10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended :                                  September 30, 2010                               

or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from    to 

Commission File Number:  000-49901

NATURALNANO, INC.

(Exact name of registrant as specified in its charter)

Nevada	87-0646435
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
11 Schoen Place, Pittsford NY	14534
(Address of principal executive offices)	(Zip Code)

585-267-4848

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.                   Yes x No ¨

Indicate by checkmark if the registrant has submitted electronically and posted on its Website, if any, every Interactive Date File required to be submitted and posted pursuant to Rule 405 of Regulation S-T(§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).                                         Yes ¨     No   ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date:

166,366,477 as of November 12, 2010

Table of Contents

PART I—FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		Consolidated Balance Sheets	3
		Consolidated Statements of Operations	4
		Consolidated Statements of Stockholders Equity (Deficiency)	5
		Consolidated Statements of Cash Flows	6
		Notes to Consolidated Financial Statements	7
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		13
	Note Regarding Forward-Looking Statements		13
	Item 4	Controls and Procedures.	18
PART II—OTHER INFORMATION
	Item 1	Legal Proceedings	19
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	19
	Item 3.	Defaults Upon Senior Securities.	19
	Item 4	Removed and Reserved.	19
	Item 5.	Other Information.	19
	Item 6.	Exhibits.	20
SIGNATURES			21

2

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements.

NATURALNANO, INC.

(A Development Stage Company)

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2010			2009
	(Unaudited)
Assets
Current assets:
Cash	$	1,167		$	89,901
Accounts Receivable		36,921			-
Inventory		19,527			15,467
Other current assets		67,332			233,589
Deferred financing costs, net		9,789			-
Total current assets		134,736			338,957
Non-current assets:
Deferred financing costs, net		-			42,892
Goodwill		80,332			-
Property and equipment, net		183,660			296,262
Total non-current assets		263,992			339,154
Total Assets	$	398,728		$	678,111
Liabilities and Stockholders' Deficiency
Liabilities
Current liabilities:
Senior secured convertible notes, net of discount $78,981 discount at 12/31/09	$	3,734,000		$	3,655,019
Senior secured promissory note		169,557			145,711
Subordinated secured convertible note, net of discount of $ 4,500		220,500			-
Unsecured promissory note		2,500			-
Accounts payable		531,345			478,227
Accrued payroll		591,758			499,589
Accrued interest		600,018			437,064
Accrued expenses		91,988			105,053
Patent license obligation-current		756,333			756,333
Deferred revenue		70,000			70,000
Derivative liability		64,606			70,000
Registration rights liability		82,489			82,489
Total current liabilities		6,915,094			6,299,485
Non-current liabilities:
Subordinated secured convertible note, net of discount of $ 12,603		-			212,397
Deferred tax liability		-			11,805
Derivative liability		46,130			14,603
Other long term liabilities		41,500			46,000
Total Liabilities		7,002,724			6,584,290
Stockholders’ Equity (Deficiency)
Preferred Stock - $.001 par value, 10 million shares authorized
Series B - issued and outstanding 730,000 and 750,000 with an aggregate liquidation preference of $ 1,460 and $1,500, respectively		730			750
Series C - issued and outstanding 4,250,000 with an aggregate liquidation preference value of $8,500		4,250			4,250
Common Stock - $.001 par value 5 billion authorized, issued and outstanding 159,976,077 and 98,882,045, respectively		159,976			98,882
Additional paid in capital		18,867,903			18,633,561
Noncontrolling interest in subsidiary		42,166			-
Accumulated deficit		(25,679,021	)		(24,643,622	)
Total stockholders' deficiency		(6,603,996	)		(5,906,179	)
Total liabilities and stockholders' deficiency	$	398,728		$	678,111

See notes to consolidated financial statements

3

NATURALNANO, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the three months ended						For the nine months ended						From inception:
	September 30,						September 30,						December 22, 2004
	2010			2009			2010			2009			to September 30,
													2010
Income:
Revenue	$	107,874		$	8,119		$	239,719		$	75,352		$	623,358
Cost of goods sold		59,141			3,927			144,790			18,887			258,721
Gross profit		48,733			4,192			94,929			56,465			364,637
Operating expenses:
Research and development		108,323			99,178			320,915			241,234			6,789,034
General and administrative		150,534			(159,689	)		509,894			(28,620	)		10,134,614
Loss on asset impairment		-			-			-			-			573,910
Write down of prepaid inventory		-			-			-			-			249,650
		258,857			(60,511	)		830,809			212,614			17,747,208
Loss from Operations		(210,124	)		64,703			(735,880	)		(156,149	)		(17,382,571	)
Other income (expense):
Interest (expense) income, net		(103,562	)		(361,659	)		(390,802	)		(1,190,408	)		(6,129,108	)
Net gain (loss) on derivative liability		(12,313	)		72,106			(26,133	)		533,376			474,646
Gain on forgiveness of debt		64,691			546			112,052			84,213			198,297
Gain on disposal of asset		4,490			-			4,490			-			4,490
Income from cooperative research project		-			-			-						180,000
Gain (loss) on  warrant		-			-			-						326,250
Financing fees		-			-			-						(3,280,228	)
		(46,694	)		(289,007	)		(300,393	)		(572,819	)		(8,225,653	)
Consolidated Net loss	$	(256,818	)	$	(224,304	)	$	(1,036,273	)	$	(728,968	)	$	(25,608,224	)
Consolidated net (income)/loss attributable to noncontrolling interest in subsidiary		1,097		$	-			874		$	-			874
Consolidated net loss attributable to the controlling interest	$	(255,721	)	$	(224,304	)	$	(1,035,399	)	$	(728,968	)	$	(25,607,350	)
Loss per common share - basic and diluted	$	-		$	-		$	(0.01	)	$	(0.01	)
Weighted average shares outstanding		132,544,494			72,073,349			130,004,447			69,172,796

See notes to consolidated financial statements

4

NATURALNANO, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIENCY)

(unaudited)

																Deficit
													Additional			Accumulated			Non-controlling			Stockholders’
	Common Stock						Preferred Stock						Paid-in			in Development			Interest			Equity
	Shares			Amount			Shares			Amount			Capital			Stage			in Subsidiary			(Deficiency)
December 22, 2004 (inception)
20,000,000 shares issued for cash @ $.005 per share		20,000,000		$	20,000								$	80,000		$	-					$	100,000
Net loss from inception to 12/31/04																	(7,336	)					(7,336	)
Balance at December 31, 2004		20,000,000		$	20,000								$	80,000		$	(7,336	)				$	92,664
Warrant issued for 4,500,000 shares of common stock for services														273,442									273,442
Vesting of stock options granted														270,082									270,082
Shares issued pursuant to convertible bridge notes on 11/29/05		20,939,200			20,939									4,135,061									4,156,000
Recapitalization on 11/29/05		79,820,840			79,821									(79,821	)								-
Net loss for the year ended 12/31/05																	(2,666,382	)					(2,666,382	)
Balance at December 31, 2005		120,760,040		$	120,760								$	4,678,764		$	(2,673,718	)				$	2,125,806
Grant of common stock in exchange for license @ $1.45 per share		200,000			200									289,800									290,000
Grant of common stock as settlement of liability @ $1.45 per share		60,600			61									87,809									87,870
Grant of common stock as settlement of liability @ $1.52 per share		54,100			54									82,178									82,232
Common stock returned and cancelled @ $0.42 per share		(200,000	)		(200	)								(83,800	)								(84,000	)
Vesting of stock options granted														2,970,959									2,970,959
Warrants issued:
4,770,000 shares at exercise prices from $0.75 to $1.30 per share														3,006,786									3,006,786
200,000 shares at $0.28 per share														32,460									32,460
Exercise of stock options @ $.05 per share		826,000			826									40,474									41,300
Net loss for the year ended 12/31/06																	(8,862,917	)					(8,862,917	)
Balance at  December 31, 2006		121,700,740		$	121,701								$	11,105,430		$	(11,536,635	)				$	(309,504	)
Allocation of  note proceeds to warrants														3,213,600									3,213,600
Fair market value of warrant issued to purchase:
2,947,162 shares with an exercise price of $0.22 price per share in partial payment of offering costs														501,018									501,018
240,741 shares at $0.26 per share for services														50,767									50,767
Vesting of stock options granted														912,006									912,006
Grant of common stock for services @:
$0.36 per share		160,000			160									57,440									57,600
$0.10 per share		340,000			340									33,660									34,000
Exercise of stock options @ $.05 per share		680,000			680									33,320									34,000
Net loss for the year ended  12/31/07																	(5,860,640	)					(5,860,640	)
Balance at December 31, 2007		122,880,740		$	122,881								$	15,907,241		$	(17,397,275	)				$	(1,367,153	)
Vesting of stock options granted														840,464									840,464
Beneficial conversion feature of debt														324,811									324,811
Grant of common stock for services @:																							-
$0.10 per share		360,000			360									35,640									36,000
$0.06 per share		162,000			162									10,008									10,170
$0.05 per share		480,000			480									23,520									24,000
$0.04 per share		734,286			734									27,903									28,637
$0.03 per share		2,685,715			2,686									83,885									86,571
$0.02 per share		200,000			200									3,800									4,000
Fair market value of warrant issued as interest														6,490									6,490
Issuance of common stock as interest payment:
$0.05 per share		6,607,493			6,607									339,900									346,507
Redemption of common stock		(69,303,189	)		(69,303	)								68,303									(1,000	)
Gain on extinguishment of debt by shareholder														1,029,600									1,029,600
Issuance of Series B Preferred stock								750,000			750			(750	)								-
Issuance of Series C Preferred stock								4,250,000			4,250			(4,250	)								-
Shares issued on debt conversion		2,200,000			2,200									8,800									11,000
Net loss for the year ended  12/31/08																	(5,667,486	)					(5,667,486	)
Balance at December 31, 2008		67,007,045		$	67,007			5,000,000			5,000			18,705,365			(23,064,761	)					(4,287,389	)
Cumulative effect of adoption of accounting for instruments indexed to common stock as of 1/1/09														(501,108	)		(71,671	)					(572,779	)
Vesting of stock options granted														(74,050	)								(74,050	)
Grant of common stock for services @:
$0.01 per share		8,475,000			8,475									67,970									76,445
$0.02 per share		4,500,000			4,500									76,500									81,000
$0.03 per share		400,000			400									12,600									13,000
Shares issued on debt conversion		15,500,000			15,500									62,000									77,500
Issuance of common stock as interest payment:
$0.05 per share		3,000,000			3,000									12,000									15,000
Allocation of note proceeds to discount														272,284									272,284
Net loss for the year ended  12/31/09																	(1,507,190	)					(1,507,190	)
Balance at December 31, 2009		98,882,045		$	98,882			5,000,000		$	5,000			18,633,561		$	(24,643,622	)					(5,906,179	)
Beneficial conversion feature of debt														11,805									11,805
Grant of common stock for services @:
$0.001 to $.005 per share		16,122,832			16,123									18,527									34,650
$0.006 per share		1,650,000			1,650									8,100									9,750
$0.012 to $0.013 per share		1,000,000			1,000									11,559									12,559
$0.022 per share		150,000			150									3,150									3,300
Issuance of common stock as interest payment $ 0.005 per share		18,971,200			18,971									75,885									94,856
Warrant issued for 12,000,000 shares of common stock for services														83,700									83,700
Issuance of common stock and warrants for 49% minority interest in Combotexs		20,000,000			20,000									24,796						43,040			87,836
Series B preferred shares converted to common		3,200,000			3,200			(2,000	)		(20	)		(3,180	)								-
Net loss for the nine months ended 9/30/10																	(1,035,399	)		(874	)		(1,036,273	)
Balance at September 30, 2010		159,976,077		$	159,976			4,998,000		$	4,980			18,867,903			(25,679,021	)		42,166			(6,603,996	)

See notes to consolidated financial statements

5

NATURALNANO, INC.

(A Development Stage Company)

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

							From inception:
	For the nine months ended						December 22, 2004
	September 30,						to September 30,
	2010			2009			2010
Cash flows from operating activities:
Net loss	$	(1,035,399	)	$	(728,968	)	$	(25,607,350	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		117,003			115,009			785,730
Amortization of discount on convertible notes		87,084			816,809			3,951,900
Amortization of deferred financing costs		33,103			135,405			864,678
Vesting of stock options					(74,050	)		4,919,461
Non-cash gain on forgiveness of debt		112,052			83,667			25,807
Fair value adjustment of derivative liabilities		26,133			(533,376	)		(462,043	)
Issuance of stock for services		60,258						388,081
Issuance of stock for interest		94,855			3,375			456,363
Issuance of warrants for services		83,700						3,453,645
Forgiveness of interest expensed								42,016
Loss on asset impairments								573,909
Loss (gain) on disposal of asset								69,292
Receipt of and gain on Atlas Mining warrant								(506,250	)
Change in value of registration rights agreement								12,128
Deferred rent								9,034
Gain (loss) in noncontrolling interest in subsidiary		(874	)					(874	)
Changes in operating assets and liabilities:
Decrease (increase) in inventory		2,488			335			(12,979	)
Decrease (increase) in other current assets		132,261			130,093			(101,328	)
(Decrease) Increase in accounts payable, accrued payroll, accrued expenses and patent lease obligation		176,756			62,209			2,242,493
(Decrease) Increase in deferred revenue		0			(10,000	)		70,000
Increase (decrease) in other liability		(4,500	)		2,450			28,747
Net cash used in operating activities		(115,080	)		2,958			(8,797,540	)
Cash flows from investing activities:
Purchase of property and equipment					(6,600	)		(568,982	)
Purchase of license								(200,000	)
Proceeds from sale of property and equipment								3,128
Proceeds from sale of Atlas Mining warrant								506,250
Net cash (used in) provided by investing activities		0			(6,600	)		(259,604	)
Cash flows from financing activities:
Proceeds from senior secured convertible notes								7,881,000
Proceeds from Promissory Notes		23,846			191,126			221,346
Proceeds from secured Promissory Notes								256,126
Proceeds from unsecured Promissory Notes		5,000						5,000
Payment on senior secured convertible notes					(141,125	)		(110,414	)
Payment on unsecured Promissory Notes		(2,500	)					(2,500	)
Deferred financing costs					(3,685	)		(182,449	)
Repayment of capital lease obligations					(44,616	)		(175,018	)
Advances from related parties					3,462			1,303,561
Reduction in amounts due to related parties								(1,149,102	)
(Redemption) issuance of common stock								99,000
Proceeds from exercise of stock options								75,300
Advances on related party line of credit								900,000
Payment of registration rights damages								(63,539	)
Net cash provided by financing activities		26,346			5,162			9,058,311
Increase(decrease)  in cash		(88,734	)		1,520			1,167
Cash at beginning of period		89,901			1,148			0
Cash at end of period	$	1,167		$	2,668		$	1,167
Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	12,874					$	160,208
Schedule of non-cash investing and financing activities:
Common stock issued for convertible notes				$	30,000		$	4,244,500
Allocation of note proceeds to discount on debt							$	3,835,103
Issuance of warrants in partial payment of  financing costs							$	507,508
Capital lease obligations							$	178,737
Gain on extinguishment of debt by shareholder							$	1,029,600
Common stock returned and cancelled for:
Issuance of warrants							$	69,303
Cancellation of license agreement							$	(84,000	)
Accrual for purchase of Navy License							$	400,000
Note issued in consideration of deferred financing costs							$	97,500
Registration rights liability							$	82,489
Acquisition of subsidiary through issuance of common stock and warrants	$	87,836					$	87,836
Acquisition of license settled through issuance of common stock (net of $100,000 cash)							$	290,000
Conversion of preferred shares into common shares	$	3,200					$	3,200

See notes to consolidated financial statements

6

NaturalNano, Inc.

For the nine months ended September 30, 2010 and 2009

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements

The consolidated financial statements as of September 30, 2010 and for the three and nine months ended September 30, 2010 and 2009 are unaudited. However, in the opinion of management of the Company, these financial statements reflect all adjustments, consisting solely of normal recurring adjustments, necessary to present fairly the financial position and results of operations for such interim periods. The results of operations for the interim periods presented are not necessarily indicative of the results to be obtained for a full year. The accompanying consolidated financial statements have been prepared in accordance with U.S. generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X for smaller reporting companies.  Accordingly, these financial statements do not include all of the information required by U.S. generally accepted accounting principles for complete financial statements.  These unaudited consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2009.

Estimates

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States requires us to make estimates and assumptions that affect the amounts reported and disclosed in the financial statements and the accompanying notes. Actual results could differ materially from these estimates. On an ongoing basis, we evaluate such estimates. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable, the results of which form the basis for making judgments about the carrying values of assets and liabilities.

Basis of Consolidation

The consolidated financial statements include the accounts of NaturalNano, Inc. (“NaturalNano” or the “Company”), a Nevada corporation, and its wholly owned subsidiary NaturalNano Research, Inc. (“NN Research”) a Delaware corporation. As of April 20, 2010 the consolidated financial statements reflect the acquisition of a 51% controlling interest in Combotexs, LLC, (“Combotexs”), a privately held New York limited liability company, pursuant to the terms of the Equity Purchase Agreement executed with Worldwide Medical Solutions LLC (“WMS”) (Refer to Note 3).  All significant inter-company accounts and transactions have been eliminated in consolidation.

Description of the Business

NaturalNano (the “Company”), located in Pittsford, New York, is a development stage company engaged in the development and commercialization of material science technologies with an emphasis on additives to polymers and other industrial and consumer products by taking advantage of technology advances developed in-house. The Company’s current activities are directed toward research, development, production and marketing of its proprietary technologies relating to the treatment and separation of nanotubes from halloysite clay and the development of related commercial applications for:

• cosmetics, health and beauty products

• polymers, plastics and composites

Combotexs is a technology company organized on October 28, 2009 and has had minimal revenue and markets Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining.  Combotexs also has certain marketing and distributions agreements for various household products.  The Company acknowledges the acquisition of Combotexs as a short term source for revenue, cash flow and a method of incorporating nanotubes found in halloysite clay into Combotexs products. NaturalNano will evaluate and develop certain Combotexs products with nano-enhanced materials that may result in future sales growth for both of these business entities.

NaturalNano is domiciled in the state of Nevada as a result of the merger with Cementitious Materials, Inc., (“CMI”), which was completed on November 29, 2005.

Liquidity and Going Concern

Going Concern – The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a net loss for the nine months ended September 30, 2010 of $1,035,399 and had negative working capital of $6,780,358 and a stockholders’ deficiency of $6,603,996 at September 30, 2010. Since inception the Company’s growth has been funded through a combination of convertible debt from private investors and from cash advances from its former parent and majority shareholder Technology Innovations, LLC. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to obtain additional financing, renegotiate the terms of existing financing obligations and ultimately to attain successful operations. The ability to successfully achieve those items is uncertain.

As of September 30, 2010, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 for lenders waivers and maturity extensions received from the lenders.

7

OTCBB delisting December 3, 2009

The Company received a OTCBB Delinquency Notification, dated November 24, 2009, from the Financial Industry Regulatory Authority (FINRA) indicating that the Company’s common stock was be removed from quotation on the OTC Bulletin Board, effective as of the opening of trading on December 3, 2009. The delisting will make it more difficult to attract investors or issue shares as a means to raise funds.

Reclassifications

Certain prior year amounts have been reclassified to conform to the current year presentation.

Loss Per Share

Basic loss per common share is computed by dividing net loss by the weighted-average number of shares of common stock outstanding during the period. Diluted loss per common share gives effect to dilutive convertible preferred stock, convertible debt, options and warrants outstanding during the period. Shares to be issued upon the exercise of these instruments have not been included in the computation of diluted loss per share as their effect is anti-dilutive based on the net loss incurred.

As of September 30, 2010 there were 487,443,764 shares underlying preferred stock, convertible debt, outstanding options and warrants that could potentially dilute future earnings. These potentially dilutive shares have been limited by certain debt and equity agreements with Platinum, Platinum Advisors, Longview and Technology Innovations LLC (“TI”). These agreements provide limitations on the conversion of the dilutive instruments such that the number of shares of Common Stock that may be acquired by the holder upon conversion of such instruments shall be limited to ensure that following such conversion the total number of shares of Common Stock then beneficially owned by the holder does not exceed 4.99% of the total number of issued and outstanding shares of Common Stock.

2.  DEBT AGREEMENTS

As of September 30, 2010 the Company had $3,903,557 in principal that was outstanding and past due under the terms of the Senior Secured Convertible Notes and Promissory Notes with Platinum Partners Long Term Growth IV (“Platinum”), Platinum Advisors and Longview Special Financing, Inc. (“Longview”). The Company entered into various Senior Secured Convertible Notes and Promissory Note obligations during the period from 2007 through 2009 with Platinum, Platinum Advisors and Longview, the holders of the Company’s primary debt obligations since 2007. The outstanding principal and all accrued and unpaid interest on these obligations was due and payable in full on various dates between March 6, 2009 and January 31, 2010. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances to January 1, 2011, and waived the application of the 16% default interest rate. Additionally Platinum and Platinum Advisors waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services. Longview has granted waivers of default, extended the due dates of all the outstanding principal balances to January 1, 2011, and waived the application of the 16% default interest rate. Additionally, Longview waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services.

The Subordinated Secured Convertible Note matures and all outstanding principal is due and payable on March 1, 2011.

On June 7, 2010 Combotexs LLC entered into an Unsecured Promissory Note with an unrelated party for $5,000. The Unsecured Promissory Note is due on October 7, 2010, payable in four monthly principal payments of $1,250, and bears interest at an annual rate of 5%. As of September 30, 2010, there was $2,500 remaining on the principal balance.  The Note along with interest has been paid in full as of the date of this filing.

On July 21, 2010, the Company borrowed a total of $23,846 with $20,000 from Platinum and $3,846 from Longview.  These promissory notes were pursuant to the terms of the Senior Secured Promissory Note.  Both the notes bear interest at the rate of 8% per annum and are due and payable on January 1, 2011.

During the first nine months of 2010, the Company issued 18,971,000 shares of common stock to Platinum in payment of $94,855 of interest expense obligations on the Senior Secured Convertible Notes. In accordance with the debt agreement, these shares were issued to Platinum using a conversion price of $0.005 per common share.

Registration Rights Agreement

On March 7, 2007, the Company entered into a Registration Rights Agreement with the Agent and the other investors, pursuant to which the Company agreed to prepare and file within 60 days of the March 7, 2007 agreement, a registration statement for resale under the Securities Act of 1933, the common stock issuable upon the exercise of the Warrants, in payment of interest on, or upon conversion of, the Notes. The Company further agreed to use its best efforts to cause the Registration Statement to be declared effective 120 days following the March 7, 2007 agreement date, or within 150 days if the Company receives a comment letter from the SEC, and to maintain such Registration Statement for the two year period following this date. This agreement allows for liquidated damages based on a daily amount of 0.0333% of the principal amount of the notes relating to the common stock issuable upon conversion of the Notes included in the Registration Statement.

As of September 30, 2010, the registration statement had not been updated with the requisite SEC filings and as such, the Company was in default of this provision of the Registration Rights Agreement. The lenders have provided the Company a forbearance agreement related to this default through January 1, 2011. The Company recorded a total of $146,028 in such liquidated damages as of December 17, 2007, the date the registration statement was declared effective. As of December 31, 2007, $63,539 of this obligation was paid in cash and $82,489 was recorded as an accrued liability. The lender has the option to settle the liquidated damages in common stock valued at the average price for the five days prior to the end of a payment period. At September 30, 2010 and December 31, 2009 the outstanding balance for this obligation was $82,489.

8

3.  51% ACQUISITION of COMBOTEXS, LLC

On April 20, 2010 the Company acquired a 51% interest in Combotexs, LLC, (“Combotexs”), a privately held New York limited liability company, pursuant to the terms of an Equity Purchase Agreement executed with Worldwide Medical Solutions LLC (“WMS”) the sole member of Combotexs. Combotexs is a technology company that has had minimal revenue since its inception in October 2009 and markets Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining. The Company acknowledges the acquisition of Combotexs as a short term source for revenue, cash flow and a method of incorporating nanotubes found in halloysite clay into Combotexs products.

In consideration for 51% of Combotexs, NaturalNano issued 20,000,000 shares of the Company’s common stock to WMS and in a contingent consideration arrangement, will grant up to 40,000,000 common stock warrants (based on future sales volumes). The grant of up to 40 million warrants each entitles WMS to purchase one share of the Company’s common stock. The first 20,000,000 warrants become exercisable at a price of $.05 on the first day that of the first month after the gross sales of Combotexs exceeds $1,000,000 in the aggregate, net of taxes. The second 10,000,000 warrants become exercisable at a price of $.08 on the first day of the first month after the gross sales of Combotexs exceed $3,000,000 in the aggregate, net of taxes.  The final 10,000,000 warrants become exercisable at a price of $.10 on the first day of the first month after the gross sales of Combotexs exceed $4,000,000 in the aggregate, net of taxes. The warrants have a term of five years from and after the date on which they become exercisable and provide for cashless exercise.

The Company accounted for the acquisition in accordance with ASC 805-10 “Business Combinations”, whereby the Company measured the identifiable assets acquired and liabilities assumed based on the acquisition date fair value.  The Company is required to recognize and measure any related goodwill acquired in the business combination or a gain from a bargain purchase.  In order to determine the goodwill or gain from a bargain purchase, the Company is required to determine the fair value of the consideration transferred in a business combination.  The fair value is calculated as the sum of the acquisition date fair value of the assets transferred by the Company, the liabilities incurred by the Company and the equity interest issued by the Company.

The goodwill of $80,332 arising from the acquisition consists of future cash flow, utilization of nano technology within their products and future profits. None of the goodwill recognized is expected to be deductible for income tax purposes.

The following table summarizes the consideration paid for Combotexs and the amounts of the assets acquired and liabilities assumed recognized at the acquisition date.

At April 20, 2010
Consideration
Equity 20,000,000 common shares of NNAN	$	22,690
Contingent consideration arrangement
20,000,000 warrants		13,849
10,000,000 warrants		5,632
10,000,000 warrants		2,626
Fair value of consideration transferred		44,797
Noncontrolling interest		43,040
	$	87,837
Recognized amounts of identifiable assets acquired and liabilities assumed
Inventory	$	6,548
Prepaid Expense and other assets		2,525
Fixed Asset		4,800
Accounts Payables		(6,368	)
Total Identifiable net assets		7,505
Goodwill		80,332
	$	87,837

The fair value of the 20,000,000 common shares issued as part of the consideration paid for Combotexs ($22,690) was determined by using an estimate of the enterprise value allocated to various instruments outstanding consistent with estimates used in valuing the derivative liability (See Note 4).

9

The fair value of the contingent consideration arrangement is in three parts, first, 20,000,000 warrants ($13,849) become exercisable on the first day of the first month after the gross sales of Combotexs from and after April 20, 2010 exceeds $1,000,000 in the aggregate, net of taxes. These warrants were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 7 years, exercise price of $.05, interest rate of 3.20%, a volatility rate of 150% and a probability factor of 100%. Second, 10,000,000 warrants ($5,632) were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 8 years, exercise price of $.08,interest rate of 3.50%, a volatility rate of 150% and a probability factor of 80%. Third, 10,000,000 warrants ($2,626) were valued using the Black-Scholes model and in determining the fair value per share for the warrants, the Company utilized key assumptions of an expected term of 10 years, exercise price of $.10,interest rate of 3.79%, a volatility rate of 150% and a probability factor of 30%.

Noncontrolling interest was calculated based on the fact the fair value of consideration transferred equaled 51% ($44,797) of the total Combotexs entity value, therefore 49% or the noncontrolling interest is $43,040.

The fair value of the assets acquired was based on current market values. Inventory, fixed asset, and prepaid expense were purchased within a 90 day period of April 20, 2010. Likewise the accounts payables were expenses incurred within the same 90 day period prior to April 20, 2010

The results of operations of Combotexs are included in the accompanying financial statements for the period beginning on April 20, 2010. The revenue and earnings of Combotexs for the periods noted are as follows:

	Revenue		Earnings
4/20/2010 – 9/30/2010 (included in accompanying financial statements)	$	167,474	$	(1,781	)
1/1/2010 – 4/19/2010	$	6,922	$	(7,320	)
Proforma consolidated nine month, as if transaction occurred on 1/1/2010	$	246,661	$	(1,042,719	)

Combotexs did not generate any revenue or earnings prior to January 1, 2010

The Company is in the process of evaluating the business acquired and the integration with its existing operations. This evaluation will include the determination of whether the Company will continue to report its financial statements as a development stage enterprise and the consideration of the need for operating segment reporting in future periods.

4.  DERIVATIVE LIABILITY

The Company’s derivative liabilities as of September 30, 2010 are as follows:

· The debt conversion feature embedded in the Senior Secured Convertible Notes entered into in March 2007, August 2008, September 2008 and October 2008 which contains anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below this exercise price.

· The 162,093,910 warrants granted to Platinum Advisors LLC at an exercise price of $0.005 per share in 2007 as consideration for due diligence services in connection with the Senior Secured Convertible debt entered into in 2007.  These warrants contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below this exercise price.

· The debt conversion feature and the 45 million warrants exercisable at $0.0025 per share granted in connection with the 10% Subordinated Secured Convertible Note entered into in November 2009.  These agreements contain anti-dilution provisions that would be triggered if the Company issued instruments with rights to the Company’s common stock at prices below the exercise price.

ASC 815 was implemented in the first quarter of 2009 and is reported as a cumulative effect of a change in accounting principle. As a result, the cumulative effect on the accounting for the warrants was as follows:   

Derivative Liability	September 30, 2010		December 31, 2009
Platinum Advisor’s warrants	$	15,758	$	2,000
Senior Secured Convertible Notes conversion feature		64,606		70,000
Subordinated Secured Convertible Note conversion feature		24,298		2,897
Cape One warrants		6,074		9,706
Total	$	110,736	$	84,603

 

During the three-months ended September 30, 2010 and 2009, respectively, the Company recognized $12,313 in net losses and $72,106 in net gains relating to the changes in fair market value for these derivative liabilities.

 Fair Value Valuation Hierarchy Measurement

ASC 820 establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels as follows.

10

· Level 1 input are quoted prices (unadjusted) in active markets for identical assets or liabilities.

· Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

· Level 3 inputs are unobservable inputs based on the Company’s own assumptions used to measure assets and liabilities at fair value.

A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.

The derivative liabilities are measured at fair value using certain estimated factors such as volatility and probability and are classified within Level 3 of the valuation hierarchy. The following table provides a roll forward of the liabilities carried at fair value measured using significant unobservable inputs (level 3).

Fair value – 12/31/2009	$	84,603
Gain recognized in Q1		(194	)
Loss recognized in Q2		14,014
Loss recognized in Q3		12,313
Fair value – 9/30/2010	$	110,736

5.  WARRANT AGREEMENT WITH TECHNOLOGY INNOVATIONS, LLC  

On August 1, 2008, $900,000 of principal outstanding to TI, along with $129,600 of accrued and unpaid interest, was satisfied in exchange for a warrant. Under the warrant agreement, TI may purchase up to that number of shares that would give TI a beneficial ownership of not more than 4.99% of the Company.   If the purchase occurs after February 13, 2009 and before the warrant expires on February 11, 2011, the purchase price shall be computed as $40 million divided by the fully diluted common shares outstanding on the date of exercise.  Based on the terms of the warrant conversion agreement TI has the right to purchase up to 29,818,316 shares at an exercise price of $0.065 per share as of September 30, 2010.

6.  STOCKHOLDERS EQUITY

During the first nine months of 2010, the Company issued an aggregate of 18,922,832 shares of common stock to various individuals or entities in connection with professional consulting, lab and research services, facility rent, and website assistance provided to the Company in an aggregate amount of $60,259.  

Additionally, the Company issued 18,971,000 shares of common stock to Platinum in payment of $94,855 of interest expense obligations on the Senior Secured Convertible Notes. In accordance with the debt agreement, these shares were issued to Platinum using a conversion price of $0.005 per common share.

On April 20, 2010 NaturalNano issued 20,000,000 shares of the Company’s common stock to acquire 51% equity interest in Combotexs, (refer to Note 3).

On April 23, 2010 Longview Special Finance converted 20,000 preferred shares into 3,200,000 common shares.

On May 15, 2010, Mr. Jim Wemett, the sole officer and director of the Company, was awarded 12 million warrant shares, each warrant share grants the right to purchase one share of common stock, at an exercise price of $0.02 per warrant share. The warrants expire May 15, 2015 and contain a cashless exercise provision. The fair value of the warrant on the date of grant was determined using the Black-Scholes model and was measured on the date of grant at $83,700. An expected volatility assumption of 150% has been used based on the volatility of the Company’s stock price utilizing a look-back basis and the risk-free interest rate of 3.2% has been derived from the U.S. treasury yield. The market price of the Company’s common stock on March 7, 2007 was $0.008 per share. The expiration date used in the valuation model aligns with the warrant life of five years. The dividend yield was assumed to be zero.

The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of September 30, 2010 there were common stock warrants outstanding to purchase an aggregate 259,534,651 shares of common stock excluding the shares available under the Technology Innovations LLC warrant, (refer to Note 4) pursuant to various warrant grant agreements.

7.  INCENTIVE STOCK PLANS

Under the Company’s 2005 Incentive Stock Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the “2007 Plan”), the 2008 Incentive Stock Plan (the “2008 Plan”) and the 2009 Stock Incentive Plan (the “2009 Plan”), officers, employees, directors and consultants may be granted options to purchase the Company’s common stock at fair market value as of the date of grant. Options become exercisable over varying vesting periods commencing from the date of grant and have terms of five to ten years. The plan also provides for the granting of performance-based and restricted stock awards.  The shares of common stock underlying the plans are reserved by the Company from its authorized, but not issued common stock. Such shares are issued by the Company upon exercise by any option holder pursuant to any grant of such shares.  

11

The Plans are authorized to grant awards as follows: the 2005 Plan is authorized to grant up to 14 million share unit awards, the 2007 Plan is authorized to grant up to 17 million share unit awards, the 2008 Plan is authorized to grant up to 800 million unit share awards, and the 2009 Plan is authorized to grant up to 20 million unit share awards.

A summary of the option activity for the nine months ended September 30, 2010 is presented below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Life-years
Outstanding at January 1, 2010		12,633,333	$	0.21		6.01
Granted/Exercises/Cancelled/Forfeited		0
Options outstanding at September 30, 2010		12,633,333	$	0.21		5.25
Options exercisable at September 30, 2010		12,633,333	$	0.21		5.25

8.  CREDITOR CONCESSIONS

During the nine months ended September 30, 2010 and the nine months ended September 30, 2009, the Company entered into various agreements with certain vendors to settle accounts payable that were outstanding for amounts less than the liability that was recorded in the accompanying balance sheet. As a result of the agreements, a gain on forgiveness of debt of $112,052 was recognized in the first nine months of 2010 and a gain on forgiveness of debt of $84,213 was recognized in the first nine months of 2009. These vendor concessions have been treated as gains in the period that the underlying agreements were reached. Included in the 2010 gain was a reduction in accrued consulting expenses payable to TI in the amount of $45,235 resulting from a final settlement agreement between TI and the Company dated March 17, 2010. No future payments are required under the TI consulting agreement.

9.  CONTINGENCIES

Legal Proceedings

On March 24, 2009 the Company received a demand notice from an attorney representing a group of certain former employees of the Company, including but not limited to the Company’s former President and Chief Financial Officer, demanding immediate payment of $331,265 for certain deferred compensation, severance and vacation benefits. Each of the former employees cited in the demand notice, as well as other former employees, had executed written agreements during 2008 that allowed the Company to defer certain of these compensation payments. The Company has accrued for earned and unused vacation benefits and deferred payroll costs for amounts electively deferred by these and other former employees as of December 31, 2009. The Company has retained counsel in connection with this demand and continues to evaluate this demand notice and has responded to this demand. No actions or probable settlement discussions between the parties have developed since the filing of this demand. Due to the Company’s current cash and liquidity position discussed above and the current evaluation of the items in the demand notice the timing of future payment of these outstanding amounts is uncertain. 

During the third quarter ending September 30, 2010, two former employees, one involved in the March 24, 2009 demand, agreed to forgive the Company’s liability to them of $54,691 related to deferred compensation.  .

10.   SUBSEQUENT EVENTS

Subsequent to September 30, 2010 and prior to the filing of this report, as follows:

Promissory Notes

· On October 20, 2010, the Company borrowed $16,293 from Platinum Long Term Growth IV, LLC and $3,077 from Longview Special Finance Inc. pursuant to the terms of a Senior Secured Promissory Note.  Both notes bear interest at the rate of 8% per annum are due and payable on January 15, 2011.

· On November 12, 2010, the Company borrowed $51,000 from Platinum Long Term Growth IV, LLC and $9,000 from Longview Special Finance Inc. pursuant to the terms of a Senior Secured Promissory Note.  Both notes bear interest at the rate of 8% per annum are due and payable on January 15, 2011.

License Agreement

· On November 5, 2010, the Company entered into a nonexclusive patent license agreement with the United States Department of the Navy as represented by the Naval Research Laboratory (NRL).  The Company plans to use these licenses to continue their commercial development plan related to their Haloycite products.  The license requires the first commercial sale of the royalty-bearing product by October 1, 2012.  Upon issuance of the license, a non-refundable fee of $5,000 was paid.  The royalties due on the net sales for each royalty-bearing product are 5%.  The royalty fees are accrued each year between January 1 and December 31 and they are required to be paid in full by May 1st of the following year.  In addition, an annual license fee of $5,000 is due on October 31, 2012 and each year thereafter the license is in effect.  The license remains in effect but can be terminated by the Navy if the first commercial sale does not occur by October 1, 2012, along with several other provisions.

Board Members

·

On November 9, 2010, the board of directors appointed John P. Ryan, Howard Crosby and Alexander Ruckdaeschel, as members of the Board, to serve until their successors are duly appointed and qualified.

John P. Ryan is currently the Chief Executive Officer of Senetek PLC and has been in that position since March 10, 2010. Mr. Ryan has been the President of Fontana Capital Corporation, a closely held consulting company for the last ten years as well as an Officer and/or Director of a number of public companies including High Plains Uranium, Inc., U.S. Silver Corporation, and Gold Crest Mines, Inc.  He is a graduate of the University of Idaho with an engineering degree in mining and he also holds a law degree from Boston College. Howard Crosby is currently the President of Sentek PLC and has held that position since March 10, 2010. Mr. Crosby has been the President of Crosby Enterprises, Inc., a closely held family investment company for more than twenty years. He is also as an officer and a director of a number of public companies including High Plains Uranium, Inc., White Mountain Titanium Corporation, and Cadence Resources Corporation. Alexander Ruckdäschel is a venture capitalist, who serves on the board of directors of several small cap companies. Mr. Ruckdäschel is a co-founder of Blue Rock-AG, a Swiss-based investment manager. From 2002 to 2006 he was a Fund Advisor at DAC-FONDS, a European Investment company specializing in clean tech and small-cap equities worldwide. Since 2003, Mr. Ruckdäschel has served as an investment advisor to Nanostart AG. Founded in 2003, Nanostart quickly became the leading European venture investment firm in the area of nanotechnology. Prior to 2003, Mr. Ruckdäschel was a research analyst with Dunmore Management, a global hedge fund, and Thieme Associates, an investment advisor.

Stock Transactions

· On October 12, 2010, 4,790,400 of common stock was issued to settle $23,952 of outstanding interest with Platinum.

· On November 8, 2010, 1,600,000 of common stock was issued to settle $1,000 of outstanding vendor payables.

12

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations.

FORWARD-LOOKING STATEMENTS

This quarterly report on Form 10-Q and other reports that we file with the SEC contain statements that are considered forward-looking statements that involve risks and uncertainties. These include statements about our expectations, plans, objectives, assumptions or future events. In some cases, you can identify forward-looking statements by terminology such as “anticipate,” “estimate,” “plans,” “potential,” “projects,” “continuing,” “ongoing,” “expects,” “management believes,” “we believe,” “we intend” and similar expressions. Such forward looking statements include statements addressing operating performance, events or developments that the Company expects or anticipates will occur in the future, including statements relating to revenue realization, revenue growth, earnings, earnings per share, or similar projections. These statements estimates involve estimates, assumptions and uncertainties that could cause actual results to differ materially from those expressed for the reasons described in this report. You should not place undue reliance on these forward-looking statements.

You should be aware that our actual results could differ materially from those contained in the forward-looking statements due to a number of factors such as:

· the ability to raise capital to fund our operations until we generate adequate cash flow internally;

· the terms and timing of product sales and licensing agreements;

· our ability to enter into strategic partnering and joint development agreements;

· our ability to competitively market our controlled release and filled tube products;

· the successful implementation of research and development programs;

· our ability to attract and retain key personnel ;

· general market conditions.

Our actual results may differ materially from management’s expectations. The following discussion and analysis should be read in conjunction with our financial statements included herewith.  This discussion should not be construed to imply that the results discussed herein will necessarily continue in the future, or that any conclusion reached herein will necessarily be indicative of actual operating performance in the future. Such discussion represents only the best present assessment of our management.

The forward-looking statements speak only as of the date on which they are made, and except to the extent required by federal securities laws, we undertake no obligation to update any forward-looking statement to reflect events or circumstances after the date on which the statement is made or to reflect the occurrence of unanticipated events. In addition, we cannot assess the impact of each factor on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.

General

NaturalNano since inception we were, and for 2010 we expect we will continue to be, a development stage company. Our primary mission is to develop and exploit technologies in the area of advanced materials science, with an emphasis on additives to industrial and consumer products, taking advantage of technological advances we have developed in-house. These technologies include a specific focus on nanoscale materials using modifications to tubular and spherical materials found in clay. Our strategy is to develop patentable processes and technologies related to these nanoscale materials and to develop products in the polymers and plastics industries as well as the composites, cosmetics, household products and agrichemical industries.

Combotexs is dedicated to building upon the pioneering work of NaturalNano, to commercialize and distribute a wide variety of products incorporating materials that utilize nanotubes found in halloysite clay. From consumer packaged goods to industrial cleaning solutions and medical procedural checklists, nano technology is helping to make these products more effective and less expensive.

NaturalNano is domiciled in the state of Nevada as a result of the merger with Cementitious Materials, Inc. (“CMI”), which was completed on November 29, 2005.

Liquidity and Capital Resources

Liquidity and Going Concern

Going Concern – The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a net loss for the nine months ended September 30, 2010 of $1,035,399 and had negative working capital of $6,780,358 and a stockholders’ deficiency of $6,603,996 at September 30, 2010. Since inception the Company’s growth has been funded through a combination of convertible debt from private investors and from cash advances from its former parent and majority shareholder Technology Innovations, LLC. These factors, among others, may indicate that the Company will be unable to continue as a going concern for a reasonable period of time. The Company's continuation as a going concern is dependent upon its ability to generate sufficient cash flow to meet its obligations, to obtain additional financing, renegotiate the terms of existing financing obligations and ultimately to attain successful operations. The ability to successfully achieve those items is uncertain.

13

As of September 30, 2010, the Company continued to require waivers for debt covenant violations and extensions of maturity dates. Refer to Note 2 for lenders waivers and maturity extensions received from the lenders.

OTCBB delisting December 3, 2009

The Company received a OTCBB Delinquency Notification, dated November 24, 2009, from the Financial Industry Regulatory Authority (FINRA) indicating that the Company’s common stock was be removed from quotation on the OTC Bulletin Board, effective as of the opening of trading on December 3, 2009. The delisting will make it more difficult to attract investors or issue shares as a means to raise funds.

Operating activities

Net cash used in operating activities in the nine months ended September 30, 2010 and 2009 was $(115,080) and $2,958, respectively. Cash used 2010 versus 2009 was down  due mainly to paying vendors – subcontractors, consultants, rent, interest and other vendor expenses – with common stock; additionally, the Company had vendors forgive debt owed for nominal consideration. The net loss generated in the first nine months of 2010 was $306,431 greater than the prior year period.  The Company continues to actively monitor spending and cash outflows in an effort to reduce costs until continuing revenue sources are developed. The Company is actively seeking opportunities to reduce expenses and improve its liquidity position. We expect that total consolidated spending in 2010 to be equal if not slightly greater than the 2009 levels, although we will continue to invest in product and commercialization efforts as our cash position and liquidity allow. Additionally, with the acquisition of Combotexs, the Company feels cash flow will improve.

Total adjustments to reconcile the net loss incurred to the cash used in operations aggregated $613,315 in the first nine months of 2010 versus $546,839 in first nine months of 2009. The change in these non-cash items reflects decreases in amortization on debt discount and deferred financing costs on a year over year basis as the amortization of the items were fully amortized as of January 2010. For the nine months ended September 30, 2010 and 2009 the Company recognized non-cash expenses of $120,187 and $952,214, respectively, for amortization of debt discount and deferred financing costs incurred in connection with the senior secured convertible debt and 10% subordinate secured convertible debt. Additionally, for the first nine month of 2010 the Company recognized a loss adjustment to derivatives of $26,133 and for the same period 2009 a gain of $533,376, a net increase of $559,509.

During the first nine months of 2009, the Company recognized a net credit for stock option costs due to an increase in forfeitures and cancellations for previously granted unvested stock options as a result of employee turnover experienced in the first quarter of 2009. During both the first nine months of 2010 and 2009, the Company reduced outstanding liabilities through negotiations with certain vendors, resulting in a net gain on the forgiveness of debt of $112,052 in 2010 and $84,213 in the comparable period in 2009.

Investing activities

Net cash used in investing activities in the nine months ended September 30, 2010 and 2009 was $0 and $6,600, respectively. The first nine months of 2009 reflects the buy out on a capital lease for equipments used in the Company’s research and development lab.

Financing Activities

Net cash provided from financing activities in the nine months ended September 30, 2010 and 2009 was $26,346 and $5,162, respectively. The cash flows from financing activities in the nine months of 2010 were a receipt of $5,000 in proceeds from a 5% Unsecured Promissory Note with an unrelated party. The cash flows from financing activities in the first nine months of 2009 reflect the receipt of $191,126 in proceeds from the senior secured promissory notes and payments of $141,125 against the same senior secured promissory notes. During 2009, the Company also received cash advances of $3,462 from affiliated entities for shared services agreements. Additionally, during the nine months ended September 30, 2009 capital lease payments were made totaling $44,616, no payments were made in 2010.

Critical Accounting Policies and Estimates

Our consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these consolidated financial statements requires us to make assumptions that affect the reported amounts of assets, liabilities, revenue, costs and expenses, and related disclosures. Our actual results may differ from these estimates.

 Refer to the Company’s December 31, 2009 report on Form 10K for a complete discussion of the critical accounting policies which have not changed during the first nine months ended September 30, 2010.

  Comparison of Statement of Operations for the three months ended September 30, 2010 and 2009

Revenue and Gross Profit

During the three months ended September 30, 2010 and 2009, the Company recorded $107,874 and $8,119, respectively in consolidated revenue. Third quarter 2010 revenue included $33,150 from shipments of halloysite based products and $74,724 from Combotexs products including medical boards and related products. Consolidated cost of goods sold was $59,141 and $3,927 for the shipments completed in the respective quarters. Gross margin of $48,733 and $4,192 was realized for the three months ended September 30, 2010 and 2009, respectively.

14

Gross margin realized in the three months ended September 2010 was 45% compared to 52% for three months ended September 2009. The variance is attributable in two areas; first, the Combotexs products have a lower gross margin than the sale of halloysite based products. Second, the Company expects that it will experience significant variations in gross margins with its halloysite based products as it continues to introduce to market and develop new products and related applications.  The Company expects that competitive pricing will be a continuing challenge as new products are developed and introduced and product acceptance and the Company’s production reputation develops.

	For the three months ended				Variance
	September 30,				increase
Sales, Cost of Goods, and Gross Margin	2010		2009		(decrease)
Halloysite based products	$	33,150	$	8,119	$	25,031
Combotexs		74,724		-		74,724
		107,874		8,119		99,755
Halloysite cost of goods		15,177		3,927		11,250
Combotexs cost of goods		43,964		-		43,964
Consolidated Gross Margin	$	48,733	$	4,192	$	44,541

Operating Expenses

Research and development expenses for the three months ended September 30, 2010 were $108,323 compared to $99,178 for the three months ended September 30, 2009.  The Company recognized minimum licensing fees under the agreement with the Naval Research Laboratory of $58,000 in the three months ended September 30, 2010 compared to $29,333 for three months ended September 30, 2009. This reflects increased licensing fees scheduled for payment under the contract in calendar year 2010.

	For the three months ended				Variance
	September 30,				increase
Research and Development	2010		2009		(decrease)
Salaries & benefits	$	4,705	$	-	$	4,705
Consulting services		3,799		10,291		(6,492	)
Patent costs		61,370		46,286		15,084
Depreciation		28,400		28,589		(189	)
Rent & utilities		8,506		12,732		(4,226	)
All other		1,543		1,280		263
	$	108,323	$	99,178	$	9,145

Total general and administrative expenses for the three months ended September 30, 2010 was $150,534 as compared to negative expenses of $159,689 for the three months ended September 30, 2009. The increase in general and administrative expenses reflects the costs of Combotexs and the reduction/none of New York State tax credit/refund during the same third quarter.  Management continues to actively assess the Company’s operating structure with the objective align cash expenditures and expenses with growth in total revenue.

	For the three months ended						Variance
	September 30,						Increase
General and Administrative	2010			2009			(decrease)
Salaries & benefits	$	61,494		$	32,500		$	28,994
Consulting services		24,626			9,907			14,719
Legal & professional fees		29,750			41,350			(11,600	)
Depreciation & amortization of intangible assets		10,083			9,844			239
Insurance expense		1,122			3,352			(2,230	)
Shareholder expense		2,861			3,903			(1,042	)
State tax		(775	)		(269,875	)		269,100
All other		21,373			9,330			12,043
	$	150,534		$	(159,689	)	$	310,223

15

Other (Expense) Income

Other expense consists of interest expense on convertible and promissory notes outstanding and other debt related financing and amortization expenses considered components of interest expense for financial reporting.

The debt discount and deferred financing costs attributed to the Senior Secured Convertible Notes were fully amortized as of January 10, 2010.  During the three months ending September 2010 amortization of this maturing debt discount was $2,701 as compared to $236,943 for the three months ending September 2009. During the fourth quarter of 2009, the Company issued $225,000 in 10% Subordinated Convertible Notes which resulted in a three months ending September 2010 interest expense of $5,671.

	For the three months ended						Variance
	September 30,						increase
Other (Expense) Income	2010			2009			(decrease)
Amortization of debt discount	$	(2,701	)	$	(236,943	)	$	(234,242	)
Interest to Senior convertible and promissory notes		(89,216	)		(77,728	)		11,488
Interest to 10% Subordinated Secured Convertible Notes		(5,671	)		-			5,671
Amortization of financing costs		(5,974	)		(45,631	)		(39,657	)
Interest paid on capital leases		-			(1,357	)		(1,357	)
Interest earned on cash		-			-			-
	$	(103,562	)	$	(361,659	)	$	(258,097	)
Net (loss) gain on derivative liability	$	(12,313	)	$	72,106		$	(84,419	)

During the first quarter of 2009 and in accordance with EITF 07-05, certain warrants and the embedded conversion of feature associated with the 8% convertible debt were recognized as derivative instruments and as such were re-characterized as derivative liabilities. SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”) requires that the fair value of these liabilities be re-measured at the end of every reporting period with the change in value reported in the statement of operations. The re-measurement of these derivative liabilities resulted in a loss of $12,313 in the third quarter of 2010 and a gain of $72,106 during the third quarter of 2009.

Comparison of Statement of Operations for the nine months ended September 30, 2010 and 2009

Revenue and Gross Profit

During the nine months ended September 30, 2010 and 2009, the Company recorded $239,719 and $75,352, respectively in revenue. For the nine months ending 2010 $168,010 came from Combotexs sales and the $71,709 from shipments of halloysite based product samples; all sales for the same period 2009 – $75,352 – came from shipments of halloysite based product samples. The related cost of goods sold was $119,896 and $24,894 for these shipments completed in the first nine months of 2010; and, $18,887 for the respective quarter 2009. Gross margin of $94,919 and $56,465 were realized for the nine months ended September 30, 2010 and 2009, respectively.

Gross margin realized in the first nine months of 2010 was 40% compared to 75% in the first nine months of 2009.  The variance is attributable in two areas; first, the Combotexs products have a lower gross margin than the sale of Halloysite based products. Second, the Company expects that it will experience significant variations in gross margins with its halloysite based products as it continues to introduce to market and develop new products and related applications.  The Company expects that competitive pricing will be a continuing challenge as new products are developed and introduced and product acceptance and the Company’s production reputation develops.

Operating Expenses

Total research and development expenses for the nine months ended September 30, 2010 were $320,915 compared to $241,234 for the nine months ended September 30, 2009.  The Company recognized minimum licensing fees under the agreement with the Naval Research Laboratory of $164,000 in the first nine months of 2010 compared to $88,000 in the first nine months of 2009. This reflects increased licensing fees scheduled for payment under the contract in calendar year 2010. The increase in research and development expenses in the current period also reflects the 2009 credit for stock option compensation in the first nine months of 2009 of $28,538 reflecting the forfeiture of unvested options for employees terminated in the first quarter of 2009.  No option grants were made in 2009 or in the first nine months of 2010.

	For the nine months ended					Variance
	September 30,					increase
Research and Development	2010		2009			(decrease)
Salaries & benefits	$	5,653		-		$	5,653
Consulting services		19,891		11,645			8,246
Patent costs and licensing fees		178,561		124,807			53,754
Depreciation		85,579		85,454			125
Rent & utilities		26,411		36,258			(9,847	)
All other		4,820		(16,930	)		21,750
	$	320,915	$	241,234		$	79,681

16

Total general and administrative expenses for the nine months ended September 30, 2010 were $509,894 as compared to negative $28,620 for the nine months ended September 30, 2009. The Company incurred $196,200 in compensation for its sole officer during the first nine months of 2010 and $65,000 in the comparable period in 2009; plus, commission expense for Combotexs. Included in the 2010 officer’s compensation was $83,700 of warrants (refer to note 6 of the financial statements). Legal and professional fees in the first quarter of 2010 reflect more outside consultants engaged primarily in the preparation and filing of our financial reports. During the first quarter of 2009 the Company recorded a credit for stock option compensation in of $45,512 reflecting the forfeiture of unvested options for employees terminated in the first quarter of 2009.  No option grants were made in 2009 or in the first half of 2010. Additionally the Company did not benefit from a New York State tax credit and refunds as it did during the same third quarter 2009 – a total difference of 266,304.

During the first quarter 2009 the Company received $14,865 in amended state income tax refunds for the years 2005, 2006 and 2007. Upon receipt of these refunds the Company recorded the amount as a reduction to general and administrative expenses.

	For the nine months ended					Variance
	September 30,					increase
General and Administrative	2010		2009			(decrease)
Salaries & Benefits	$	255,259	$	63,880		$	191,379
Consulting Services		48,238		47,574			664
Legal & professional fees		99,960		77,030			22,930
Depreciation & amortization of intangible assets		29,930		29,554			376
Insurance expense		3,251		14,629			(11,378	)
Shareholder expense		9,594		16,261			(6,667	)
State tax		1,262		(266,304	)		267,566
All other		62,400		(11,244	)		73,644
	$	509,894	$	(28,620	)	$	538,514

Other (Expense) Income

Other expense consists of interest expense on various debt instruments and related amortization of deferred financing and debt discount expenses which are considered components of interest expense for financial reporting.

The debt discount and deferred financing costs attributed to the Senior Secured Convertible Notes were fully amortized as of January 10, 2010.  During the first nine months of 2010 amortization of this maturing debt discount was $87,084 as compared to $816,809 in the first nine months of 2009. During the fourth quarter of 2009, the Company issued $225,000 in Subordinated Secured Convertible Notes which resulted in first nine months of 2010 interest expense of $16,921.

	For the nine months ended						Variance
	September 30,						increase
Other (Expense) Income	2010			2009			(decrease)
Amortization of debt discount	$	(87,084	)	$	(816,809	)	$	(729,725	)
Interest on Senior convertible and promissory notes		(253,727	)		(234,477	)		19,250
Interest to 10% Subordinated Secured Convertible Notes		(16,921	)		-			16,921
Amortization of financing costs		(33,103	)		(135,405	)		(102,302	)
Interest paid on capital leases					(3,717	)		(3,717	)
Interest earned on cash		33			-			(33	)
	$	(390,802	)	$	(1,190,408	)	$	(799,606	)
Net (loss) gain on derivative liability	$	(26,133	)	$	533,376		$	(559,509	)
Gain on forgiveness of debt	$	112,052		$	84,213		$	27,839

The Company adopted ASC 815, “Determining Whether an Instrument (or Embedded Feature) is indexed to an Entity’s Own Stock,” effective January 1, 2009. During the first nine months of 2010 and 2009, respectively, the Company recognized a loss of $26,133 and a net gain of $533,376 relating to the changes in fair market value for these derivative liabilities.

During the first nine months of 2010 and 2009, the Company entered into agreements with certain vendors to settle liabilities that were outstanding as of prior periods for amounts less than the liability was recorded during those prior periods.   The most significant items of debt forgiveness during the first nine months of 2010, were the $45,235 recorded as part of the March 17, 2010 agreement between the Company and Technology Innovations, LLC (“TI”) that capped the fees payable under the TI consulting agreement to the 750,000 common shares granted to TI during the first quarter of 2010 (no future payments are required under that agreement) and the $54,691 forgiven by former employees.

The vendor concessions of $112,052 and $84,213 respectively have been treated as gains in the first nine months of 2010 and 2009, which is the period the related vendor agreements were reached.   

17

ITEM 4 - CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Management is responsible for establishing and maintaining effective disclosure controls and procedures. Our Chief Executive Officer has evaluated the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the “Exchange Act”)) as of the end of the period covered by this report to provide reasonable assurance that information we are required to disclose in reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms and that such information is accumulated and communicated to management, including the CEO as appropriate, to allow timely decisions regarding required disclosure.

Based on this evaluation, and in light of the material weaknesses in our internal control over financial reporting that are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 our Chief Executive Officer has concluded that our disclosure controls and procedures were not effective. The material weaknesses consist of an insufficient complement of qualified accounting personnel and controls associated with segregation of duties and ineffective controls associated with identifying and accounting for complex and non-routine transactions in accordance with U.S. generally accepted accounting principles.

Since the fourth quarter of 2008, the Company experienced the resignations in the positions of Controller, Chief Financial Officer and Chief Executive Officer. These roles were filled in the first quarter of 2009 by part time and contract staffing. Coincident with the Company’s Form 10Q for the quarter ended March 31, 2009; the Company’s then Chief Financial Officer resigned and has not been replaced. To address the material weaknesses the Company performed additional analyses and other post-closing procedures to ensure our consolidated financial statements were prepared in accordance with accounting principles generally accepted in the United States of America (U.S. GAAP). Notwithstanding these material weaknesses, management believes that the financial statements included in this Quarterly Report on Form 10-Q fairly present, in all material respects, our financial condition, result of operations and cash flows for the periods presented.

There can be no assurance, however, that our disclosure controls and procedures will detect or uncover all failures of persons within the Company and its consolidated subsidiaries to disclose material information otherwise required to be set forth in our periodic reports. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of the controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable, not absolute, assurance of achieving their control objectives.

Changes in Internal Control over Financial Reporting

An evaluation was performed under the supervision of the Company’s CEO, as required under Exchange Act Rule 13a-15(d) and 15d-15(d), of whether any change in the Company’s internal control over financial reporting occurred during the first nine months ended September 30, 2010. Based on that evaluation, the Company’s CEO concluded that no changes in our internal control over financial reporting occurred during the first nine months of 2010 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

18

PART II—OTHER INFORMATION

Item 1. Legal Proceedings.

On March 24, 2009 the Company received a demand notice from an attorney representing a group of certain former employees of the Company, including but not limited to the Company’s former President and Chief Financial Officer, demanding immediate payment of $331,265 for certain deferred compensation, severance and vacation benefits. No actions or probable settlement discussions between the parties have developed since the filing of this demand. During the quarter ending September 30, 2010, two former employees, one involved in the litigation, agreed to forgive the Company’s liability to them of $54,691 related to deferred compensation.

Other than as described above, there are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company’s property is not the subject of any pending legal proceedings.

Item 1A.   Risk Factors

A smaller reporting company, as defined by Item 10 of Regulation S-K, is not required to provide the information required by this item.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.

 None.

Purchases of equity securities by the issuer and affiliated purchasers

None.

Use of Proceeds

None

Item 3. Defaults upon Senior Securities.

Effective as of September 30, 2010 the Company entered into various Forbearance Agreements with Platinum Long Term Growth IV LLC and Platinum Advisors LLC relating to the Company’s default on various terms and conditions with borrowing agreements. Platinum Long Term Growth IV LLC and Platinum Advisors LLC agreed to not take any action or exercise or move to enforce any rights or remedies provided for in the various loan documents or otherwise available to it, under law or equity, due to the events of default under the existing Notes until January 1, 2011 unless extended by the lenders in their discretion.

Effective as of October 22, 2010 the Company entered into a Forbearance Agreement with Platinum Long Term Growth LLC due to the Company’s default on various terms and conditions under the following borrowing agreements:

$2,750,000 8% Senior Secured Notes due March 6, 2009,

$150,000 8% Senior Secured Notes due March 6, 2009,

$59,500 8% Senior Secured Notes due January 31, 2010,

$190,000 8% Senior Secured Promissory Note due January 31, 2010,

$136,375 8% Senior Secured Promissory Note due January 31, 2010,

$5,000 8% Senior Secured Promissory Note due June 30, 2009,

$15,000 8% Senior Secured Promissory Note due June 30, 2009,

$25,000 16% Senior Secured Promissory Note due October 12, 2009, and

one or more secured bridge notes in the current principal amount of $70,961.12 (together the “Notes”).

Also, effective as of  September 30, 2010 the Company entered into a Forbearance Agreement with Platinum Advisors LLC relating to the Company’s default on $97,500 of 8% Senior Secured Notes due March 6, 2009.

Effective as of August 10, 2010 the Company entered into a Forbearance Agreement with Longview Special Finance Inc. relating to the Company’s default on various terms and conditions with borrowing agreements. Longview Special Finance Inc.  agreed to not take any action or exercise or move to enforce any rights or remedies provided for in the various loan documents or otherwise available to it, under law or equity, due to the events of default under the existing Notes until January 1, 2011 unless extended by Longview Special Finance Inc. in their discretion. Due to the Company’s default on various terms and conditions under the following borrowing agreements:

$500,000 8% Senior Secured Notes due March 6, 2009,

$20,000 8% Senior Secured Notes due March 6, 2009,

$30,000 Senior Secured Promissory Note due January 31, 2010,

$25,500 Senior Secured Promissory Note due January 31, 2010,

$34,750 16% Senior Secured Promissory Note due January 31, 2010

$40,000 16% Senior Secured Promissory Note due November 1, 2009.

These Forbearance Agreements also extend to the Registration Rights Agreement entered into by the Company on March 7, 2007. Platinum Long Term Growth, Platinum Advisors and Longview Special Finance have agreed to forbear from demanding payments defined in these agreements until January 1, 2011, respectively.  

As of December 31, 2009, the Company was not in compliance with certain debt covenants of the Subordinated Secured Convertible Note including limitations on the use of proceeds.  On March 20, 2010 the Company received a waiver from the Cape One Financial LP indicating that the Lender will not demand payment of principal, default interest and liquidated damages as a result of non-compliance with any existing covenant violations through January 1, 2011.

Item 4. Removed and Reserved

Item 5. Other Information.

None.

19

Item 6. Exhibits.   

Exhibit No.	Description	Location
10.82	Letter Agreement effective as of October 22, 2010 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to the $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 and one or more secured bridge notes in the current principal amount of $70,961.12 (together the “Notes”).	**
10.83	Letter Agreement effective as of with Platinum Advisors LLC regarding their forbearance with respect to the $97,500 8% Senior Secured Promissory Note due March 6, 2009.	**
10.85	8% Senior Secured Promissory Note dated as of November 12, 2010 in the original principal amount of $9,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Longview Special Finance Inc.	**
10.86	8% Senior Secured Promissory Note dated as of November 12, 2010 in the original principal amount of $51,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC.	**
31.1	Certification of principal executive officer and principal accounting officer pursuant to section 302 of the Sarbanes-Oxley Act of 2002	**
32.1	Certification of principal executive officer and principal accounting officer pursuant to section 906 of the Sarbanes-Oxley Act of 2002	**
**	Filed herewith

20

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		NaturalNano, Inc.
Date:	November 15, 2010	/s/ James Wemett
		James Wemett
		President and Director (Principal Executive, Financial and Accounting Officer)

21

EX-10.82

EX-31.1

EX-32.1

EXHIBIT 32.1

CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002

In connection with the quarterly report of NaturalNano, Inc. (the "Company") on Form 10-Q for the period ended September 30, 2010, as filed with the Securities and Exchange Commission on the date hereof (the “Report"), I, James Wemett, President of the Company, certify to the best of my knowledge, pursuant to 18 U.S.C. Sec. 1350, as adopted pursuant to Sec. 906 of the Sarbanes-Oxley Act of 2002, that:

(1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934; and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

Date: November 15, 2010

By:	/s/ James Wemett
Name:	James Wemett
Title:	President
	(Principal Executive, Financial and Accounting Officer)