currently showing no other questions at this time.

All right, operator, we will wrap up the call. Thank you for participating in today’s call. If you did not receive a copy of a press release or if you have further questions, you can contact me at 972-301-3658, email m.paxton@intrustion.com. Thanks again.