Good evening. My name is Nicole and I will be your conference operator today. At this time, I would like to welcome everyone to the Q1 2016 Quarterly 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. Mike Paxton, you may begin your conference.

All right, thanks. Welcome to this afternoon’s call to review Intrusion's first quarter 2016 results and discuss our business. Participating on the call today with me would be Ward Paxton, Chairman, Co-Founder, President and CEO and Joe Head, Senior Vice President and Co-Founder of the company. Ward will give a business update, I will discuss financial results, Joe will give an update on ongoing projects. We will answer any questions after our prepared remarks. We distributed earnings release at approximately 3:05 Central 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 number is 855-859-2056. At the replay prompt, you can enter conference ID number, 9365800. 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 2016. 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 2016 and previous Form 10-Qs. Now, I will turn the call over to CEO and President, Ward Paxton.

Thank you, Mike. Welcome to Intrusion’s first quarter 2016 conference call. It’s good to be with you today to discuss our first quarter results and our progress. As most of you know, we have two product areas, TraceCop and Savant and we sell our products to both large commercial customers and the federal government. We sell both directly to the end customer and to resell partners. Our objective is to identify and locate bad guys or hackers that have penetrated our customer’s networks. The amount of this illegal activity continues to grow and TraceCop and Savant are extremely good tools in controlling the bad guys. Our top priority in 2016 is to grow our business and the first quarter was the step in the right direction. Orders booked in the first quarter 2016 were $1.9 million compared to $1.86 million in the fourth quarter of 2015 and $1.7 million in the first quarter of 2015. We will discuss our sales activities later, but now, Mike Paxton, our Chief Financial Officer will review our first quarter 2016 financial results that we released a little over an hour ago. Mike?

Okay. The 2016 financial results, revenue for the first quarter was $1.5 million compared to $1.7 million in the first quarter of 2015 and 1.5 million for the fourth quarter of 2015. Gross profit margin was 64% in the first quarter compared to 63% in the first quarter of last year and 63% for the fourth quarter 2015. Gross profit margin can be [Technical Difficulty] affected by sales product mix of deliverables in the quarter. In general, our goal is 65%, but it will be substantially attributable to the mix of products shipped. Intrusion’s first quarter 2016 operating expenses were $1.5 million compared to $1.4 million in the comparable quarter in 2015 and $1.4 million in the fourth quarter of 2015. Net loss for the quarter was $0.5 million compared to net loss of $0.3 million for the first quarter of 2015 and close to the same of $0.5 million for the fourth quarter of 2015. Thank you. And now back to Ward.

Thanks, Mike. Now, Joe Head, my partner, Co-Founder and Senior Vice President will discuss our products, markets and sales activities. Joe?

Thanks, Ward. In the first quarter, we booked 6 orders totaling $1.9 million. Of these 6, 2 were new projects. In April, we also received a first order from a new customer for $402,000 as we combined Savant and TraceCop data together around many projects, some new orders are hard to label as one or the other, but the above seven and three includes Savant. One of our newer partners has introduced us to their customers. Unlike our other partners, this one wants to be a referrer and recommender rather than a reseller. We've not yet completed the partnership documents, but they have already introduced us to a couple of customers and we have a trial underway at the first prospect now. I am meeting with that customer next week to see if we can turn the trial into a customer. We continue to work our partner channel as a way to multiply our sales force. We expect this referring partner to take us into a half a dozen more accounts over the next few months. This prospect pipeline has grown substantially this year with meetings with new prospects on our schedules every week. It is easy to sometimes to forget how long we work with many customers to book an order. The order we booked $402,000 in April was a new customer I started meeting with a year ago with the product defined and then the customer allocated his budget last September and the order came in six months after that. But after that they funded a full year rather than a half-year trial, so instead of getting $200,000, we got $400,000 which was good. As with most of our projects, we continue – we expect this new customer and their order and their work to continue for many years. I have been personally defining 12 new projects with one new partner of which six have been quoted and the customers are working on decisions in the budget now. The other six I am working with that partner, but too early to have a forecastable traction. In addition I am excited about working on a number of other prospects, five more potential customers I am working personally and 10 more that our sales reps are working. This is not a count of everything in the pipeline, but the ones that are in the detailed discussion demo or quote phase, one of my five in this last group may blossom into a number of projects over the next few months. Ward?

Thanks, Joe. We have a lot of new opportunities across the marketplace for both of our product lines and we expect growth in all areas this year. We thank you for joining our call today and look forward to communicating with you in the future. Mike.

All right. Nicole, at this time could you remind the participants how to queue up for questions.

[Operator Instructions] Your first question comes from the line of Ross Taylor. Your line is open.

Gentlemen, about two years ago you came on the conference call and you talked about the fact that you guys were going to invest in sales and product development in order to drive top line and earnings. Since then the company has lost money in seven of the last nine quarters, it’s had one quarter broke-even and your powerful quarter was you made $0.01 back in a quarter couple years ago. At the same time your revenues rather than growing have gone from $7.7 million in 2013 to $6.7 million and in fact it appears to me that the only growth vehicle you guys have is your tax loss carry forward. The stock is down 90% in the last 18 months, investors who want to get out or left with the situation where the only way they can get out is to tap out bids and I guess the positive thing is having lost about $2.60 in the last 18 months shareholders only have to look at losing $0.31 now.

Do you have a question?

Yeah, I actually I do, but I want to - I have to set this out and if you would be patient enough, I have been pretty damn patient with you, you should be patient with me. Your credibility has completely evaporated. You guys come on these calls and you repeatedly tell us that things are about to turnaround, they don't turnaround.

Again, is there a question?

Excuse me, sir, yes, there is. I would like to frame it. If you are afraid to be accountable for your failure to perform, then honestly take this company private or leave the job. I’d like to ask you why you continue to promise us things are going to get better when they only get worse? What is wrong with your sales efforts? What’s wrong with your management effort that you cannot get this company to where it’s got at least a flat operating cost basis, so you're not losing money? Why can't you sell a product in an area where people are – where opportunity is exploding in the area? Perhaps you'd like to answer those questions now, sir.

This is Ward Paxton. Yeah, over the last two years we've been focusing on broadening our approach to the marketplace and we've I think accomplished that now. We have met - our revenues are about constant over this period of time. We have increased our expenses to increase our investment in the business area, both in sales and marketing expense and R&D expense. Going forward this year we plan to concentrate on not only increasing our sales, but to move us back towards the back again. And we did stay profitable for a couple of years there as we’ve grown the business here over the last few years. However, we will put a priority on regaining profitability this year as in the past couple of years our priorities have been in expanding the product line and increasing our sales efforts.

You talked about expanding the product line yet sales have continually shrunk. I am confused. And also you had two years of losses, not two years of flat or gain.

With the capital that we have, we’re very limited to the amount we can invest in sales and marketing, R&D, all other things combined. So that’s a real limiting force and right now, it’s a real catch-22 type situation with, are we able to go out and raise capital at this time, probably not unless it’s at a huge cost and dilution to your shares. So we’re very limited into how we can grow and how we can attempt to grow and that makes everything pretty slow at limited options.

It seems pretty clear that the real answer is probably this company is worth a lot more debt than it is. Your tax loss alone is probably worth 2 to 3 times where the stock is trading at, and what you just laid out says you can’t

Okay. Well, in the release, I think you will find that’s not the case.

Well, I hate to tell you, but the definition of insanity is doing the same thing over and over again and expecting a different outcome, you can talk all you want about getting a different outcome, but --

[Technical Difficulty] we can’t do anything else.

But then you sell the company. I mean, the honest answer is if you can’t do anything else and you have don’t have the capital to grow the business, the tax loss alone is worth probably $0.80 to $1.00, the stock is trading at $0.31.

It’s not. Let’s now get in to what the value of the tax loss carry-forward is, it’s not nearly as great as what you just indicated. But –

What is the tax loss carry forward?

We did have a great deal of confidence in our ability to regain profitability going forward and I think you will be happy with the results.

I seriously doubt that any shareholder will be happy with the result. I mean, in fact if you believe that you guys should be aggressively buying stock in the market, I mean, now, for a pack of cigarettes, you can buy 300 shares or 400 shares.

Next question.

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

Good afternoon, gentlemen. How are you all? Can I get a breakdown on TraceCop and Savant for the first quarter? You did not release that in the -- let’s assume the Q, which I haven’t seen yet. So it’s a $1.5 million revenue in Q1, what’s the breakdown between TraceCop and Savant?

I don’t have that.

I don’t have that here at my fingertips. So TraceCop --

Can we do that offline?

Yes, we can do that offline.

Okay, fine. Secondly, I noticed in the balance sheet that this additional loan payable to officer for 525,000 and a line of credit for 364,000, so it’s total additional borrowings of $900,000? Is that for this quarter correct?

Yes.

Okay. Mike, you and I had conversation a bunch of months ago, and you had mentioned to me that the management is aligned with shareholders. So just gently taking up one comment that Ross Taylor made, why would you not be buying stock back, personally I am talking about, obviously not for the company.

We already own over 50% of the company, I mean, our family.

I know that, Mike. And my point –

And our CEO has a huge amount outstanding in loans to the company.

I am very well aware of where the loan came from and how it will happen, I recognize.

There is some difficulties in us purchasing stock in the marketplace with respect to responsibilities as then we see the turnaround that we are predicting, it would not be a good situation to be in.

I mean, [indiscernible] purchase a substantial amount of shares.

No, hear me out. And notwithstanding, you’ve already indicated you expect a turnaround to profitability this year, that’s public information. What I’m saying is not for a lot of money, and I know what you’ve lent to the company on very good terms in the path forward and I’m aware of. But for not a lot of money, you would go a long way to show your shareholders, yes, we already know about your ownership, but to better align emotionally that the shareholder see that guess, you care, you have a Board member who owns to the best of my knowledge, no stock and that sends a message. So my recommendation would be for -- listen 100,000 shares is $30,000, $40,000, I’m not suggesting a dollar amount, I am suggesting that it would be very nice to see that -- I don’t know what you’re going to disclose at your Annual Meeting, but after Annual Meeting, which is next week, that all the Board members, yourselves, your officers buy some stock, it would be worthwhile for the rest of the shareholders to see that happen. So please do take that under consideration.

I appreciate the input.

All right. Please. I think it would be very important –

Along the line, you might note in the filings that a few months ago, Mike and I exercised a couple of stock options and bought several shares.

We basically bought stock, the company got the proceeds.

I understand that's because of stock options. I know what they were and I saw that but I'm talking about buying stock in the open market versus exercising stock options, there is a big difference.

Alright, very good.

Okay, so bear that in mind.

Thank you.

Couple of other questions. You said your priority is to be in the black.

Yeah.

Can you give us an estimate and I understand the issue of credibility but could you or attribution, can you give us an estimate is it going to be Q2, Q3, Q4, do you have any sense?

I won't want to make any forecast of that at this time.

And going back to the number of customers, you said you're handling 5 people.

5 that is, had some focus on here.

Yeah it' 12 plus 5, yes personally. 17 right now.

So 17 potential customers, are these for and this is what I'm trying to get a breakdown, is this for Savant or is this for TraceCop?

Some in both, that's what I'm saying in the preamble there, as in lot of cases, we're actually combining the Savant and TraceCop data and the combined offering what we said we were going to do a month ago, so of that amount, they're basically all Savant plus TraceCop combined.

One last question and correct me if I'm wrong, but did I not hear in the call, from the last couple of calls that you're looking to do this as a - instead of an outright sale but as a potential service?

Well, involved in our activity with the customer, we do provide a lot of analytical inputs, and so it is a combination of the actual software and hardware plus then analytical and the analysis of the data.

So you call that as a service as opposed to a sale of the software and you're breaking it down differently?

No, we don't break it down differently but that's what's included in that.

So the 402,000 for the Savant order that's a sale of software?

That's accrued over a year --

Yeah the 402-K is actually TraceCop plus Savant combined sale.

And that is over a year's period of time?

That's a year worth of time.

Yeah, I assumed so. My last and this is a comment now, I really truly believe you should take it under advice that the Board and the senior officers buy some stock in the open market, I think we go a long way to bring some creditability back to the company which I believe very humbly that you're quite lacking.

We appreciate the input, thank you.

This is Joe, [indiscernible] put on your side is, if they buy stock in the open market that doesn’t put money into the company and what they've been doing is putting money in the company.

I understand that.

We’re not doing a secondary offering have complicated proceeds.

So, for all of us, I'm a stockholder as well.

I know that.

Doing things that don't help us get there seem like they might be good gestures but bad items.

Well, right now the creditability of the company is in question. And in fact if you wanted to do sell stock from the treasury to all of you at a reasonable price, I don't think I would object to that.

We appreciate that input, thank you.

There are no further questions at this time.

Operator at this time, we will conclude the conference call. Thank you for participating in today's call, if you did not receive the copy of the press release or if you have further questions, you can call me at 972-301-3658, you can email me mpaxton@intrusion.com. Thanks again.