PRO DEX INC (PDEX) Risk Factors

ITEM 1A. RISK FACTORS

Investing in our common
stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information contained
in this report, before deciding whether to invest in shares of our common stock. If any of the following risks actually occur, our business,
financial condition, operating results, and prospects would suffer. In that case, the trading price of our common stock would likely decline
and you might lose all or part of your investment in our common stock. The risks described below are not the only ones we face. Additional
risks that we currently do not know about or that we currently believe to be immaterial may also impair our operations and business results.

Risks Related to Our Business and the Industry
in Which We Operate

A substantial portion of our revenue is derived
from a few customers. If we were to lose a key customer, it would have a material adverse effect on our business, financial condition,
and results of operations.

In fiscal 2025, our top three
customers accounted for 94% of our sales, with our current largest customer accounting for 75% of our sales. This customer has made purchase
commitments to us through a supply agreement to purchase surgical handpieces through calendar 2025, and has placed purchase orders for
deliveries in 2026, but there can be no assurance that this customer will extend purchase commitments to us beyond that date. The loss
of, or a material reduction in purchases from, this customer or any of our other significant customers would severely impact us, including
having a material adverse effect on our business, financial condition, cash flows, revenue, and results of operations.

A substantial portion of our business is derived
from our core business area that, if not serviced properly, may result in a material adverse impact upon our business, financial condition,
and results of operations.

In fiscal 2025, we derived
99% of our revenue from sales of our medical device products and related services. We believe that a primary factor in the market acceptance
of our products and services is the value they create for our customers. Our future financial performance will depend in large part on
our ability to continue to meet the increasingly sophisticated needs of our customers through the timely development, and successful introduction
and implementation, of new and enhanced products and services, while at the same time continuing to provide the value our customers have
come to expect from us. We have historically expended a significant percentage of our revenue on product development and believe that
significant continued product development efforts will be required to sustain our growth. Continued investment in our sales and marketing
efforts will also be required to support future growth.

There can be no assurance
that we will be successful in our product development efforts, that the market will continue to accept our existing products, or that
new products or product enhancements will be developed and implemented in a timely manner, meet the requirements of our customers, or
achieve market acceptance. If the market does not continue to accept our existing products, or our new products or product enhancements
do not achieve market acceptance, our business, financial condition, and results of operations could be materially adversely affected.

Our customers may cancel or reduce their orders, change production
quantities, or delay production, any of which would reduce our sales and adversely affect our results of operations.

Since most
of our customers purchase our products from us on a purchase order basis, they may cancel, change, or delay product purchase commitments
with little notice to us. As a result, we are not always able to forecast with certainty the sales that we will make in a given period
and sometimes we may increase our inventory, working capital, and overhead in expectation of orders that may never be placed, or, if placed,
may be delayed, reduced, or canceled.

The following factors, among others, affect our
ability to forecast accurately our sales and production capacity:

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In addition to reducing our
sales, delayed, reduced, or canceled purchase orders also may result in our inability to recover costs that we incur in anticipation of
those orders, such as costs associated with purchased raw materials and write-offs of obsolete inventory.

In recent years, we have launched several new
medical device products and our estimates of warranty claims are based largely on our previous history from similar legacy products. If
actual warranty claims exceed our estimates, it could have an adverse effect on our results of operations and financial condition.

In recent years, we have completed
significant medical device development projects in the CMF and thoracic surgical segments for which we have made estimates of product
warranty claims based upon similar, legacy products. If the actual repair volumes or repair costs exceed the estimates that we have been
using, we may incur additional costs which could be materially adverse to our results of operations and financial condition.

We face significant competition from a number
of different sources, which could negatively impact our results of operations.

The markets for products in
the industries served by our customers are intensely competitive, and we face significant competition from a number of different sources.
Several of our competitors have significantly greater name recognition, as well as substantially greater financial, technical, product
development and marketing resources, than us.

We compete in all of our markets
with other major surgical device and related companies. As a provider of outsourced products and services, we also compete with our customers’
own internal development groups. Competitive pressures and other factors, such as new product or new technology introductions by us, our
customers’ internal development and manufacturing departments, or our competitors, may result in price or market share erosion that
could have a material adverse effect on our business, results of operations and financial condition. Also, there can be no assurance that
our products and services will achieve or maintain broad market acceptance or will successfully compete with other products.

The industry in which we operate is subject
to significant technological change and any failure or delay in addressing such change could adversely affect our competitive position
or could make our current products obsolete.

The medical device market
is generally characterized by rapid technological change, changing customer needs, frequent new product introductions and evolving industry
standards. The introduction of products incorporating new technologies and the emergence of new industry standards could render our existing
products obsolete and unmarketable. There can be no assurance that we will be successful in developing and marketing new products that
respond to technological changes or evolving industry standards.

New product development requires
significant research and development expenditures that we have historically funded through operations; however, we may be unable to do
so in the future. Any significant decrease in revenues or research funding could impair our ability to respond to technological advances
in the marketplace and to remain competitive. If we are unable, for technological or other reasons, to develop and introduce new products
in a timely manner in response to changing market conditions or customer requirements, our business, results of operations, and financial
condition may be materially adversely affected. Although we continue to target new markets for access, develop new products, and update
existing products, there can be no assurance that we will do so successfully or that, even if we are successful, such efforts will be
completed concurrently with or prior to the introduction of competing products. Any such failure or delay could adversely affect our competitive
position or could make our current products obsolete.

We rely heavily on our proprietary technology,
which, if not properly protected or if deemed invalid, could have a material adverse effect on our business, financial condition, and
results of operations.

We are dependent on the maintenance
and protection of our proprietary technology and rely on patent filings, exclusive development and supply agreements, confidentiality
procedures and employee nondisclosure agreements to protect it. There can be no assurance that the legal protections and precautions taken
by us will be adequate to prevent misappropriation of our technology or that competitors will not independently develop technologies equivalent
or superior to ours. Further, the laws of some foreign countries do not protect our proprietary rights to as great an extent as do the
laws of the United States and are often not enforced as vigorously as those in the United States.

We do not believe that our
operations or products infringe on the intellectual property rights of others. However, there can be no assurance that others will not
assert infringement or trade secret claims against us with respect to our current or future products. Assertions or claims by others,
whether or not valid, could cause us to incur significant legal costs defending our intellectual property rights and potentially require
us to enter into a license agreement or royalty arrangement with the party asserting the claim or to cease our use of the infringing technology,
any of which could have a material adverse effect on our business, financial condition and results of operations.

If our technology infrastructure is compromised,
damaged or interrupted by a cybersecurity incident, data security breach or other security problems, our results of operations and financial
condition could be adversely affected.

We use technology in substantially
all aspects of our business operations, and our ability to serve customers most effectively depends on the reliability of our technology
systems. We use software and other technology systems, among other things, to generate sales orders, job orders, and purchase orders and
to monitor and manage our business on a day-to-day basis. Cybersecurity incidents can include computer viruses, computer denial-of-service
attacks, worms, and other malicious software programs or other attacks, covert introduction of malware to computers and networks, impersonation
of authorized users, and efforts to discover and exploit any design flaws, bugs, security vulnerabilities or security weaknesses, as well
as intentional or unintentional acts by employees or other insiders with access privileges, intentional acts of vandalism by third parties
and sabotage.

In addition, our technology
infrastructure and systems are vulnerable to damage or interruption from natural disasters, power loss and telecommunications failures.
Any such disruption to our systems, or the technology systems of third parties on which we rely, the failure of these systems to otherwise
perform as anticipated, or the theft, destruction, loss, misappropriation, or release of sensitive and/or confidential information or
intellectual property, could result in business disruption, negative publicity, loss of customers, potential liability, including litigation
or other legal actions against us or the imposition of penalties, fines, fees or liabilities, which may not be covered by our insurance
policies, and competitive disadvantage, any or all of which would potentially adversely affect our customer service, decrease the volume
of our business and result in increased costs and lower profits. Moreover, a cybersecurity breach could require us to devote significant
management resources to address the problems associated with the breach and to expend significant additional resources to upgrade further
the security measures we employ to protect information against cyber-attacks and other wrongful attempts to access such information, which
could result in a disruption of our operations.

While we have invested, and
continue to invest, in technology security initiatives and other measures to prevent security breaches and cyber incidents, as well as
disaster recovery plans, these initiatives and measures may not be entirely effective to insulate us from technology disruption that could
result in adverse effects on our results of operations and financial condition.

To service our debt obligations, we will require
a significant amount of cash. However, our ability to generate cash depends on many factors beyond our control.

Our ability to make payments
on, and to refinance, our debt obligations and to fund capital expenditures, will depend on our ability to generate cash in the future,
which, in turn, is subject to general economic, financial, competitive, regulatory and other factors, many of which are beyond our control.

Our business may not generate
sufficient cash flow from operations, and we may not have available to us future borrowings in an amount sufficient to enable us to pay
our debt obligations or to fund our other liquidity needs. In these circumstances, we may need to refinance all or a portion of our debt
obligations on or before maturity. We may not be able to refinance any of our debt obligations, on commercially reasonable terms, or at
all. Without this financing, we could be forced to sell assets or secure additional financing to make up for any shortfall in our payment
obligations under unfavorable circumstances. However, we may not be able to secure additional financing on terms favorable to us or at
all and, in addition, the agreements governing our debt obligations limit our ability to sell assets. In addition, we may not be able
to sell assets quickly enough or for sufficient amounts to enable us to meet our obligations.

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Our cash and cash equivalents may be exposed
to banking institution risk.

We hold our cash balances
with a single financial institution which institution is subject to risks, which may include failure or other circumstances that limit
our access to deposits or other banking services. For example, in March 2023, Silicon Valley Bank (“SVB”) was unable to continue
their operations and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver for SVB. If similar failures
in financial institutions occur where we hold deposits, we could experience additional risk. Any such loss or limitation on our cash and
cash equivalents would adversely affect our business.

In addition, if similar failures
affect institutions relied on by our customers, we might not be able to receive timely payment from customers. We and they may maintain
cash balances that are not insured or are in excess of the FDIC’s insurance limit. Any delay in ours or our customers’ ability
to access funds could have a material adverse effect on our operations. If any parties with which we conduct business are unable to access
funds pursuant to such instruments or lending arrangements with such a financial institution, such parties’ ability to continue
to fund their business and perform their obligations to us could be adversely affected, which, in turn, could have a material adverse
effect on our business, financial condition and results of operations.

We periodically invest surplus cash in marketable
securities and other investments in order to realize a positive return, although there can be no assurance that a positive return will
be realized, and we could lose some or all of our investments, which could adversely affect our financial condition and results of operation.

We invest a significant portion
of our excess capital in marketable securities, including equity securities of publicly traded companies. At June 30, 2025, the fair value
of our investments was approximately $6.9 million. While we intend to hold our investments until such time as we believe it is appropriate
to sell them in accordance with our overall investment policy, we may have unexpected cash requirements that could necessitate the sale
of some or all of these investments for a loss. Additionally, these investments are subject to changes in their valuation, and are recorded
at their estimated fair value at each measurement date, with unrealized gains and losses presented in other income (expense) in our consolidated
income statements, which can result in material upward or downward non-cash adjustments to our income from quarter-to-quarter.

Our operations are dependent upon our key personnel.
If such personnel were to leave unexpectedly, we may not be able to execute our business plan.

Our future performance depends
in significant part upon the continued service of our key technical and senior management personnel. Because we have a relatively small
number of employees when compared to other companies in the same industry, our dependence on maintaining our relationship with key employees
is particularly significant. We are also dependent on our ability to attract and retain high quality personnel, particularly in the areas
of product development, operations management, marketing and finance.

A high level of employee mobility
and the aggressive recruiting of skilled personnel characterize the medical device industry. There can be no assurance that our current
employees will continue to work for us. Loss of services of key employees could have a material adverse effect on our business, results
of operations, and financial condition. Furthermore, we may need to provide enhanced forms of incentive compensation to attract and retain
such key personnel, which could potentially dilute the holdings of other shareholders.

We may not be able to successfully integrate our business acquisitions,
which could adversely affect our business, financial condition, and results of operations.

We have acquired, and may
acquire in the future, businesses, products, and technologies that complement or expand our current operations. Acquisitions could require
significant capital investments and require us to integrate with companies that have different cultures, management teams, and business
infrastructure. Depending on the size and complexity of an acquisition, our successful integration of the acquisition could depend on
several factors, including:

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If market conditions or other
factors require us to change our strategic direction, we may fail to realize the expected value from one or more of our acquisitions.
Our failure to successfully integrate any future acquisitions or realize the expected value from past or future acquisitions could harm
our business, financial condition, and results of operations.

We have experienced losses in the past, and we cannot be certain
that we will sustain our current profitability; we may need additional capital in the future to fund our businesses, which we may not
be able to obtain on acceptable terms.

We have experienced operating
losses in the past. Our ability to achieve or sustain profitability is based on a number of factors, many of which are out of our control,
including the material costs for our products and the demand for our products.

We currently anticipate that
our available capital resources, including our existing cash and cash equivalents and accounts receivable balances, will be sufficient
to meet our expected working capital and capital expenditure requirements as our business is currently conducted for at least the next
12 months. However, if our available capital resources become insufficient, we may attempt to raise additional funds through public
or private debt or equity financings, if such financings become available on acceptable terms. We cannot be certain that any additional
financing we may need will be available on terms acceptable to us, or at all. If adequate funds are not available or are not available
on acceptable terms, we may not be able to take advantage of opportunities, develop new products, or otherwise respond to competitive
pressures, and our operating results and financial condition could be adversely affected.

Risks Related to Ownership of Our Common Stock

Two of our directors hold voting power with
respect to a substantial portion of our outstanding common stock that enables them to have significant influence over the outcome of all
matters submitted to our shareholders for approval, which influence may conflict with our interests and the interests of other shareholders.

As of August 20, 2025, two
of our directors, Nicholas J. Swenson and Raymond E. Cabillot, directly or indirectly, controlled voting power over approximately 39%
(31% and 8%, respectively) of the outstanding shares of our common stock. As a result of such voting control, these directors will have
significant influence over all matters submitted to our shareholders for approval, including the election of our directors and other corporate
actions, and may have interests that conflict with our interests and the interests of other shareholders.

Our quarterly results can fluctuate significantly
from quarter to quarter, which may negatively impact the price of our shares and/or cause significant variances in the prices at which
our shares trade.

Our sales have fluctuated
in the past, and may fluctuate in the future from quarter to quarter and period to period, as a result of a number of factors, including,
without limitation: the size and timing of orders from customers; the length of new product development cycles; market acceptance of new
technologies; changes in pricing policies or price reductions by us or our competitors; the timing of new product announcements and product
introductions by us or our competitors; the financial stability of major customers; our success in expanding our sales and marketing programs;
acceleration, deferral, or cancellation of customer orders and deliveries; changes in our strategy; revenue recognition policies in conformity
with accounting principles generally accepted in the United States (“U.S. GAAP”); personnel changes; and general market and
economic factors.

Because a significant percentage
of our expenses are fixed, a variation in the timing of sales can cause significant fluctuations in operating results from quarter to
quarter. As a result, we believe that interim period-to-period comparisons of our results of operations are not necessarily meaningful
and should not be relied upon as indications of future performance. Further, our historical operating results are not necessarily indicative
of future performance for any particular period.

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In addition, it is possible
that our operating results in future quarters may be below the expectations of public market analysts and investors. In such an event,
the price of our common stock could be materially adversely affected.

Regulatory & Compliance Risks

Our operations are subject to a number of complex
government regulations, the violation of which could have a material adverse effect on our business.

The manufacture and distribution
of medical devices are subject to state and federal requirements set forth by various government agencies including the FDA and EPA. The
statutes, regulations, administrative orders, and advisories that affect our businesses are complex and subject to diverse, often conflicting,
interpretations. While we make every effort to maintain full compliance with all applicable laws and regulations, we are unable to eliminate
the ongoing risk that one or more of our activities may at some point be determined to be non-compliant. The penalties for non-compliance
could range from an administrative warning to termination of a portion of our business. Furthermore, even if we are subsequently determined
to have fully complied with applicable laws or regulations, the costs to achieve such a determination and the intervening loss of business
could adversely affect or result in the cessation of a portion of our business. A change in such laws or regulations at any time may have
an adverse effect on our operations.

The FDA designates all medical
devices into one of three classes (Class I, II, or III) based on the level of control necessary to assure the safety and effectiveness
of the device (with Class I requiring the lowest level of control and Class III requiring the greatest level of control). The surgical
instrumentation we manufacture is generally classified into Class I. The FDA has broad enforcement powers to recall and prohibit the sale
of products that do not comply with federal regulations and to order the cessation of non-compliant processes. No claim has been made
to date by the FDA regarding any of our products or processes. Nevertheless, as is common in the industry, certain of our products and
processes are from time to time subject to routine governmental reviews and investigations. We are also subject to EPA regulations concerning
the disposal of industrial waste.

While management believes
that our products and processes fully comply with applicable laws and regulations, we are unable to predict the outcome of any such future
review or investigation.

We face risks and uncertainties associated
with potential litigation by or against us, which could have a material adverse effect on our business, financial condition, and results
of operations.

We continually face the possibility
of litigation as either a plaintiff or a defendant. It is not reasonably possible to estimate the awards or damages, or the range of awards
or damages, if any, that we might incur in connection with such litigation.

Many of our products are complex
and technologically advanced. Such products may, from time to time, be the subject of claims concerning product performance and construction,
including warranty and patent infringement claims. While we are committed to investigating such concerns and correcting them, there is
no assurance that solutions will be found on a timely basis, if at all, to satisfy customer demands or to avoid potential claims or litigation.
Also, due to the location of our facilities, as well as the nature of our business activities, there is a risk that we could be subject
to litigation related to environmental remediation claims. We maintain insurance to protect against claims associated with the manufacture
and use of our products as well as environmental pollution, but there can be no assurance that our insurance coverage will adequately
cover any claim asserted against us.

The uncertainty associated
with potential litigation may have an adverse impact on our business. In particular, litigation could impair our relationships with existing
customers and our ability to obtain new customers. Defending or prosecuting litigation could result in significant legal costs and a diversion
of management’s time and attention away from business operations, either of which could have a material adverse effect on our business,
financial condition, and results of operations. There can be no assurance that litigation would not result in liability in excess of our
insurance coverage, that our insurance will cover such claims, or that appropriate insurance will continue to be available to us in the
future at commercially reasonable rates.

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The agreements governing our various debt obligations
impose restrictions on our business and could adversely affect our ability to undertake certain corporate actions.

The agreements governing
our debt obligations include covenants imposing significant restrictions on our business. These restrictions may affect our ability to
operate our business and may limit our ability to take advantage of potential business opportunities as they arise. These covenants place
restrictions on our ability to, among other things:

•
incur additional debt;

•
declare or pay dividends to shareholders;

•
create liens or use assets as security in other transactions;

•
be acquired by a third party;

•
pursue strategic acquisitions;

•
engage in transactions with affiliates; and

•
sell or transfer assets.

The agreements governing
our debt obligations also require us to comply with a number of financial ratios, borrowing base requirements and additional covenants.

Our ability to comply with
these covenants may be affected by events beyond our control, including prevailing economic, financial, and industry conditions. These
covenants could adversely affect our business by limiting our ability to take advantage of financing, merger and acquisition, or other
corporate opportunities. The breach of any of these covenants or restrictions could result in a default under our debt obligations. If
we were unable to repay our debt or are otherwise in default under any provision governing our secured debt obligations, our lender could
proceed against us and against the collateral (consisting of substantially all of our assets) securing that debt.

We are subject to changes in and interpretations of financial accounting
matters that govern the measurement of our performance, compliance with which could be costly and time-consuming.

We are subject to changes
in and interpretations of financial accounting standards that govern the measurement of our performance. Based on our reading and interpretations
of relevant pronouncements, guidance, or concepts issued by, among other authorities, the Financial Accounting Standards Board, the SEC,
and the American Institute of Certified Public Accountants, management believes our performance, including current sales contract terms
and business arrangements, has been properly reported. However, there continue to be issued pronouncements, interpretations, and guidance
for applying the relevant standards to a wide range of contract terms and business arrangements that are prevalent in the industries in
which we operate. Future interpretations or changes by the regulators of existing accounting standards or changes in our business practices
may result in future changes in our accounting policies and practices that could have a material adverse effect on our business, financial
condition, cash flows, revenue, and results of operations.

We have previously identified material weaknesses
in our internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting
could materially and adversely affect our business, results of operations, financial condition, and stock price.

We identified material weaknesses
in our internal control over financial reporting as of June 30, 2024, and June 30, 2023. The material weaknesses as of June 30,
2024, related to our inventory accounting and the valuation of one of our Level 2 investments. The material weakness as of June 30,
2023, related to the valuation of our Level 3 investments. As a result of these material weaknesses, as of June 30, 2024, and
June 30, 2023, our management concluded that our internal control over financial reporting was not effective based on the framework
in Internal Control-Integrated Framework (2013), issued by the Committee of Sponsoring Organizations of the Treadway Commission.

In fiscal 2025 and 2024, we
implemented remediation plans designed to address our June 30, 2024 and 2023, material weaknesses, which were both time consuming
and costly. In addition, if additional material weaknesses or significant deficiencies in our internal control are discovered or occur
in the future, our consolidated financial statements may contain material misstatements and we could be required to restate our financial
results.

If we or our auditors discover
one or more additional material weaknesses in our internal controls in the future, the market’s confidence in our financial statements
could decline and our stock price may be harmed. In addition, our failure to maintain effective controls over financial reporting could
subject us to sanctions or investigations by The Nasdaq Stock Market, the SEC, or other regulatory authorities.

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Our evaluation of internal controls and remediation
of potential problems is costly and time-consuming and could expose weaknesses in financial reporting.

Section 404 of the Sarbanes-Oxley
Act of 2002, as amended, requires management’s assessment of the effectiveness of our internal control over financial reporting.
This process is expensive and time consuming and requires significant attention of management. Management can give no assurance that material
weaknesses in internal controls will not be discovered (see above, “We have previously identified material weaknesses in our
internal control over financial reporting. Failure to achieve and maintain effective internal control over financial reporting could materially
and adversely affect our business, results of operations, financial condition, and stock price.”). We cannot be certain that
a future material weakness will not occur and that it will not be time consuming and costly to remediate and further divert the attention
of management. The disclosure of a material weakness, even if quickly remedied, could reduce the market’s confidence in our financial
statements and harm our stock price, especially if a restatement of financial statements for past periods is required.

General Risks

The global economic environment may impact
our business, financial condition, and results of operations.

Changes in the global economic
environment have caused, and may cause in the future, a general tightening in the credit markets, lower levels of liquidity, increases
in rates of default and bankruptcy, high rates of inflation, higher interest rates, and extreme volatility in credit, equity and fixed
income markets. These macroeconomic developments could negatively affect our business, operating results or financial condition should
they cause, for example, current or potential customers to become unable to fund purchases of our products, in turn resulting in
delays, decreases or cancellations of purchases of our products and services, or causing the customer to not pay us or to delay paying
us for previously purchased products and services. In addition, financial institution failures may cause us to incur increased expenses
or make it more difficult either to obtain financing for our operations, investing activities (including the financing of any future acquisitions),
or financing activities. Additional economic risks and uncertainties not currently known to us or that we currently deem to be immaterial
also may materially and adversely affect our business, financial condition, and results of operations.

Tariffs could have a negative effect on our
business, results of operations, financial condition, and liquidity.

Starting in the first calendar
quarter of 2025, the United States government announced its intention and/or actively took action to increase tariffs at various rates,
including on certain products imported from many countries and individualized higher tariffs on certain other countries. Other countries
have announced reciprocal tariffs or other similar actions. In some cases, these tariffs have since been followed by announcements of
limited exemptions and temporary pauses. We are subject to risks relating to increased tariffs on U.S. imports, and other changes affecting
imports, as we purchase raw materials and components from a complex supply chain which includes both direct and indirect purchases from
foreign countries. The recent enactment of these tariffs, along with the unpredictability of the rates, poses a risk to our business operations
and may materially increase our costs and reduce our margins. There continues to be significant uncertainty about the future relationship
between the U.S. and other countries regarding such trade policies, treaties and tariffs. As such, we can make no assurances about the
eventual impact on our operating results and business. However, some of our suppliers have begun passing along tariff charges. Our inability
to minimize the impact of tariffs on our raw material and components costs, pass through price increases to customers, or find alternative
sources for our raw materials and components, may have a material adverse impact on our business, financial condition, and results of
operations.

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