PhaseRx (PZRXQ) Risk Analysis

The trading price of shares of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors, some of which are beyond our control. In addition to the factors discussed in this "Risk Factors" section and elsewhere in this report, these factors include: - actual or anticipated fluctuations in our results of operations;- announcement or expectation of additional financing efforts;- the timing and results of preclinical studies for our urea cycle disorder programs and any product candidates that we may develop;- commencement or termination of collaborations for our product development and research programs;- failure or discontinuation of any of our product development and research programs;- variance in our financial performance from the expectations of market analysts;- announcements by us or our competitors of results of preclinical studies, clinical trials, or regulatory approvals of product candidates, significant business developments, changes in distributor relationships, acquisitions or expansion plans;- adverse regulatory decisions;- changes in the prices of our raw materials or the products we sell;- data concerning the safety and efficacy profile of our products;- sales of our common stock by us, our insiders, or other stockholders;- expiration of market stand-off or lock-up agreements;- our involvement in litigation;- our sale of common stock or other securities in the future;- market conditions in our industry;- changes in key personnel;- the trading volume of our common stock;- changes in the structure of healthcare payment systems;- changes in the estimation of the future size and growth rate of our markets;- the recruitment or departure of key personnel;- developments or disputes concerning patent applications, issued patents, or other proprietary rights;- market conditions in the pharmaceutical and biotechnology sectors;- general economic, industry, and market conditions; and - the other factors described in the "Risk Factors" section of this Annual Report on Form 10-K. In recent years, the stock markets in general have experienced extreme price and volume fluctuations, especially in the biotechnology sector. Broad market and industry factors may materially harm the market price of shares of our common stock, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class action litigation has often been instituted against that company. If we were involved in any similar litigation, we could incur substantial costs and our management's attention and resources could be diverted.

Sales by us or our stockholders of a substantial number of shares of our common stock in the public market, or the perception that these sales might occur, could cause the market price of our common stock to decline or could impair our ability to raise capital through a future sale of our equity securities. As of December 31, 2016, we had 11,690,329 shares of common stock outstanding. The resale of 4,745,174 shares, or 40.6% of our outstanding shares as of December 31, 2016 is currently prohibited or otherwise restricted as a result of securities law provisions, market standoff agreements entered into by our stockholders with us or lock-up agreements entered into by our stockholders with the underwriters of our IPO; however, subject to applicable securities law restrictions, these shares will be able to be sold in the public market beginning as follows: - 4,290,981 shares of our outstanding shares of common stock beneficially owned by certain stockholders who are subject to lock-up agreements, each of which, subject to limited exceptions, restricts transfer of the stockholder's shares of common stock for a period of 12 months after the closing of our IPO without the prior written consent of Titan Multi-Strategy Fund I, LTD., one of the lenders from the bridge loan financing we received in December 2015; provided that, after 180 days following the IPO, the foregoing restrictions will automatically terminate if for 20 consecutive trading days on each such trading day (x) the closing price of our common stock is at least 150% of the IPO price for our common stock and (y) the trading volume of our common stock is not less than 100,000 shares; provided further that, Titan Multi-Strategy Fund I, LTD. may unilaterally waive any term of the lock-up agreement ("Category 1");- 454,193 shares of our outstanding shares of common stock beneficially owned by certain stockholders and option holders who are subject to lock-up agreements, each of which, subject to limited exceptions, restricts transfer of the stockholder's shares of common stock for a period of 12 months after the closing of our IPO without our prior written consent, which restriction will terminate in accordance with the same terms as Category 1; provided further that, we may unilaterally waive any term of the lock-up agreement ("Category 2"); As noted above, we or Titan Multi-Strategy Fund I, LTD., as applicable, may, in our or their sole discretion, and at any time without notice, release all or any portion of the shares subject to the corresponding lock-up agreements. After the expiration of the lock-up period, these shares can be resold into the public markets in accordance with the requirements of Rule 144, subject to certain volume limitations. In addition, we have also registered the offer and sale of all of the outstanding options of our 2006 Plan as of May 17, 2016 and all of the shares of common stock issuable under the PhaseRx, Inc. 2016 Long-Term Incentive Plan, and such shares are freely transferable, except for any shares held by "affiliates," as such term is defined in Rule 144 under the Securities Act of 1933, as amended. The market price of our common stock may drop significantly when the restrictions on resale by our existing stockholders lapse and these stockholders are able to sell our common stock into the market. Upon the expiration of the lock-up restrictions described above, the number of shares of our common stock that are potentially available for sale in the open market will increase materially, which could make it harder for the value of our common stock to appreciate unless there is a corresponding increase in demand for our common stock. This increase in available shares could cause the value of your investment in our common stock to decrease. In addition, a sale by us of additional shares of common stock or similar securities in order to raise capital might have a similar negative impact on the share price of our common stock. A decline in the price of shares of our common stock might impede our ability to raise capital through the issuance of additional shares of common stock or other equity securities, and may cause you to lose part or all of your investment in our common stock.

As of December 31, 2016, our executive officers, directors, 5% or greater stockholders, and their respective affiliated entities in the aggregate beneficially owned approximately 56.5% of our outstanding common stock. As a result, these stockholders, acting together, have control over matters that require approval by our stockholders, including the election of directors and approval of significant corporate transactions. Corporate actions might be taken even if other stockholders oppose them. This concentration of ownership might also have the effect of delaying or preventing a corporate transaction that other stockholders may view as beneficial.

The trading market for our common stock will, to some extent, depend on the research and reports that securities or industry analysts publish about us or our business. We do not have any control over these analysts. If one or more of the analysts who cover us downgrade our shares or change their opinion of our shares, our share price would likely decline. If one or more of these analysts cease coverage of us or fail to regularly publish reports on us, we could lose visibility in the financial markets, which could cause our share price or trading volume to decline.

Prior to our IPO in May 2016, there was no public market for our common stock. Although our common stock is listed on The NASDAQ Capital Market, the market for our shares has demonstrated varying levels of trading activity. Furthermore, an active trading market may not be sustained in the future. The lack of an active market may impair your ability to sell your shares at the time you wish to sell them or at a price that you consider reasonable. The lack of an active market may also reduce the fair value of your shares. An inactive market may also impair our ability to raise capital to continue to fund operations by selling shares and may impair our ability to acquire other companies or technologies by using our shares as consideration.

Our certificate of incorporation and bylaws contain certain provisions that may discourage, delay or prevent a change of control that our stockholders may consider favorable. These provisions: - authorize the issuance of "blank check" preferred stock that our board of directors could issue to increase the number of outstanding shares to discourage a takeover attempt;- prohibit stockholder action to elect or remove directors by majority written consent;- provide that the board of directors is expressly authorized to make, alter or repeal our bylaws;- prohibit our stockholders from calling a special meeting of stockholders; and - establish advance notice requirements for nominations for elections to our board of directors or for proposing matters that can be acted upon by stockholders at stockholder meetings.

Our certificate of incorporation provides that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf; any action asserting a breach of fiduciary duty; any action asserting a claim against us arising pursuant to the Delaware General Corporation Law, our certificate of incorporation or our bylaws; or any action asserting a claim against us that is governed by the internal affairs doctrine. The choice of forum provision may limit a stockholder's ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees, which may discourage such lawsuits against us and our directors, officers and other employees. Alternatively, if a court were to find the choice of forum provision contained in our certificate of incorporation to be inapplicable or unenforceable in an action, we may incur additional costs associated with resolving such action in other jurisdictions, which could adversely affect our business and financial condition.

Our common stock is listed on The NASDAQ Capital Market. For continued listing on The NASDAQ Capital Market, we will be required to comply with the continued listing requirements, including the minimum market capitalization standard, the corporate governance requirements and the minimum closing bid price requirement, among other requirements. In the event that we fail to satisfy any of the listing requirements of The NASDAQ Capital Market, our common stock may be delisted. If our securities are delisted from trading on The NASDAQ Stock Market, and we are not able to list our securities on another exchange or to have them quoted on The NASDAQ Stock Market, our securities could be quoted on the OTC Bulletin Board or on the "pink sheets." As a result, we could face significant adverse consequences including: - a limited availability of market quotations for our securities;- a determination that our common stock is a "penny stock," which would require brokers trading in our common stock to adhere to more stringent rules and possibly result in a reduced level of trading activity in the secondary trading market for our securities;- a limited amount of news and analyst coverage; and - a decreased ability to issue additional securities (including pursuant to short-form registration statements on Form S-3 or obtain additional financing in the future).