Good afternoon, ladies and gentlemen. My name is Kai and I will be your conference operator today. At this time, I’d like to welcome everyone to the Intrusion, Inc. First Quarter 2017 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. I’d now like to turn the call over to the Chief Financial Officer, Mr. Mike Paxton. Sir, you may begin your conference.

Okay. Thanks a lot. Sorry for the big [indiscernible] folks, I don’t know what’s going on with intercoms a day, but anyway I guess we’re finally here. Welcome to the call. We are going to discuss our first quarter 2017 financial results. On the call today is, Ward Paxton, President, and CEO; and Joe Head, Vice President and Co-Founder. Ward will give a business update. I will give the financial results and Joe will give an update on projects. And we will be glad to answer questions after the prepared remarks. We distributed the orange release at approximately 3:05 PM Central Time today. A replay of our call here today is available for about a one-week period. The replay conference call number is (855) 859-2056. At the replay prompt, enter conference ID 21215585. In addition, a live and archived audio webcast is hopefully going on at our Web site intrusion.com. Please be reminded that during this call, including the question-and-answer session, we may make forward-looking statements with respect to results, strategies, trends, economies 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 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, it was filed in March of 2017 and previous 10-Qs, the latest one was filed this afternoon. Now, I'll turn the call over to CEO and President, Ward Paxton.

Thank you, Mike. Welcome to Intrusion's first quarter 2017 conference call. It's good to be with you today. The good news is that Congress finally has passed the 2017 budget. As you know we had been in operating on what is known as continuing resolution since last October. Continuing resolution makes it almost impossible to get new business. Consequently, it has been almost impossible to grow our business. The business climate will be improved now. Intrusion's has two major product lines, TraceCop and Savant, and we sell primarily to federal government entities and large commercial customers. We sell our products directly to end users and through resell partners. Our products address network security issues and are used to identify and locate the bad guys who penetrate our customer's networks. This criminal activity continues to grow getting rise to opportunity for us in the future. Our federal government business has been adversely affected over the past eight months by the failure of Congress to prove the 2017 budget. However, the budget passage two weeks ago will cover government activities until the end of September. This will help some, but the government's primarily focusing now on next year's budget, 2018 budget, and that that has boarding's for next year I think, but things will continue pretty flat for the balance of this year until the end of September. Cyber security is receiving a lot of attention from the government, and we expect Congress to increase spending in this area. Congresses delays in approving the budget in a timely manner has made growth difficult to achieve and our quarterly revenues been running approximately flat at around $1.6 million. We've been working hard to expand our customer base and are optimistic that we will be successful in generating growth. At this time our TraceCop business pipeline includes more than 14 new customers, and our Savant pipeline includes more than 9 new customers. Products like TraceCop and Savant continually evolve when their capabilities grow. Our R&D efforts are focused on increasing these product capabilities. We will discuss our sales activities later, but now Mike Paxton, our Chief Financial Officer will review our first quarter financial results that we released a little over an hour ago. Mike?

Okay. Let's go over the first quarter 2017 financials. Unfortunately this won't take very long, because it hasn't changed much. Revenue for the first quarter was $1.56 million compared to $1.51 million for the first quarter of 2016. Gross profit margin was 63% compared to 64% first quarter last year. And as we’ve told you before the margins can be greatly affected by sales product mix deliverables in the quarter. In general, our goal is to hit 65% that can easily be done with greater revenue levels. Intrusion's first quarter 2017 operating expenses were $1.3 million compared to $1.5 million for the comparable quarter in 2016. Net loss for the current -- for the first quarter was $351,000 compared to a net loss of $544,000 for the first quarter of 2016. I guess that's positive. Thank you and now back to Ward.

Thank you, Mike. Now Joe here, my Partner and Co-Founder and Senior Vice President will discuss products, markets, and sales activities. Joe?

Thanks, Ward. As you all know at our size it only takes a few large new customers to make a big impact on our bottom-line. So I’ve been focused on developing a few new TraceCop opportunities and a new Savant partner. Last year's revenue came from nine TraceCop customers and four Savant customers. So a lot of my focus for last year has been developing some new TraceCop opportunities. Currently I'm waiting on two new project funds with DoD to make their way through procurement. Since the last call one of the three projects I mentioned has been in procurement, has been awarded and is now billing. It was the smallest one for 200K over six months. I expect another small one this month and a large one potentially in June. I do proof-of-concept TraceCop deliveries for a prospective customer to show them the value of our work. In addition to the three projects above I have an additional seven medium and three large-size projects that I'm working with new customers. Three of the medium ones and one small one will likely be the next ones funded with upside on a few more that haven't committed funds yet. Of these 10, we know 8 of them fairly well. We have -- they’ve already seen our work. This represents an increase in our pipeline since last quarter, moved five projects down to developmental from active and put eight more on the active list for a net increase of three. Of the five that moved down, four still talking to us, but won't likely happen to our next year's budget for FY18 starting after September 30. As I mentioned in last call, I’ve been spinning time with a new potential Savant partner. We’ve also uncovered some DoD potential for Savant and will be having a few meetings on this opportunity soon. So I’m just starting to spend a few hours here and there on Savant, but the potential upside is worth the time. I’m working on some other long-term potential customers that need to see some new projects as well, while supporting our Savant sales reps and their sales effort. One law enforcement prospect indicated last summer that they wanted to put us under contract to [indiscernible] and now that they have the new budget I met with them last week, they’re still interested, introduced me to the new Group Chief who takes over the Group in September. So, keep working things. Sometimes that get put off forever working on budget, but they’re moving again. My goal is to continue to focus on TraceCop opportunities, till I gets above the breakeven revenue level, then I will be able to shift time back to Savant and FDA sales. Our stable base of 13 customers is now 14, they continue to renew our base business in a predictable fashion, so our key is to add to that data -- to that base. Ward?

Thanks, Joe. The new business we are pursuing is very exciting and should generate growth and sales and profitability. Our breakeven point as you mentioned, there's approximately $1.8 million of quarterly revenue, which we should breach soon. The Intrusion team is focused on achieving revenue growth and profitability, and we are confident of reaching these goals. Thank you for joining us today, and we look forward to an outstanding future. Mike?

Okay. We will now take questions. Operator, could you remind the participants how to ask questions?

[Operator Instructions] And our first question comes from the line of Howard Brous.

Good afternoon. In the last quarter, in the conference call -- excuse me, I apologize, you had indicated that you had three potential contracts under the continuing resolution. And the three contracts were two for 400,000, one for 800,000. Now we wind up with the contract for 200,000, I’d like to try to understand what is that -- how does that happen?

Well, basically the 400,000 is an annual estimate and the 200,000 it was for half the year. So it's a six months order. So it's basically still the same scope. It's that the customer decided to break it down into two pieces. This is not uncommon. It happens frequently.

And you expect the other two contracts in the next foreseeable future?

Yes.

Yes, one of them maybe this week. The other one, the funds are being moved to the customer shop, but that haven't happened yet.

Right. Getting back to a constant question about releases of contracts, which I want to get to because we communicate with you quarterly and a lot of events happened like the budget, like contracts, when do you think you're going to be comfortable like or I will ask the same question I do every quarter about announcing more information in between quarters.

We will begin doing that as a total amount of business increases and is a frequency of this increases. As we’ve talked since the last quarter, there hasn't been a great deal of activity and the orders there. Some of it -- the larger part has been renewals of existing business. So the value of communication and everything we will continue to increase and as that occurs we will start making a more frequent announcement.

You had also indicated in the prior calls -- two prior calls that your opportunity and I think you quantified it has been close to $5 million, assuming that we did have a final budget? I would like you to comment on that number and how do you think …?

So, again now …

Yes, and you acquired -- in your prior conference calls …

Yes.

… you had indicated that the opportunity, should the budget be passed this year that your opportunity was approximately $5 million, that's almost a verbatim quote from your conference call. I think it was exactly $4.4 million, but it's a number. I’d like you to comment on that. And based on the discussion you just had a moment ago about your additional opportunities, can you quantify those?

Well, the general value of the business is related, as Joe mentioned, they’re -- the size of the contracts and we normally see from our customers a range from $400,000 a year to more than $1 million. The average is somewhere down and probably are between $400,000 and $800,000 annually, so that as we reach continuum there and get a customer into the end of the column or the business with them regularly, our experience has been they continue so that our level of continued activity is good. When -- if you got the $4.4 million that undoubtedly came from a number of opportunities that we were working times on average number, or say $400,000 a year and have come up with your $4.4 million estimated value, that was in the final. So as Joe indicated, our number of opportunities in the final now has increased and therefore we would expect that overall number to come up in terms of expected value over the next year.

Based on what you’ve just indicated a few moments ago, can I expect these contracts become viable, you’re going to be profitable in Q2 or Q3?

Well, the budget just was a -- it is now approved and the amount of time that it takes for that they all go through is at least a couple of months, so we won't see any effects of the approved budget, any material effects until the next quarter. So, the first quarter that we will see some material effects of the budget now the third quarter.

Now but you just indicated that the other -- going back to last quarter's conference call, you indicated …

Yes.

… that they were three contracts that you were probably going to get based on the continuing resolution.

Yes.

You’ve already received one, and other two you expect to receive, will that create for the third quarter or the second quarter profitability. I'm not talking about the new budget.

You know I understand what you’re saying, and we don’t have -- right now we’ve got one of those three.

Right.

As we get to the next two, then they will start generating revenue. As we get the order, it takes a little bit before it starts generating revenue. So that the $200,000 contract we just received will generate about $30,000 a month, okay?

Right. I realize how it all breaks down.

Yes. And so the other two will generate $30,000 a month and $60,000 a month, so the overall -- after they all three get booked and running, we will see the results of about 100 -- go over a $100,000 a month for those three contracts, which will generate about $300,000 a quarter, which starts the movement as opposed to profitability.

Well, to come back to the comment, how -- let me ask you differently. These three contracts assuming you had them by the end of this quarter, second quarter …

Yes.

… in the third quarter you’re generating an additional $300,000 or $1.2 million a month. I’m sorry, how much additional dollars in the quarter would you generate from those …?

$300,000.

About $300,000 for the third quarter.

For the third quarter.

Yes.

So that would put us at about breakeven for the quarter.

Okay.

Obviously we're planning on all that to happen, so we’ve been close to profitable.

All right. I will rejoin the queue. Thank you.

Okay.

Thank you.

And our next question comes from the line of Walter Schenker.

Hi, Walter.

Hi, Ward. Gee, I had me Ward when I heard the conference call is cancelled [indiscernible] something happened to somebody.

Yes.

Something happened to the conference call switch.

[Indiscernible] alternative, so we’ve been going through quarterly conference calls for over a decade. During that period of time and you again used the term funnel just now, although it wasn’t in the press release, there have been various figures and ways of describing your contact with customers, largely potential customers that old time that number has been a reasonably good size number, 10, 15, 20, sometimes it's so much bigger number, but those with the top of the funnel, they’re not in the bottom of the funnel. I’m trying to understand why about now you’ve add some Savant back in, why this press release and the potential contracts in this press release are any more likely to occur than the last 40 odd conference calls, when there's been a significant number of potential contracts and maybe one would close every so often. So what makes this different than all the other conference calls that funnel and with the potential customers?

Go ahead. There hasn’t been any material difference in the probabilities of success and getting the orders from the customer's. The -- one of the things that has occurred this year of course sets the continuing resolution situation has extended longer than we thought and everything the number of new orders that we’ve seen up until now, it have been very limited and less than in the past, so that should get improve going forward as we’ve just indicated the three orders that we talked about last time that we now say are coming. We did indicate we’re moving forward independent of the continuing resolution situation, and that's true. So the total yield of these orders I don’t think it has changed any of the degree that the probability of the total numbers maybe has changed.

Okay. And the probability of the total numbers therefore has increased materially?

I believe that it will. We're indicating there, that it has been increased. Perhaps that the earlier ones, I’m not -- don’t know what the data was and everything, we had a list of potential customers that was a lower probability than now. The probabilities that we are seeing now are pretty typical of what we expect.

Okay. And assuming Joe and the sales staff have concentrated on TraceCop for well over a year now. I realize some of the results that delayed due to the government budgetary process, but in the past you've indicated that again always such actions are vagaries of delay and time, but you thought a significant number of the hard probability contracts by definition to sort of high profitability could in fact be close. So we should expect or you're expecting -- [indiscernible] suppose to expect that a significant number of these things in the pipeline can be approved for this [indiscernible] between now and the end of September over the next [indiscernible] months, correct?

Yes, we expect that number to be approved.

Okay. And just …

Go ahead -- Joe, I’m sorry. Joe, ahead.

Yes, Walter, I went through my list of 13 and sort of handicapped, which of those -- I have already said, I have this amount of money and I’m going to see it. That’s the 3 plus 4 more and then if I look -- that was I why I made the comment about the additional insight, expect might move this quarter, through September 30. In addition, we’ve got one project that may double in run rate, which will help us from our traditional base pool and didn't talk about today. And then we also have two of them that are larger that they've applied for unspent, uncommitted funds. One of the potential bluebirds for us is that there is a large amount of unspent money, because of the CR and people are clamoring to get that. Two folks that are trying to lay hands on that for us. And so addition of that seven there's two more that are sort of large. But that has not been that -- our name is not carved in stone on those yet, but that's in my 13 I’m working. So we’ve got some good things [indiscernible] looked in the eye and say I’m funding this and it will move your way, but it actually take some three months to do those things sometimes.

Okay. And just briefly address Savant which sort of was dead [ph] in the water seems be getting a little bit a life back that you sort of explained, What’s happening there?

Really it's a continuation of where we were. There's very little new stuff with Savant. We are still working with one primary reseller that's as good potential but we're betting on reaching profitability without Savant. What we get with Savant will be a bonus.

Yes.

Okay. Thank you.

Thanks, Walter.

Operator, anymore questions? All right. At this time, I will wrap up the call. Thank you for sticking with us today and participating in today's call. If you didn't get the press release or if you have further questions, you can contact me at 972-301-3658, email mpaxton@intrusion.com. Thanks a lot. Good bye.

That concludes today’s conference call. Thank you for your participation. You may now disconnect.