13G Filing: Nantahala Capital Management and Arqule Inc (ARQL)

If this statement is filed pursuant to Rule 13d-1(b),
or 13d-2(b) or (c), check whether the person filing is a: 

(a) ¨ Broker or dealer registered under section 15 of the
Act (15 U.S.C. 78o).

(b) ¨ Bank as defined in section 3(a)(6) of the Act (15 U.S.C.
78c).

(c) ¨ Insurance company as defined in section 3(a)(19) of
the Act (15 U.S.C. 78c).

(d) ¨ Investment company registered under section 8 of the
Investment Company Act of 1940 (15 U.S.C 80a-8).

(e) x An investment adviser in accordance with §240.13d-1(b)(1)(ii)(E).

(f) ¨ An employee benefit plan or endowment fund in accordance
with §240.13d-1(b)(1)(ii)(F).

(g) x A parent holding company or control person in
accordance with § 240.13d-1(b)(1)(ii)(G).

(h) ¨ A savings associations as defined in Section 3(b) of
the Federal Deposit Insurance Act (12 U.S.C. 1813).

(i) ¨ A church plan that is excluded from the definition of
an investment company under section 3(c)(14) of the

Investment Company Act of 1940 (15 U.S.C. 80a-3).

(j) ¨ Group, in accordance with §240.13d-1(b)(1)(ii)(J).

Item 4.

Ownership:

Amount Beneficially Owned:

As of the date hereof, Nantahala may be
deemed to be the beneficial owner of 9,668,880 Shares held by funds and separately managed accounts under its control, and as the
managing members of Nantahala, each of Messrs. Harkey and Mack may be deemed to be a beneficial owner of those Shares. The 9,668,880
Shares includes 1,053,333 options held by the Reporting Persons that may be exercised for 1,053,333 Shares within sixty days.

Percent of Class:

As of the date hereof, each of the Reporting
Persons may be deemed to be the beneficial owner of 13.4% of the total number of Shares outstanding (Based upon information provided
by the Issuer on Form 10-K filed February 29, 2016, there were 62,929,706 Shares outstanding as of February 17, 2016. Based upon
information provided by the Issuer on Form 8-K filed February 29, 2016, an additional 8,027,900 Shares were issued on March 2,
2016 pursuant to a registered direct offering via definitive securities purchase agreements with certain institutional and accredited
investors entered into on February 26, 2016).