PRO DEX INC (PDEX) FY 2026 MD&A

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.

17

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).

18

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:

19

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, we expect
to see similar levels of revenue reported in orthopedic sales through 2028. During fiscal 2026,
thoracic sales decreased by $2.2 million to $2.1 million, down from $4.3 million in fiscal 2025. Recurring revenue from distributors
of CMF drivers increased $1.3 million in fiscal 2026 compared to fiscal 2025. We do not have much visibility into our customers’
distribution networks, but these fluctuations are within expected levels.

Industrial
and scientific sales increased $652,000, or 76%, for fiscal 2026 compared to fiscal 2025 primarily due to the inclusion of APM sales from
the acquisition date of February 9, 2026.

Sales
of our NRE & prototype services increased $952,000, or 136%, during fiscal 2026 as compared to fiscal 2025 and relates to an increase
in the number of billable engagements for various NRE projects undertaken for our customers.

Our
fiscal 2026 repair revenue decreased approximately $6.0 million, or 33%, to $12.5 million, as compared to fiscal 2025, due to decreased
repairs of the legacy orthopedic handpiece we sold to our largest customer. This decrease relates to the customers transition to their
next generation handpiece. We anticipate that repair revenue may continue to decline in future periods as this customer continues to transition
to the next generation handpiece in lieu of enhancements of the legacy handpiece. However, beginning in fiscal 2027 we expect to commence
billable repairs of our customer’s next generation handpiece but we do not know yet at what volumes.

At June 30, 2026, we
had a backlog of $32.9 million compared with a backlog of $50.4 million at June 30, 2025. Our backlog represents firm purchase orders
received and acknowledged from our customers and does not include all revenue expected to be generated from existing customer contracts.
Substantially all of our backlog at June 30, 2026, as well as certain purchase orders received subsequent to June 30, 2026, are expected
to be delivered during fiscal 2027. We have experienced, and may continue to experience, variability in our new order bookings due to,
among other reasons, the launch of new products, the timing of customer orders based on end-user demand, and customer inventory levels.
While the June 30, 2026 backlog is significantly less than the backlog from one year ago, we attribute this simply to timing. We do not
typically experience seasonal fluctuations in our shipments and revenues.

20

Cost of Sales and Gross Margin

Cost of sales in fiscal 2026
increased $6.1 million, or 13%, from fiscal 2025, primarily due to the increase in product costs, consistent with the 16% increase
in net sales. During fiscal 2026, we experienced $2.0 million of under-absorption of manufacturing costs compared to $2.5 million in fiscal
2025. Costs related to inventory and warranty charges increased $858,000 in fiscal 2026 compared
to fiscal 2025, primarily due to increased inventory reserves relating to a complex machined part used in our largest customer’s
next generation handpiece.

Operating Expenses

Selling expenses consist of
salaries and other personnel-related expenses related to our business development department, as well as trade show attendance, advertising
and marketing expenses, and travel and related costs incurred in generating and maintaining customer relationships. Selling expenses increased
$172,000, or 50%, compared to fiscal 2025, primarily due to a $349,000 bad debt expense offset by reduced personnel and advertising expenses
of $80,000 and $92,000, respectively.

General and administrative
expenses (“G&A”) consist of salaries and other personnel-related expenses for corporate, accounting, finance, and human
resource personnel, as well as costs for outsourced information technology services, professional fees, directors’ fees, and costs
associated with being a public company. Fiscal 2026 G&A expenses increased $2.6 million, or 55%, compared to fiscal 2025, primarily
due to $449,000 in increased bonus accruals, $620,000 in increased personnel costs, $668,000 related to APM’s separate general and
administrative expenses since the date of acquisition, $500,000 in non-recurring consulting fees paid to the former owner of APM and $133,000
in increased non-cash equity compensation expense.

21

Research and development costs
generally consist of salaries, employer-paid benefits, and other personnel- related costs of our engineering and support personnel, as
well as allocated facility and information technology (“IT”) costs, professional and consulting fees, patent-related fees,
lab costs, materials, and travel and related costs incurred in the development and support of our products. Fiscal 2026 research and development
costs decreased $291,000 from fiscal 2025 due to a $155,000 reduction in legal expenses related to intellectual property matters and $76,000
and $35,000 in decreased recruiting and IT expenses, respectively, as well as increased spending on billable project expenditures which
get reclassified to cost of sales. The majority of our research and development expenditures incurred in fiscal 2026 and 2025 relates
to our sustaining activities related to products we currently manufacture and sell. Typical examples of sustaining engineering activities
include, but are not limited to, end-of-life component replacement, especially in electronic components found in our printed circuit board
assemblies, analysis of customer complaint data to improve process and design, and replacement and enhancement of tooling and fixtures
used in the machine shop, assembly operations, and inspection areas to improve efficiency and through-put.

Other Income (Expense)

Interest and Dividend Income

Our interest and dividend
income earned in fiscal 2026 and 2025 includes income earned from our interest-bearing money market accounts and portfolio of equity investments.

Gain on marketable investments,
net

As described in Note 5 to
the consolidated financial statements contained elsewhere in this report, during the second quarter of fiscal 2026, Zimmer Biomet acquired
Monogram Technologies, Inc. (“Monogram”) and upon consummation of the acquisition we received proceeds of $8.9 million and
realized a gain on our investment of $6.8 million. Additionally, during the third quarter ended March 31, 2026, Monogram successfully
completed the first of five milestones such that we earned and recorded an additional gain in the amount of $2.3 million. During fiscal
2025, we sold some of the stocks in our portfolio of equity investments receiving proceeds of $1.9 million and recording a gain on the
sale in the amount of $595,000. In addition to these realized gains, during fiscal 2026 and 2025, we also recorded unrealized gains and
losses to adjust our investment holdings to estimated fair value as well as eliminating the previously recorded unrealized gains on our
Monogram investment during the second quarter of fiscal 2026 in conjunction with recording the realized gain.

Interest Expense

Interest expense incurred
in fiscal 2026 and 2025 consists primarily of interest expense related to our debt with UMB Bank N.A. (“UMB”) described more
fully in Note 9 to the consolidated financial statements contained elsewhere in this report.

Income Taxes

The effective tax rate for
the fiscal years ended June 30, 2026 and 2025 was 24% and 26%, respectively. Our effective tax rate is slightly lower in fiscal 2026 compared
to 2025 due to our expansion into Florida and Indiana for income tax purposes, which states have a lower state income tax rate than California.

22

Liquidity and Capital Resources

The following table is a summary
of our Statements of Cash Flows and Cash and Working Capital as of and for the fiscal years ended June 30, 2026 and 2025:

Cash Flows from Operating Activities

Cash provided by operating
activities during fiscal 2026 totaled $7.2 million. Our net income was $13.7 million, which includes $5.7 million of net gains on equity
investments, as well as $1.4 million of depreciation and amortization and $688,000 of non-cash stock compensation. Additionally, at June
30, 2026 compared to June 30, 2025, our accounts receivable increased by $4.7 million corresponding with our increased revenue, offset
by our inventory decreasing by $1.6 million.

Cash used in operating activities
during fiscal 2025 totaled $1.7 million. Our net income was $9.0 million, which included $2.1 million of gains on certain equity investments,
as well as $1.2 million of depreciation and amortization and $555,000 of non-cash stock compensation. Additionally, at June 30, 2025 compared
to June 30, 2024, our accounts receivable increased by $2.5 million corresponding with our increased revenue, our income tax accounts
reflected a $1.5 million outlay of cash mostly related to higher estimated income tax payments, and our inventory increased by $6.9 million
in anticipation of increased sales to support our largest customer’s release of their next generation orthopedic handpiece.

Cash Flows from Investing Activities

Net cash provided by investing
activities for fiscal 2026 was $3.9 million and relates primarily to the proceeds received from the Zimmer Biomet acquisition of Monogram
previously disclosed in the amount of $11.2 million offset by our acquisition of APM in the amount of $6.5 million described further in
Note 3 to the consolidated financial statements contained elsewhere in this report. Additionally, we spent $483,000 on the purchase of
capital equipment and $350,000 related to Series A Preferred Stock of a privately held technology company.

Net cash used in investing
activities in fiscal 2025 was $238,000. During the 2025 fiscal year, we made capital expenditures in the amount of $1.2 million and exercised
warrants to purchase common stock and preferred stock of Monogram for cash in the amount of $899,000 (See Note 5 to the consolidated financial
statements contained elsewhere in this report) offset by proceeds of $1.9 million from the sales of marketable equity securities.

Cash Flows from Financing Activities

Net cash used in financing
activities for fiscal 2026 totaled $3.4 million and relates primarily to the repurchase of 79,898 shares of our common stock pursuant
to our share repurchase program.

Net cash used in financing
activities for fiscal 2025 totaled $292,000 and included $3.5 million in net borrowings on various notes payable to UMB, more fully described
in Note 9 to the consolidated financial statements contained elsewhere in this report, offset by $3.5 million related to the repurchase
of 130,148 shares of our common stock pursuant to our share repurchase program, as well as payment of $305,000 of employee payroll taxes
related to the award of 40,000 shares of common stock to employees under previously granted performance awards.

23

Liquidity Requirements for the Next 12 Months

As of June 30, 2026,
our working capital was $40.3 million. We currently believe that our existing cash and cash equivalent balances, together with our
account receivable balances, and anticipated cash flows from operations will provide us sufficient funds to satisfy our cash requirements
as our business is currently conducted for at least the next 12 months. We may also liquidate some or all of our investment portfolio
or borrow against our revolving loan with UMB (See Note 9 to consolidated financial statements contained elsewhere in this report), under
which we had availability of $11.0 million as of June 30, 2026.

We are focused on preserving
our cash balances by monitoring expenses, identifying cost savings, and investing only in those development programs and products that
we believe will most likely contribute to our profitability. As we execute our current strategy, however, we may require additional debt
and/or equity capital to fund our working capital needs and requirements for capital equipment to support our manufacturing and inspection
processes. In particular, we have experienced negative operating cash flow in the past, especially as we procure long-lead time materials
to satisfy our backlog, which can be subject to extensive variability.

Surplus Capital Investment Policy

During fiscal
2013, our Board approved a Surplus Capital Investment Policy (the “Policy”) that provides,
among other items, for the following:

The
Investment Committee is comprised of Messrs. Swenson (Chair), Cabillot,
and Van Kirk. Both Mr. Cabillot and Mr. Swenson are active investors with extensive portfolio management expertise. We leverage
the experience of these committee members to make investment decisions for the investment of our surplus operating capital or borrowed
funds. Additionally, many of our securities holdings include stocks of public companies that either Messrs. Swenson or Cabillot or both
may own from time to time either individually or through the investment funds that they manage, or other companies whose boards they sit
on. The Investment Committee approved each of the investments comprising the $1.7 million of investments held at June 30, 2026, which
amount includes unrealized holding losses in the amount of $97,000 at June 30, 2026.

In December 2019, our Board
approved a new share repurchase program authorizing us to repurchase up to one million shares of our common stock, as the prior repurchase
plan, authorized by our Board in 2013, authorizing the repurchase of 750,000 shares of common stock was nearing completion. In accordance
with, and as part of, these share repurchase programs, our Board has approved the adoption of several prearranged share repurchase plans
intended to qualify for the safe harbor Rule 10b5-1 under the Exchange Act (“10b5-1 Plan” or “Plan”).

During the fiscal year ended
June 30, 2026, we repurchased 79,898 shares at an aggregate cost, inclusive of fees under the Plan, of $3.4 million. During the fiscal
year ended June 30, 2025, we repurchased 130,148 shares at an aggregate cost, inclusive of fees under the Plan, of $3.5 million. On a
cumulative basis, since 2013 we have repurchased a total of 1,591,395 shares under the share repurchase programs at an aggregate cost,
inclusive of fees under the Plan, of $27.6 million. All repurchases under the 10b5-1 Plans were administered through an independent broker.