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

Nantahala Capital Management, LLC (“Nantahala”)

Wilmot B. Harkey

Daniel Mack (together the “Reporting Persons”)

19 Old Kings Highway S, Suite 200

Darien, CT 06820

Nantahala is a Massachusetts limited liability company.

Each of Messrs. Harkey and Mack is a citizen of the United States
of America.

Title of Class of Securities:

Common Stock, $0.01 par value (the “Shares”).

04269E107

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).

Nantahala Capital Management, LLC

Each of Messrs. Harkey and Mack:

By signing below each Reporting Person
certifies that, to the best of such person’s knowledge and belief, the securities referred to above were acquired and are held
in the ordinary course of business and were not acquired and are not held for the purpose of or with the effect of changing or
influencing the control of the issuer of the securities and were not acquired and are not held in connection with or as a participant
in any transaction having such purpose or effect.