A class action complaint has been stayed pending preliminary approval of a settlement. The underlying case alleges that defendants made materially false and/or misleading statements, and failed to disclose material adverse facts about Intrusion's business, operations, and prospects. Specifically, defendants failed to disclose to investors that: (i) Intrusion’s Shield product was merely a repackaging of existing technology in Intrusion’s portfolio; (ii) Shield lacked the patents, certifications, and insurance critical to the sale of cybersecurity products; (iii) Intrusion overstated the efficacy of Shield’s purported ability to protect against cyberattacks; (iv) thus, Intrusion’s Shield was reasonably unlikely to generate significant revenue; and (v) accordingly, defendants’ positive statements about Intrusion’s business, operations, and prospects were materially misleading and/or lacked a reasonable basis.

On April 14, 2021, White Diamond Research published a report alleging, among other things, that Intrusion’s product, Shield, “has no patents, certifications, or insurance, which are all essential for selling cybersecurity products” and that “Shield is based on open-source data already available to the public.” Thus, the report stated that “Shield is a repackaging of pre-existing technology rather than an innovative offering.” Moreover, the report alleged that the claims that Shield “stopp[ed] a total of 77,539,801 cyberthreats from 805,110 uniquely malicious entities . . . in the 90-day beta program” were “outlandish,” leading White Diamond to question “[h]ow have these companies been able to function so far, as they’ve been attacked many times per minute by ransomware, malware, data theft, phishing and DDoS attacks?”

On this news, the Company’s share price fell $4.50, or over 16%, to close at $23.75 per share on April 14, 2021, on unusually heavy trading volume. The share price continued to decline by $3.22, or 14%, over the next trading session to close at $20.53 per share on April 15, 2021.

Unlike a class action, brought on behalf of damaged investors, a shareholder derivative action is an action brought by a shareholder of a public company on behalf of and for the benefit of the company itself against the directors and/or officers of that company. In a derivative action, shareholders “step into the shoes” of the directors and officers of a company and bring litigation that the board would be unwilling to pursue on its own.