PRO DEX INC (PDEX)

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion
and analysis should be read in conjunction with our unaudited interim condensed consolidated financial statements and the related notes
and other financial information appearing elsewhere in this report.

COMPANY OVERVIEW

The
following discussion and analysis provides information that management believes is relevant to an assessment and understanding of
the results of operations and financial condition of Pro-Dex, Inc. (“Company,” “Pro-Dex,”
“we,” “our,” or “us”) for the three-month and nine-month periods ended March 31, 2026 and 2025. This
discussion should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere
in this report. This report contains certain forward-looking statements and information.
The cautionary statements included herein should be read as being applicable to all related forward-looking statements wherever they may
appear. Our actual future results could differ materially from those discussed herein.

Except
for the historical information contained herein, the matters discussed in this report, including, but not limited to, discussions
of our product development plans, business strategies, strategic opportunities, and market factors
influencing our results, are forward-looking statements
that involve certain risks and uncertainties. Actual results may differ from those anticipated by us as a result
of various factors, both foreseen and unforeseen, including, but not limited to, our ability
to continue to develop new products and increase
sales in markets characterized by
rapid technological evolution, our ability to integrate and effectively operate Advanced Precision Machining, LLC (“APM”),
our ability to service our debt and remain in compliance with our related covenants, consolidation within our target marketplace and among
our competitors, the impact of tariffs on the cost of our raw materials and purchased components,
employee turnover, competition from larger, better capitalized competitors, and our ability
to realize returns on opportunities. Many other economic, competitive, governmental,
and technological factors could impact our ability to achieve our goals. You are urged to review
the risks, uncertainties, and other cautionary language described in this report, as well as in our
other public disclosures and reports filed with the Securities and Exchange Commission (“SEC”) from time to time, including,
but not limited to, the risks, uncertainties, and other cautionary language discussed in our Annual Report on Form 10-K for our fiscal
year ended June 30, 2025.

We specialize in the design,
development, and manufacture of autoclavable, battery-powered, and electric, multi-function surgical drivers and shavers used primarily
in the orthopedic, thoracic, and maxocranial facial (“CMF”) markets. We have patented adaptive torque-limiting software
and proprietary sealing solutions which appeal to our customers, primarily medical device distributors. We also manufacture and sell rotary
air motors to a wide range of industries, and precision machined parts and assemblies for the aerospace and defense industries through
our APM subsidiary.

Our principal
headquarters are located at 2361 McGaw Avenue, Irvine, California 92614 and our phone number is (949) 769-3200. Our Internet
addresses are www.pro-dex.com and www.advanced-precision.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K, amendments to those reports, and other SEC filings are available free of charge through our website as
soon as reasonably practicable after such reports are electronically filed with, or furnished to, the SEC. In addition, our Code of
Ethics and other corporate governance documents may be found on our website at the Pro-Dex, Inc. Internet address set forth above.
Our filings with the SEC may also be read and copied at the SEC’s Public Reference Room at 100 F Street, N.E., Washington,
D.C. 20549. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC
maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC at www.sec.govand company specific information at
www.sec.gov/edgar/searchedgar/companysearch.html.

Basis of Presentation

The condensed consolidated
results of operations presented in this report are not audited and are not necessarily indicative of the results to be expected for the
entirety of the fiscal year ending June 30, 2026, or any other interim period during such fiscal year. Our fiscal year ends on June 30
and our fiscal quarters end on September 30, December 31, and March 31. Unless otherwise stated, all dates refer to our fiscal year
and those fiscal quarters.

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Critical Accounting Estimates and Judgments

Our condensed consolidated
financial statements are prepared in accordance with accounting principles generally accepted in the United States. The preparation of
our financial statements requires management to make estimates and judgments that affect the reported amounts of assets, liabilities,
revenues, expenses, and related disclosures. We base our estimates on historical experience and various other assumptions that are believed
to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets
and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates.

An accounting policy is deemed
to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time
the estimate is made, and if different estimates that reasonably could have been used or changes in the accounting estimate that are reasonably
likely to occur could materially change the financial statements. Management believes that there have been no significant changes during
the three and nine months ended March 31, 2026 to the items that we disclosed as our critical accounting policies in Management’s
Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended June
30, 2025.

Business Strategy and Future Plans

Our business today is almost
entirely driven by sales of our medical devices. Many of our significant customers place purchase orders for specific products that were
developed under various development and/or supply agreements. Our customers may request that we design and manufacture a custom surgical
device or they may hire us as a contract manufacturer to manufacture a product of their own design. In either case, we have extensive
experience with autoclavable, battery-powered, and electric, multi-function surgical drivers and shavers. We continue to focus a significant
percentage of our time and resources on providing outstanding products and service to our valued principal customers. During the second
quarter of fiscal 2026, our largest customer executed an amendment to our existing supply agreement such that we shall continue to supply
their surgical handpieces to them through calendar 2028. During the third quarter of fiscal 2026, we completed the acquisition of APM,
one of our significant suppliers, to help meet the increased demand as a result of this contract extension. Our acquisition of APM provides
us with a second machine shop located in Costa Mesa, California that not only provides machined assemblies to service our largest customer
but also provides machining to other customers primarily in the defense and aerospace industries.

We are also working to build
top-line sales through active proposals of new medical device products with new and existing customers. Our patented adaptive torque-limiting
software has been very well received in the CMF and thoracic markets. Additionally, our latest Pro-Dex branded product, the Helios driver
for CMF applications, featuring our adaptive torque-limiting software, is expected to be released for production later this fiscal year.
While we have had interest in this product, there is no guarantee that our existing customers or new customers will purchase this new
driver.

In November 2020, we purchased
an approximate 25,000 square foot industrial building in Tustin, California (the “Franklin
Property”). This building is located approximately four miles from our Irvine, California headquarters and was acquired to provide
us additional capacity for our expected continued future growth, including anticipated expanded capacity for the manufacture of batteries
and new products. We began operations in the new facility during the fourth quarter of fiscal 2023 and believe that the additional capacity
will allow for our continued expected growth.

Our current objectives are
focused primarily on maintaining our relationships with our current medical device customers, successfully integrating and operating APM,
investing in research and development activities to design unique medical devices as well as Pro-Dex branded drivers to leverage our torque-limiting
software, and promoting active product development proposals to new and existing customers for both orthopedic shavers and screw drivers
for a multitude of surgical applications, while monitoring closely the progress of all these individual endeavors. While we expect revenue
growth in the future, it may not be a consistent trajectory but rather periods of incremental growth that current expenditures are helping
to create. However, there can be no assurance that we will be successful in any of these objectives.

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Description of Business Operations

Revenue

The
majority of our revenue is derived from designing, developing, and manufacturing surgical
devices for the medical device industry. The proportion of total sales by type is as follows
(in thousands, except percentages):

Certain
of our medical device products utilize proprietary designs developed by us under exclusive
development and supply agreements. All of our medical device
products utilize proprietary manufacturing methods and know-how, and are manufactured either
in our Costa Mesa or Irvine, California facilities, and are assembled in our Tustin,
California facility, along with our industrial products. Details of our medical device sales by
type is as follows (in thousands, except percentages):

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ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of
our financial condition and results of operations should be read in conjunction with our consolidated financial statements and the notes
thereto contained elsewhere in this report, as well as the Risk Factors included in Item 1A of this report. The following discussion contains
forward-looking statements. (See “Cautionary Note Regarding Forward-Looking Statements” included in Part I of this report.)

Overview

The following discussion and
analysis provides information that management believes is relevant to an assessment and understanding of our results of operations and
financial condition for the fiscal years ended June 30, 2026 and 2025.

We specialize in the design,
development, and manufacture of autoclavable, battery-powered and electric, multi-function surgical drivers and shavers used primarily
in the orthopedic, thoracic, and CMF markets. Additionally, we provide engineering, quality, and regulatory consulting services to
our customers. We also sell rotary air motors to a wide range of industries; however, these motors comprise a de minimis portion of our
business. Beginning in fiscal 2026, we began selling precision machined parts and assemblies for the aerospace and defense industries
through our newly acquired subsidiary, APM. Our products are found in hospitals, medical engineering labs, scientific research facilities,
and high-tech manufacturing operations around the world. We are headquartered in Irvine, California.

Critical Accounting Policies and Estimates

Our consolidated financial
statements are prepared in accordance with U.S. GAAP. The preparation of our financial statements requires management to make estimates
and judgments that affect the reported amounts of assets, liabilities, revenues, expenses, and related disclosures. We base our estimates
on historical experience and various other assumptions that are believed to be reasonable under the circumstances, the results of which
form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources.
Actual results may differ from these estimates.

Revenue Recognition

Under Accounting Standards
Update (“ASU”) 2014-09, (Topic 606) “Revenue From Contracts with Customers,” we recognize revenue from
the sales of products and services by applying the following steps: (1) identify the contract with a customer; (2) identify the performance
obligations in the contract; (3) determine the transaction price; (4) allocate the transaction price to each performance obligation in
the contract; and (5) recognize revenue when each performance obligation is satisfied. We primarily sell finished products and recognize
revenue at point of sale or delivery. However, we also perform services when we are engaged to design a product for a customer and there
is more judgment involved in determining the amount and timing of revenue recognition under those types of contracts. In fiscal 2026,
the revenue from NRE and prototype services represents approximately 2% of total revenue.

Returns of our product for
credit are not material; accordingly, we do not establish a reserve for product returns at the time of sale.

Inventories

Inventories are stated at
the lower of cost (first-in, first-out method) or net realizable value. Reductions to estimated net realizable value are recorded, and
charged to cost of sales, when indicated based on a formula that compares on-hand quantities to both historical usage and estimated demand
from the measurement date.

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Investments

Investments currently consist
of marketable equity securities of publicly held companies as well as preferred stock of a private company. The investments were made
to realize a reasonable return, although there is no assurance that positive returns will be realized. Investments are marked to market
at each measurement date, with unrealized gains and losses presented in other income (expense) in our consolidated income statements.
Some of our investments include the common stock of public companies that are thinly traded. Certain of these investments are classified
as long-term in nature, as we may not be able to liquidate the investments in a timely manner even if we wish to sell them. All of our
investments were subject to a valuation analysis as of June 30, 2026 and 2025.

Long-lived Assets & Intangible Assets

We review the recoverability
of long-lived assets, consisting of building, equipment, and improvements, and definite-lived intangibles when events or changes in circumstances
occur that indicate carrying values may not be recoverable. We assess the impairment of indefinite-lived intangibles annually, and more
frequently, if events or changes in circumstances indicate that it is more likely than not that the asset is impaired.

Building, equipment, and improvements
are recorded at historical cost and definite-lived intangibles are recorded at estimated fair value and depreciation is provided using
the straight-line method over the following periods:

Business Combinations

Accounting for a business
combination requires us to estimate the fair value of consideration paid and the individual assets acquired and liabilities assumed, which
involves a number of judgments, assumptions and estimates that could materially affect the amount and timing of costs recognized in subsequent
periods. We estimate the fair value of assets acquired, and liabilities assumed based upon assumptions we believe to be reasonable, but
which are inherently uncertain and, as a result, actual results may differ from estimates. Estimates associated with the accounting for
acquisitions may change as additional information becomes available. Due to the subjectivity of and reliance on forward-looking inputs,
these acquisition-related estimates qualify as critical accounting estimates.

Income Taxes

We recognize deferred tax
assets and liabilities for temporary differences between the financial reporting basis and the tax basis of our assets and liabilities,
along with net operating loss and tax credit carryovers. Deferred tax assets and liabilities at June 30, 2026 and 2025 consisted primarily
of basis differences related to unrealized gain/loss related to investments, stock-based compensation, fixed assets, accrued expenses
and inventories. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.

Significant management judgment
is required in determining our provision for income taxes and the recoverability of our deferred tax assets. Such determination is based
on our historical taxable income, with consideration given to our estimates of future taxable income and the periods over which deferred
tax assets will be recoverable. In evaluating our ability to recover our deferred tax assets, we consider all available positive and negative
evidence, including reversals of deferred tax liabilities, projected future taxable income, and results of recent operations. The assumptions
about future taxable income require significant judgment and are consistent with the plans and estimates we are using to manage the underlying
business. In evaluating the objective evidence that historical results provide, we consider three years of cumulative operating income
(loss).

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Results of Operations for the Fiscal Year Ended
June 30, 2026 Compared to the Fiscal Year Ended June 30, 2025

The following tables set forth
results from operations for the fiscal years ended June 30, 2026 and 2025:

Net Sales

The
majority of our revenue is derived from designing, developing, manufacturing and
repairing powered surgical instruments for medical device original equipment manufacturers. We
also manufacture and sell rotary air motors to a wide range of industries and precision machined parts and assemblies for the aerospace
and defense industries through our newly acquired subsidiary APM. The proportion of total sales by product/service
type is as follows:

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Net
sales in fiscal 2026 increased by $11.0 million, or 16%, as compared to fiscal 2025, due primarily to an increase in medical device revenue
of $14.4 million, offset by a decrease in repair revenue of $6.0 million. Details of our medical device sales by type is as follows:

Sales
of our medical device products increased $14.4 million, or 30%, during fiscal 2026 as compared to fiscal 2025. Our medical device revenue
to our largest customer, included in orthopedic sales above, increased $15.3 million, compared to the prior fiscal year due primarily
to the launch of that customer’s next generation handpiece. As previously disclosed, our largest customer executed a contract amendment
which extends the contract through 2028 and also provides for higher volumes of their newest surgical handpiece. Therefore,

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