Good afternoon. My name is David and I will be your conference operator today. At this time, I would like to welcome everyone to the Intrusion Inc. Second Quarter 2019 Financial Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers' remarks, there will be a question-and-answer session. [Operator Instructions] Thank you. Chief Financial Officer, Michael Paxton, you may begin your conference.

Welcome to this afternoon's call to review Intrusion's second quarter 2019 financial results. Also participating on the call today are Ward Paxton, Chairman, Co-Founder, President, and CEO; and Joe Head, Senior Vice President and Co-Founder. Ward will give a business update. I will discuss financial results. Joe will go over ongoing projects. We will be glad to answer any questions after our prepared remarks. We distributed the earnings release at approximately 3:05 P.M. today. A replay of today's call will be available at approximately 6:30 PM tonight for a one week period. The replay conference call numbers 855-859-2056, conference ID number 6866927. In addition a live and archived audio webcast of the call is available at our website, intrusion.com. Please be reminded that during this call, including the question-and-answer session, we may make 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 2019. 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 2019 and previous Form 10-Qs. Now, I'll turn the call over to CEO and President, Ward Paxton.

Thank you, Mike. Welcome to Intrusion second quarter 2019 conference call. It's good to be with you today to discuss our second quarter 2019 results and our outlook for the future. Our revenue and profit both had sequential growth over the past seven quarters. Our revenue reached $4 million, up from $3.2 million in the last quarter. Net income reached $1.8 million, up $0.9 million in the first quarter of this year. Now Mike Paxton, Intrusion's Chief Financial Officer will review our second quarter financials that we released a little over an hour ago. Mike?

Okay. The second quarter financial highlights revenue for the quarter was $4 million compared to $2.4 million for the second quarter 2018 and as Ward mentioned, $3.2 million Q1 2019. Gross profit margin was at 60% in the second quarter compared to 61% second quarter of last year and it was also 60% first quarter 2019. Intrusion's second quarter 2019 operating expenses were $0.7 million compared to $0.9 million for a comparable quarter in 2018, $0.9 million in Q1 219. Operating expenses benefited from $200,000 reduction in second quarter sales and marketing expense due to a reimbursement of a prior period expense from a customer. Operating expenses also benefited from reduced sales and marketing expenses associated with shifting expenses to cost of sales for current projects. It is expected that sales and marketing expenses will return to more traditional levels in the third quarter of 2019. Net income for the quarter was $1.8 million compared to a net income of $474,000 for the second quarter of 2018, $947,000 net income Q1 2019. Remember we benefited from a couple of special items that I just mentioned and sales and marketing being pretty low in the Q2. Now, I'll give it back to Ward.

Thank you, Mike. Now Joe Head, my partner Co-Founder of Intrusion, Senior Vice President will discuss our outstanding sales results for the second quarter.

Thanks Ward. In the second quarter 2019, we booked $2.9 million all of which were renewals. The majority of our business is purchased annually. So, we will have our usual pattern of slow bookings in Q3 with the possible exception of some early renewals perhaps in September followed by an uptick in renewal orders in Q4. We do not expect any renewal issues with any of our longstanding business this year. Our base business remains stable with a bit of growth here and there. As you recall we received two large orders in late 2018 which have boosted us to a higher run rate. These most recent two large orders are up for renewal in late 2019 and the customers are working on the funding and renewal paperwork currently. For next year, we have a number of new customers in our sites as well. I'm excited about a number of extra-large prospects related to securing infrastructure was which leveraged several of our products. One of them is these we've been working for a number of years and are now nearing the point of creating budgetary quotes for our customers to put in next year's budget; one is a potential expansion of work with the current customer and two are with new customers. One of these new ones will be quoted next week. In addition we have our usual assortment of medium prospects for work and for late 2019 and several additional large projects in 2020. So to -- by my count, I'm working on 14 new prospects currently and expect that pipeline to grow throughout the year, but count alone doesn't tell the story because the mix of large and extra-large prospects compared to small and medium ones. I'm not ignoring fills with small or medium-sized money, the work in extra hard to ensure that our four extra-large opportunities and for all define that is the $2.4 million to $6 million figure year range get more attention. But the renewal of current ones and also the pursuit of new opportunities that are larger than our historical order size. Also making presentations and writing white papers on a larger class which I'm calling giant, these won't happen in the next few months. These are 2020 opportunities, but they're worth spending some cycles on for the future. We'll make sure to keep our current customers happy as we always do and continue to add new and even larger opportunities to our pipeline for next year. Ward?

Thank you, Joe. The second quarter was a continuation and the outstanding growth in sales and profits that we have had for the past seven quarters. Our orders continued to be bumpy and we expect that to continue going forward. Last year we entered our two largest donors in the fourth quarter that fueled our revenue growth. This year we expect those two large orders to renew in the fourth quarter as Joe indicated. Also Joe is pursuing several very large orders that should contribute to growth. I look forward to opportunities to communicate with you in the future. Thank you. Mike?

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

Certainly. [Operator Instructions] Your first question comes from the line of Howard Brous. Your line is open.

Good morning Joe, Mike. Congratulations on just a phenomenally good quarter. In describing the cadence for new orders compared to last year, we're talking about sequentially third quarter fourth quarter new orders. Is that what we should look for? And could you give us some magnitude as what you think will translate?

As I was describing there I would see the third and the fourth quarter this year being renewals of the current business including those that were sort of a big step-up last year. The extra-large ones I see those being a next year thing. I've got a one that, if it all gels up, would be a June kind of install date which means first -- March/April kind of order date. The others -- there's one that actually could come in this year, but I'm really thinking those are the 22 -- I think they're 2020 orders in my new big categories. But kind of like just -- like Ward was saying, we got surprise last year. The $7.9 million we got head that down as a $2.4 million potential Bluebird and it gone three times bigger and six months sooner. But right now I don't see -- I see as -- some nice opportunities, but we're in the quote and budget stage at this point.

You had mentioned in the prior conference call that you expect a first order for a new customer in space in Q2 and expect that to grow and renew for many years. What were you referring to at that time?

It seems like a pretty generic quote.

I know but that's what -- I'm just I'm just quoting it.

There is one that that's -- that we're still awaiting on the order and that one will I think that -- that's -- it got delayed a little bit on the contracts, but it's still in the queue. I think which is -- I think that's the one I had in mind, so I'm still awaiting on that one, it's initially smaller order and then grows into a large beginning of next year.

In the prior quarters, we've discussed potential large orders of magnitude of 10 million for Savant. Where do we stand in those?

That's mainly the category I'm joined with these new extra-larges. So, most of those are Savant, with STA, with some research reports. So, those are all gelling along pretty well and so that's where I see a pretty good set of opportunities.

And so they basically what you're saying is they Savant orders moved from sort of end of Q4 to 2020. Is that what you're saying?

Yes. We have one that could be this year fallout -- it could be this year fun to order, but I don't have that in procurement yet. So, a partner has been making all the pitches and we owe them budgetary this next week.

Do you have any orders in procurement new ones I'm talking?

We have new --- one in procurement as we speak and several others that are out for funds to go into procurement next. Account and procurement as the money is already got your name on it and it's just a procurement action.

Make sure they write out the check properly, of course.

Correct.

And so those in procurement were potentially in procurement probably are Q3, Q4 orders, new ones, correct.

Correct.

Okay. Is it also a correct statement that these contracts are also sourced?

Correct. They are.

All right. I guess last for the moment. IR firm, where do we stand?

We're still working on that. I haven't made a decision yet.

Have you decided on which firm and but haven't decided on hiring them yet?

Pretty much. We're still evaluating that because we're quite weighted down the road to making that decision.

No, I understand that. And Ward, are you waiting for a large order to hire the firm concomitant with that large order?

Well, we're just -- we're waiting for progress be made. Today's release is one of the big steps.

No firm [ph]?

None in significant factor and all that is my workload to do that. Plus get the orders. It'll take a little time away from making it productive.

Joe, Saturday afternoon, what are you doing?

Yes, there's that.

I bet you got that book [Indiscernible]

Sounds still. I'm down the road.

I hear you. Fair enough. Let me go back in the queue.

Thanks Howard.

And congratulations all of you on just a spectacular quarter.

Thank you.

You're very welcome.

[Operator Instructions] Your next question comes from the line of Walter Schenker. Your line is open.

I have to agree it was a heck of a quarter. Congratulations. I never thought I'd be saying this but you're making too much money and it appears you're not investing enough in the business. I mean the last comment you made about Joe and Joe's workload would indicate that there's need and a significant need to upgrade the staff at Intrusion at a much higher level than the entry level program as you might add. How do we solve that and get people of a high caliber to join a small company like Intrusion which we've not succeeded in doing yet?

Well, we're working on that. That's a high priority thing for us Walter. And clearly it's mandatory that we hire -- make some hires of senior level folks.

I've got two guys in mind currently that look pretty good. Had a previous one I talked about -- in the previous quarter and he's going to stay where he is and do us more good there. So, we had a little bit of delay on bringing in. I've got two guys on the string of which one I really like and I'm seeing him this week.

And part of the goal is to further expand the when you hire new people; hopefully their relationships are broader than U.S. Joe. So, the brand gets into popular areas?

Yes, that's kind of the MO of my front runner as he's coming out of a place that we plan on -- half some expansion business and he knows them and they love him. And he knows our technology and the security space very well and he's coming from the place we want to sell to. So, I think he's perfect. That way I can -- I don't have to go, I can send him in and we get double effort instead of me going and leading and training somebody, it'll be him going and leading and every once and while ask me for help. So, that's looking decent.

And just one other area. On Savant, we have talked from time-to-time over the last -- must be five years now about finding a partner or another marketing agent or whatever, the right term is, who could broaden the use of it beyond just getting a contract which has it, are we yet at a point where we're having serious discussions with somebody or do you have to sign some big contracts more broadly using Savant before you can get someone interested?

Doing both. I think you're dead on as partners don't get interested unless there's some water being pumped out of that new well, where they can see something there that they would have a piece of. And so when we look at these giant kind of opportunities I'm looking at, those are deployments where you'd want to leverage a partner to do that. So, I'm looking at it three currently and have been having discussions with them already. So, the idea is it takes you a while to do that engagement and we're along that process although it's not a closed partner queue. We may find additional ones that should have been in there that weren't, which is one reason for having a IR firm to help.

And lastly in regard to this quarter which was clearly -- I think you probably earned more money this quarter than you earned last -- almost since I met your Ward maybe. Its embarrassing question, but obviously, cumulatively, it's a lot more. Aside from the cost of $200,000, this was the first quarter with the full implementation of the new big contracts. So, there was nothing terribly atypical against sort of a double negative. There was nothing all that special except for you'd had a great quarter this quarter that we can't look at it with these contracts and say we're now operating at this type of a higher level.

That's true that we're operating at a higher level now and it has more potential profitability there. But as you pointed out we need to spend more money onto things like hiring these additional senior level guys. And when -- we're doing that, we're going to do that. In addition to those super senior level, we have been hired some mid-range guys and we've made some expansions there in the last quarter. So, that capability is growing.

I'll just mention that one of our customers did kind of have some catch-up type work that they did in the second quarter that was really supposed to been spread out over the first and second quarter. So, that benefited sales and it also you know lowered sales and marketing expense quite a bit.

Okay.

Like I said a shift in those expenses to cost of sales. If you look at sales and marketing expense, like I said, it'll probably go back to a more traditional level on Q3 and look at Q1 compared to that.

Actually I'm hoping it goes up -- some highest of peak, that would be a good thing.

That's right. It'll go up -- go back to normal plus we hire people. That's all I can say. No, you said that.

That was good thing. Okay. Thanks for--

I'm trying to put it out there.

Okay good.

Thanks Walter.

Your next question comes from the line of Howard Brous. Your line is open.

Thank you. Just a couple more questions as we discussed with Walter. Is it a correct statement to say that if there's a contracting procurement, you'll get that contract? You've never lost the contract in procurement or have you?

Not long time. We did about seven years ago or whenever the Gulf War was, I had one in procurement and they stole the money to buy cruise missiles.

That's not fair.

It happened once. Well, it was all right.

They have been delayed but I guess we'll lose many.

No. We've had several. Yeah we have had several delayed in procurement where you you'll even have a gap between when you wanted it and when you got it. That's not a typical, but lost in procurement. You're correct virtually never.

All right. And the magnitude of the awards, when you define very large, are those the Savant orders of $10 million? And what would you define as a smaller order?

Small -- we've typically said, smalls like $250,000 to $512,000 and then large has been traditionally $1.2 million and then we sort of expanded the extra-large to $2.4 million or $2.5 million, or $2.6 million. So, I think.

So, I think--

Yes, go ahead.

Go ahead. No, no, go ahead please.

So, I think we've seen you know the emergence of a few of them that are in the $2.4 million plus for as you know up to last year we didn't have any until the two quarters last year and now we've got some expanded opportunities to go instrument larger networks.

So, just as I'd look for the cadence for the say the next 12 months, relevant of the renewals, there are contracts of moderate size $2.4 million in procurement of virtually going into procurement and then you're talking about say in the first quarter, second quarter for some of these Savant orders, is that sort of the cadence I could look forward to?

Yes, I was really thinking that we'd probably see one of the bigger ones in the first half of next year. And then I got the one I've quoted now that they're going for unbudgeted fallout money on and that could be never or next month.

I vote over next month. How about you?

Yes. But I would call that a Bluebird, that means Joe got lucky. So, I guess at the point there is it having the one that we were reasonably confident we'll go to deployment next year. I've been working it for three years. But the point there is that I don't expect all of them in that class to be multi-year things because people are getting more aware that security in big breaches are bad. And I think we're going to see some of that go from John over to let's do it and let's fix it. You see some of that -- I feel like that's going to accelerate and actually get done.

All right. Just Joe, just one more question. I have look forward to more communication. In November of 2017, you had mentioned and I have looked this up to be sure I was correct that you had said you planned a more frequent communications in the quarterly calls that we've had in the past. So, when could we look forward and what would it be in terms of the next communication not a quarterly report?

All right -- as we're deciding the course to take on the PR activities that'll have some effect, but also some of the big contracts that Joe's talking about were deployments to the Savant and a big part of that is important to us and that as you know for the last couple years, nearly all of our business has been government.

Yes. No, I realize. Savant is not the U.S. government, but the States, is that a correct statement?

Savant can be both.

Could it?

Yes, but for sure we're very much interested in developing that non-government Savant.

And to your more frequent question there, Howard, the two monster ones that we got last year, we actually entered them two days before a scheduled call. So, that would have been one that if it had been three weeks before the call or just after, we would have scheduled an unscheduled call because it was material size. If you look at it from a kind of a long-term perspective on communications and legality and what we committed to do is, don't hold it till the end of the quarter if it's material. And then if you look at it from the other perspective, a lot of what we've got has been sort of boring renewals and two big orders. And they certainly made us profitable, which is great. But in terms of driving the more frequent, I think that's kind of what I had in mind is if it's unusual or new or shows the priming of a new pump, like a deployment a Savant to a to a big thing, I think that's material worthy of communication.

I appreciate everything. Again Ward, Joe, Mike, congratulations on just really a great quarter. Looking forward to speaking with you before the next quarter if you understand my point.

Yes, we're anxious to [Indiscernible].

Thank you, Howard.

Thank you very much.

Your next question comes from the line of [Indiscernible]. Your line is open.

Hello. Thanks for taking the call. I have a quick question. You mentioned earlier in the call that the quarter benefited from some revenue from delayed customer orders from the first half of our first quarter, I guess, you said. Can you quantify that possibly?

I'd rather not. But if you look at the traditional level of sales and marketing spends in the first quarter was around $400,000. This quarter had $46,000.

Okay. Thank you.

Thanks.

That it?

There are no further questions at this time. I will turn the call back over to the presenters.

Okay. Operator, at this time, we'll wrap up the call. Thank you for participating in today's call. If you did not receive a copy of the press release or if you have further questions, you can reach me at 972-301-3658 or you can e-mail mpaxton@intrusion.com. Thanks again.

This concludes today's conference call. You may now disconnect.