NOTE 9 – COMMITMENTS AND CONTINGENCIES

Legal Proceedings

From time to time, the Company may become involved in various lawsuits and legal proceedings which arise in the ordinary course of business. However, litigation is subject to inherent uncertainties and an adverse result in any legal proceedings that may arise from time to time may harm the Company’s business. To the best of its knowledge, except for the legal proceedings disclosed below, there are no other material legal proceedings pending against the Company.

Securities Class Action

On July 11, 2025, we entered into a settlement term sheet to fully resolve the previously disclosed class action litigation captioned Kassam v. Flux Power Holdings, Inc. et al. (Case No. 3:25-cv-00113-JO-DDL), against the Company, its former chief executive officer, Ronald F. Dutt, and its former chief financial officer, Charles A. Scheiwe (collectively, the “Defendants”). The settlement was subsequently memorialized in a definitive settlement agreement, executed on August 27, 2025, which was filed with the Court on August 28, 2025 in connection with an unopposed motion for preliminary approval of the settlement, heard by the Court on October 23, 2025. In settling the class action, the Company is not admitting any liability and the settlement agreement constitutes no admission of liability or any admission regarding the accuracy of any allegation made by the plaintiffs.

The settlement provides for, among other things, the final dismissal of the litigation and a release of claims against the Defendants in exchange for the Company establishing a $1.75 million escrowed settlement fund to cover payments to the settlement class, attorneys’ fees and settlement administration expenses. Our liability insurers directly funded the full $1.75 million settlement amount, which was released from the escrowed settlement fund pursuant to the Order and Final Judgement.

Stockholder Derivative Action

On January 7, 2025, plaintiff Ronald Pearl filed a stockholder derivative complaint in the United States District Court, District of Nevada, captioned Pearl v. Dutt, et al. (Case No. 2:25-cv-00042), against current and former officers and directors of the Company, naming the Company as a nominal defendant. The complaint generally arises out of the same allegations contained in the above securities class action and alleges claims for breach of fiduciary duties and related claims.

Following a mediation, on July 11, 2025 the parties reached an agreement to resolve the derivative complaint in exchange for the Company implementing and maintaining certain corporate governance reforms and enhancements. In connection with the settlement, defendants agreed to a payment of attorneys’ fees and reimbursement of expenses for plaintiff’s counsel in the total amount of $425,000. On April 7, 2026, the Court issued its Order and Final Judgement and thereby dismissed all claims with prejudice.

In settling the derivative complaint, the defendants are not admitting any liability, and the settlement does not constitute an admission regarding the accuracy of any allegation made by the plaintiffs. As of June 30, 2026, the Company’s liability insurers directly funded $187,000 of the agreed upon attorneys’ fees.

Employment-Related Litigation

On April 30, 2024, a former employee (the “Employee”) filed a class action complaint against the Company and Insperity, its third-party payroll service provider, in San Diego County Superior Court for various claims which he has purported to assert on behalf of himself and all other individuals who worked for the Company or Insperity, amended to include a representative action complaint for Violation of Private Attorneys’ General Act (“PAGA”), seeking an unspecified amount of penalties and attorneys’ fees based on allegations that the Company violated certain California employment laws.

A Motion to Compel Arbitration was granted and arbitration was scheduled for March 26, 2026 wherein the parties agreed to a settlement of $164,000. Final settlement is subject to, among other things, court approval of such agreement. If the settlement does not obtain approval, the parties agree that the settlement class will be decertified without prejudice, and that all the parties will revert to their pre-settlement positions.

Final settlement is subject to, among other things, court approval of such agreement. If the settlement does not obtain approval, the parties agree that the settlement class will be decertified without prejudice, and that all the parties will revert to their pre-settlement positions.

Lease Obligations

Operating Leases

On April 25, 2019 the Company signed a Standard Industrial/Commercial Multi-Tenant Lease with Accutek to rent approximately 45,600 square feet of industrial space at 2685 S. Melrose Drive, Vista, California. Under the terms of the original lease, the monthly rental rate escalates at 3% each year. The Company has since signed additional amendments and extensions, most recently an extension through November 2028. The Company rents 63,200 square feet of industrial space for a monthly rent of approximately $70,000.

On December 16, 2022, the Company signed a Lease Agreement with MM Parker Court Associates, LLC to rent approximately 4,900 square feet of office space at Building 1959 Parker Court, Suite E, Atlanta, Georgia, set to expire in April 2028, with the monthly rate increasing 5% each year. Currently, the Company pays a monthly rent of approximately $6,000.

Total rent expense was approximately $975,000 and $929,000 for the fiscal years ended June 30, 2026 and 2025, respectively.

Finance Leases

The Company has three finance leases outstanding as of June 30, 2026 as follows:

 SCHEDULE OF FINANCE LEASES

For operating and finance leases, lease costs are amortized on a straight-line basis over their respective lease terms. Lease amortization related to leased assets was approximately $155,000 and $153,000 for the years ended June 30, 2026 and 2025, respectively. Interest expense was approximately $9,000 and $17,000 for the years ended June 30, 2026 and 2025, respectively.

On May 20, 2026, the Company notified its equipment lessor of the exercise of its option to purchase two items of Manufacturing Equipment currently under leases renewable in fiscal year 2027. The first, exercisable in August 2026, is for a payment of $20,000 for transfer of ownership. The second, exercisable in January 2027, is for a payment of $17,000 for transfer of ownership.

Lease Commitments

Future minimum lease payments as of June 30, 2026 are as follows:

 SCHEDULE OF FUTURE MINIMUM LEASE PAYMENTS

The weighted average remaining lease term for operating leases was 2.3 years and 1.6 years as of June 30, 2026 and 2025, respectively. The weighted average discount rate for operating leases was 7.2% and 8.5% as of June 30, 2026 and 2025, respectively.

The weighted average remaining lease term for finance leases was 0.5 years and 0.8 years as of June 30, 2026 and 2025, respectively. The weighted average discount rate for finance leases was 8.2% and 3.4% as of June 30, 2026 and 2025, respectively.

Product Warranty Obligations

The Company provides product warranties for goods sold. Product warranties are negotiated separately with each customer. Generally, the Company’s product warranties have a five year term for electronics components and an eight year term for battery cells. Other product components have separate warranty periods, and all warranties are voided when the product is used outside certain defined limits.

The Company evaluates its exposure to product warranty obligations based on historical experience. As of June 30, 2026 and 2025, a warranty liability of approximately $2,811,000 and $3,377,000, respectively, is included in accrued expenses on the consolidated balance sheets.

Additionally, the Company granted a certain customer a five-year right of return for goods purchased as a percentage of the original purchase price upon return of the goods to the Company’s warehouse. Management believes that, during the entire five-year period, the anticipated fair value of the purchased goods will exceed the amount committed as a refund, it therefore being disadvantageous for the customer to so exercise its right. As such, management neither presently expects, nor in the future will expect, the customer to demand such a right of return and refund, and no liability was accrued on our consolidated balance sheets therefor.