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, 2011                                                   

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 x     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:

387,946,557 as of November 11, 2011

Table of Contents

PART I—FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)	3
		Consolidated Balance Sheets	3
		Consolidated Statements of Operations	4
		Consolidated Statement of Stockholders 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	15
		Note Regarding Forward-Looking Statements	15
	Item 4.	Controls and Procedures.	21
PART II—OTHER INFORMATION
	Item 1.	Legal Proceedings	22
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	22
	Item 3.	Defaults Upon Senior Securities.	22
	Item 4.	Submission of Matters to a Vote of Security Holders	23
	Item 5.	Other Information.	23
	Item 6.	Exhibits.	24
SIGNATURES			25

2

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

NATURALNANO, INC.

CONSOLIDATED BALANCE SHEETS

	September 30,			December 31,
	2011			2010
	(Unaudited)
Assets
Current assets:
Cash	$	7,652		$	6,861
Accounts receivable		12,107			13,694
Inventory		56,528			16,738
Prepaid expenses and other current assets		11,109			16,412
Total current assets		87,396			53,705
Property and equipment, net		69,447			145,177
Goodwill		80,332			80,332
Deferred financing costs, net		-			3,815
Total non-current assets		149,779			229,324
Total Assets	$	237,175		$	283,029
Liabilities and Stockholders' Deficiency
Liabilities
Current liabilities:
Senior secured convertible notes	$	3,569,000		$	3,604,000
Senior secured promissory notes		329,557			249,557
Subordinated secured convertible note, net of discount of $0 and $1,799, respectively		240,000			223,201
Accounts payable		491,002			507,556
Accrued expenses		81,441			103,368
Accrued interest		437,481			582,559
Accrued payroll		703,283			620,907
Deferred revenue		70,000			72,270
Registration rights liability		82,489			82,489
Derivative liability		10,819			60,909
Total current liabilities		6,015,072			6,106,816
Derivative liability		23,921			15,758
Contingent consideration related to business combination		22,107			22,107
Other long term liabilities		35,500			40,000
Total Liabilities		6,096,600			6,184,681
Stockholders’ Deficiency
Preferred Stock - $.001 par value, 10 million shares authorized
Series B - issued and outstanding  647,500 and 730,000 with an aggregate liquidation preference of $1,295 and $1,460 respectively		648			730
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 352,946,557 and 207,366,477, respectively		352,946			207,366
Additional paid in capital		19,420,380			19,028,358
Noncontrolling interest in subsidiary		35,138			33,325
Accumulated deficit		(25,672,787	)		(25,175,681	)
Total stockholders' deficiency		(5,859,425	)		(5,901,652	)
Total Liabilities and Stockholders' Deficiency	$	237,175		$	283,029

See notes to consolidated financial statements

3

NATURALNANO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the three months ended						For the nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Income:
Revenue	$	30,136		$	107,874		$	233,951		$	239,719
Cost of goods sold		12,399			59,141			70,351			144,790
Gross profit		17,737			48,733			163,600			94,929
Operating expenses:
Research and development		39,556			108,323			122,741			320,915
General and administrative		115,069			150,534			306,766			509,894
		154,625			258,857			429,507			830,809
Loss from Operations		(136,888	)		(210,124	)		(265,907	)		(735,880	)
Other income (expense):
Interest expense, net		(97,165	)		(103,562	)		(281,852	)		(390,802	)
Net gain (loss) on derivative liability		80,179			(12,313	)		41,927			(26,133	)
Net gain (loss) on forgiveness/modification of debt		(30,000	)		64,691			(21,050	)		112,052
Gain  on insurance settlement		-			4,490			31,589			4,490
		(46,986	)		(46,694	)		(229,386	)		(300,393	)
Consolidated net loss		(183,874	)		(256,818	)		(495,293	)		(1,036,273	)
Less: Consolidated net (income) loss attributable to noncontrolling interest in subsidiary		7,297			1,097			(1,813	)		874
Consolidated net loss attributable to the controlling interest	$	(176,577	)	$	(255,721	)	$	(497,106	)	$	(1,035,399	)
Loss per common share - basic and diluted	$	-		$	-		$	-		$	(0.01	)
Weighted average shares outstanding		306,056,346			132,544,494			260,786,397			130,004,447

See notes to consolidated financial statements

4

NATURALNANO, INC.

CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIENCY

(unaudited)

											Additional						Non-controlling
	Common Stock				Preferred Stock						Paid-in			Accumulated			Interest		Stockholders’
	Shares		Amount		Shares			Amount			Capital			Deficit			in Subsidiary		(Deficiency)
Balance at December 31, 2010		207,366,477	$	207,366		4,980,000		$	4,980		$	19,028,358		$	(25,175,681	)	$	33,325	$	(5,901,652	)
Grant of common stock for services @:
$0.001 to $.003 per share		8,250,000		8,250								9,500								17,750
$0.0006 per share		25,000,000		25,000								(9,600	)							15,400
Issuance of common stock as interest payment $ 0.005 per share		83,130,080		83,130								332,520								415,650
Warrant issued for services												8,720								8,720
Shares issued on debt conversion		16,000,000		16,000								64,000								80,000
Series B preferred shares converted to common shares		13,200,000		13,200		(82,500	)		(82	)		(13,118	)							-
Net income (loss) for the nine months ended 09/30/11															(497,106	)		1,813		(495,293	)
Balance at September 30, 2011		352,946,557	$	352,946		4,897,500		$	4,898		$	19,420,380		$	(25,672,787	)	$	35,138	$	(5,859,425	)

See notes to consolidated financial statements

5

NATURALNANO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the nine months ended
	September 30,
	2011			2010
Cash flows from operating activities:
Net loss attributable to controlling interest	$	(497,106	)	$	(1,035,399	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		75,730			117,003
Amortization of discount on convertible notes		1,799			87,084
Amortization of deferred financing costs		3,815			33,103
Non-cash gain on forgiveness of debt		(38,950	)		(112,052	)
Fair value adjustment of derivative liabilities		(41,927	)		26,133
Issuance of stock for services		33,150			60,258
Issuance of stock for interest		415,650			94,855
Issuance of warrants for services		8,720			83,700
Loss on modification of debt		60,000			-
Income (loss) from non-controlling interest in subsidiary		1,813			(874	)
Changes in operating assets and liabilities:
(Increase) decrease in inventory		(39,790	)		2,488
Increase in accounts receivable		1,587			-
Decrease in other current assets		5,303			356,365
(Decrease) increase in accounts payable, accrued
payroll and accrued expenses		(62,233	)		176,756
(Decrease) increase in deferred revenue		(2,270	)		-
Decrease in other liability		(4,500	)		(4,500	)
Net cash used in operating activities		(79,209	)		(115,080	)
Cash flows from financing activities:
Proceeds from senior secured promissory notes		80,000			23,846
Proceeds from unsecured promissory notes		18,080			5,000
Payment on unsecured promissory notes		(18,080	)		(2,500	)
Net cash provided by financing activities		80,000			26,346
Increase (decrease) in cash		791			(88,734	)
Cash at beginning of period		6,861			89,901
Cash at end of period	$	7,652		$	1,167
Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	5,671		$	12,874
Schedule of non-cash investing and financing activities:
Common stock issued for convertible notes	$	80,000		$	-
Acquisition of subsidiary through issuance of common stock and warrants	$	-		$	87,836
Conversion of preferred shares into common shares	$	13,200		$	3,200

See notes to consolidated financial statements

6

NATURALNANO, INC.

FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2011 and 2010

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements

The consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 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, 2010.

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.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, accounts payable and accrued expenses, notes payable, capital leases and derivative liabilities. Fair values for all instruments except for derivative liabilities were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company’s convertible notes payable is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying value approximates the fair value of these debt instruments as of September 30, 2011 and December 31, 2010 based on rates charges being consistent with current market rates available to the Company.

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 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.

7

Divergence from Development Stage Company

The Company has previously presented its financial statements as a development stage enterprise.  Effective January 1, 2011, the Company has diverged from reporting as a development stage company.  In addition to selling samples of halloysite tubes for research and testing, the Company is also generating revenue from the sale of this product for use in commercial products.  Also, as a result of the Combotexs business combination in 2010, the Company has normal recurring revenue.

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, 2011 of $497,106 and had negative working capital of $5,927,676 and a stockholders’ deficiency of $5,859,425 at September 30, 2011. 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, 2011, 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.

QETC rebate for fiscal year ended December 31, 2009

The QETC tax rebate for 2009 had been in audit since its filing in September of 2010.  The Company received notice in March 2011 that the audit was complete and that the rebate for 2009 would be for $60,073.  NaturalNano received the first payment of $43,615 in March of 2011 and that amount was reflected in the financial statements for the first quarter of 2011.  The Company received the final payment of $16,458 on April 14, 2011 and that amount was reflected in the financial statements for the second quarter of 2011.  These amounts were presented as a reduction of general and administrative expenses.

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, 2011, there were 310,138,210 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, 2011, the Company had $3,898,557 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 2010 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 1, 2011. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances to November 22, 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 November 22, 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.

On January 23, 2011, the Company borrowed a total of $50,000 with $15,000 from Platinum and $35,000 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 June 30, 2011.  A forbearance agreement was entered into with both Platinum and Longview effective June 30, 2011 which extended the due date of the outstanding principal balance to November 22, 2011.

On April 15, 2011, the Company borrowed a total of $15,000 with $12,750 from Platinum and $2,250 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 June 30, 2011.  A forbearance agreement was entered into with both Platinum and Longview effective June 30, 2011 which extended the due date of the outstanding principal balance to November 22, 2011.

8

On September 21, 2011, the Company borrowed a total of $15,000 from Platinum.  This promissory note was pursuant to the terms of the Senior Secured Promissory Note.  The note bears interest at the rate of 8% per annum and is due and payable on December 31, 2011.

During the first nine months of 2011, the Company issued 79,612,680 shares of common stock to Platinum in payment of $398,063 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.

During the first nine months of 2011, the Company issued 7,000,000 shares of common stock to Alpha Capital Partners in payment of $35,000 of principal obligations on the Senior Secured Convertible Notes with Longview Special Finance. In accordance with the debt agreement, these shares were issued to Alpha Capital Partners using a conversion price of $0.005 per common share.

As of March 1, 2011 the Company had $225,000 in principal that was outstanding and due under the terms of the 10% Subordinated Secured Convertible Promissory Agreement (the “Convertible Note”) with Cape One Financial LP (“Cape One”). On March 15, 2011 the Company and Cape One entered into a forbearance agreement which altered the due date of the Convertible Note from March 1, 2011 to June 30, 2011.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principal balance of the note.  In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.  The forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended March 31, 2011 reported in the statement of operations.  Effective June 30, 2011, the Company and Cape One entered into a forbearance agreement which altered the due date of the Convertible Note from June 30, 2011 to October 1, 2011.  Effective September 30, 2011, the Company and Cape One entered into another forbearance agreement which altered the due date of the Convertible note from October 1, 2011 to November 22, 2011.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principal balance of the note.  This forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended September 30, 2011 reported in the statement of operations.

During the first nine months of 2011, the Company issued 9,000,000 and 3,517,400 shares of common stock to Cape One in payment of $45,000 of principal obligations and $17,587 of interest expense obligations, respectively, on the 10% Convertible Note.  In accordance with the debt agreement, these shares were issued to Cape One 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, 2011, 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 with a forbearance agreement related to this default through November 22, 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, 2011 and December 31, 2010 the outstanding balance for this obligation was $82,489.

Related Party Unsecured Promissory Notes

During the first nine months of 2011, the Company borrowed a total of $18,080 from the chief executive officer.  The notes bear no interest and were repaid in full as of September 30, 2011.

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.

9

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 40,000,000 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 5).

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.

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4.  SEGMENT INFORMATION

In conjunction with the acquisition a 51% voting equity interest in Combotexs, the Company adopted ASC 280 Segment Reporting. The Company's reportable segments are strategic business units that offer different products and services. The Company’s reportable segments are organized, managed and internally reported separately because each business requires different technology and marketing strategies. The Company currently has two operating segments, NaturalNano and Combotexs.  A summary of the two segments is as follows:

NaturalNano	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 and polymers, plastics and composites.
Combotexs	Production and marketing of Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining, as well as certain marketing and distributions agreements for various household products.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies of the Company.  The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein.  For purposes of determining segment loss, corporate overhead is primarily included in NaturalNano, other than direct expense of Combotexs. The Company only operated in the NaturalNano business during the three months ended March 31, 2010.  

Approximate information concerning the Company’s operations by reportable segment as of and for the three and nine months ended September 30, 2011 are as follows:

	NaturalNano						Combotexs					Consolidated
	For the three months ended						For the three months ended					For the three months ended
	September 30,						September 30,					September 30,
	2011			2010			2011			2010		2011			2010
Segment profit (loss) from operations	$	(124,575	)	$	(231,954	)	$	(12,313	)	$	21,830	$	(136,888	)	$	(210,124	)
Revenues from external customers	$	2,000		$	33,193		$	28,136		$	74,681	$	30,136		$	107,874
Revenues from intersegment sales	$	2,580		$	27,330		$	-		$	-	$	2,580		$	27,330
Interest expense and amortization of debt discount	$	24,370		$	103,562		$	-		$	36	$	24,370		$	103,598
Depreciation and amortization	$	22,457		$	38,243		$	240		$	240	$	22,697		$	38,483
Significant non-cash items:
Equity based payments	$	13,107		$	19,300		$	-		$	-	$	13,107		$	19,300

	NaturalNano						Combotexs				Consolidated
	For the nine months ended						For the nine months ended				For the nine months ended
	September 30,						September 30,				September 30,
	2011			2010			2011		2010		2011			2010
Segment profit (loss) from operations	$	(284,368	)	$	(794,298	)	$	18,461	$	58,418	$	(265,907	)	$	(735,880	)
Revenues from external customers	$	71,460		$	72,245		$	162,491	$	167,474	$	233,951		$	239,719
Revenues from intersegment sales	$	14,760		$	70,940		$	-	$	-	$	14,760		$	70,940
Interest expense and amortization of debt discount	$	209,056		$	390,801		$	-	$	36	$	209,056		$	390,837
Depreciation and amortization	$	75,010		$	116,603		$	720	$	400	$	75,730		$	117,003
Significant non-cash items:
Equity based payments	$	50,270		$	188,497		$	-	$	-	$	50,270		$	188,497

Total Assets - As of September 30, 2011, the Company had total assets of approximately $237,175 ($283,029 at December 31, 2010) of which approximately $184,866 ($178,005 at December 31, 2010) was for NaturalNano and approximately $52,309 ($105,024 at December 31, 2010) was for Combotexs.

Geographic Areas - The Company had no revenue and no long-lived assets in any country other than the United States for any period presented.

Major Customers - During the three months and nine months ended September 30, 2011, the Company derived 44% (included in the Combotexs operating segment) and 31% (included in the NaturalNano operating segment), respectively of its revenue from two different customers.

5.  DERIVATIVE LIABILITY

The Company’s derivative liabilities as of September 30, 2011 and December 31, 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.

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· 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.  These warrants expired unexercised during the second quarter of 2011 resulting in the elimination of the liability as of June 30, 2011.

· 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.

· The 15,000,000 warrant shares granted to the CEO of the Company at an exercise price of $0.01 per share on January 2011 which vest over three years.

The fair value of the derivatives is as follows:

Derivative Liability	September 30, 2011		December 31, 2010
Platinum Advisor’s warrants	$	-	$	16,197
Senior Secured Convertible Notes conversion feature		32,963		57,022
10% Subordinated Secured Convertible Note conversion feature		1,636		3,448
Cape One warrants		14		-
CEO warrants		127		-
Total	$	34,740	$	76,667

 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:

· Level 1 inputs 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).

	For the nine months ended
	September 30,
	2011			2010
Fair value – beginning	$	76,667		$	84,603
Loss (gain) recognized in Q1		67,914			(194	)
Loss (gain) recognized in Q2		(29,662	)		14,014
Loss (gain) recognized in Q3		(80,179	)		12,313
Fair value – ending	$	34,740		$	110,736

6.  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.  These warrants expired unexercised on February 11, 2011.

7.  STOCKHOLDERS EQUITY

During the first three months of 2011, the Company issued an aggregate of 3,750,000 shares of common stock to three individuals in connection with board services provided to the Company in an aggregate amount of $11,250.  Each of the 3 individuals received 1,000,000 shares that vested immediately and 1,000,000 shares that vest quarterly throughout 2011 for services provided.  The value of the shares will be recognized over the requisite service period resulting in $11,250 of compensation expense during the 3 months ended March 31, 2011.  Expense related to the third quarter of 2011 is not considered material.    

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On January 3, 2011, Mr. Jim Wemett was awarded 15,000,000 warrant shares, each warrant share grants the right to purchase one share of common stock, at an exercise price of $0.01 per warrant share, vesting over three years. The warrants expire January 3, 2016 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 $34,879.  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 3.36% has been derived from the U.S. treasury yield. The market price of the Company’s common stock on January 3, 2011 was $0.0028 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 fair value of the warrant will be recorded monthly over the 36 month life of the warrant.  During the three and nine months ended September 30, 2011, the Company recorded $2,907 and $8,720 respectively of expense for the vested portion of the warrant.

During the first nine months of 2011, the Company issued 79,612,680 shares of common stock to Platinum in payment of $398,063 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 February 11, 2011, Alpha Capital Partners (“Alpha”) converted $35,000 of principal on the Longview Senior Secured Convertible Notes into 7,000,000 common shares.  In accordance with the debt agreement, these shares were issued to Alpha using a conversion price of $0.005 per common share.

During the first nine months of 2011, the Company issued 12,517,400 shares of common stock to Cape One in payment of $17,587 of interest expense obligations and $45,000 of principal obligations on the Convertible Notes. In accordance with the debt agreement, these shares were issued to Cape One using a conversion price of $0.005 per common share.

During the first nine months of 2011, the Company issued an aggregate of 29,500,000 shares of common stock to various individuals or entities in connection with professional consulting provided to the Company in an aggregate amount of $30,300.  

The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of September 30, 2011, there were common stock warrants outstanding to purchase an aggregate 112,440,741 shares of common stock pursuant to various warrant grant agreements.  In May of 2011, 162,093,910 warrants originally issued to Platinum Advisors in March of 2007 expired unexercised.

On May 20, 2011, June 8, 2011 and August 26, 2011 Alpha Capital Anstalt converted 20,000, 31,250 and 31,250 preferred shares held by Longview Special Finance into 3,200,000, 5,000,000 and 5,000,000 common shares respectively.

8.  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”), the 2009 Incentive Stock Plan (the “2009 Plan”), and the 2011 Stock Incentive Plan (the “2011 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.

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, the 2009 Plan is authorized to grant up to 20 million unit share awards and the 2011 Plan is authorized to grant up to 25 million unit share awards.

A summary of the option activity for the nine months ended September 30, 2011 is presented below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Life-years
Outstanding at January 1, 2011		12,673,333	$	0.21		4.99
Granted/Exercises/Cancelled/Forfeited		0
Options outstanding at September 30, 2011		12,673,333	$	0.21		4.23
Options exercisable at September 30, 2011		12,673,333	$	0.21		4.23

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9.  CREDITOR CONCESSIONS

During the nine months that ended September 30, 2010 and September 30, 2011, 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.  Included in the 2010 gain was a reduction in accrued consulting expenses payable to TI in the amount of $45,235 resulting in a final settlement agreement between TI and the Company dated March 17, 2010.  No future payments are required under the TI consulting agreement.  In the first nine months of 2011, the Company recorded a gain on forgiveness of debt of $38,950.

10.  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.  No further communication has been had regarding this notice. 

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 in exchange for shares of common stock.

11. INSURANCE SETTLEMENT

In April 2011, the Company received a settlement payment of $31,589 on an insurance claim submitted in July 2010 for a warehousing fire at a vendor location that occurred on June 29, 2010. The Company stored halloysite clay inventory at the vendor location.  The Company recorded the settlement payment as Other Income in the second quarter of 2011.

12. SUBSEQUENT EVENTS

Subsequent to September 30, 2011 and prior to the filing of this report, the following occurred:

Promissory Notes

· On October 11, 2011, the Company borrowed $15,000 from Platinum Long Term Growth IV, LLC pursuant to the terms of a Senior Secured Promissory Note.  The note bears interest at the rate of 8% per annum and is due and payable on December 31, 2011.

Stock Transactions

· On October 6, 2011, 17,000,000 shares of common stock were issued to Platinum Long Term Growth IV, LLC to settle $85,000 of outstanding interest.

· On November 9, 2011, 18,000,000 shares of common stock were issued to Platinum Long Term Growth, IV, LLC to settle $90,000 of outstanding interest.

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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

Since inception through December 31, 2010, NaturalNano was a development stage company. Effective January 1, 2011, the Company has diverged from reporting as a development stage company as a result of the business combination with Combotexs.  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, 2011 of $497,106 and had negative working capital of $5,927,676 and a stockholders’ deficiency of $5,859,425 at September 30, 2011. 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.

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As of September 30, 2011, the Company had $3,898,557 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 2010 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 1, 2011. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances to November 22, 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 November 22, 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.

As of September 30, 2011, 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.

Operating activities

Net cash used in operating activities in the nine months ended September 30, 2011 and 2010 was $79,209 and $115,080, respectively. Cash used 2011 versus 2010 is down over 31% due to paying vendors – subcontractors, consultants, rent, interest and other vendor expenses – with common stock in lieu of cash. The net loss generated in the first nine months of 2011 was $538,293 less 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 total consolidated spending in 2011 to continue to be less than the 2010 levels, and we will continue to invest in product and commercialization efforts as our cash position and liquidity allow.

Total adjustments to reconcile the net loss incurred to the cash used in operations aggregated $519,800 in the first nine months of 2011 and $389,210 in first nine months of 2010. 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 March 2011. For the nine months ended September 30, 2011 and 2010 the Company recognized non-cash expenses of $5,614 and $120,187, 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 months of 2011 the Company recognized a gain adjustment to derivatives of $41,927 and for the same period 2010 a loss adjustment to derivatives of $26,133, a net decrease of $68,060.

During the first nine months of 2011 and 2010, the Company reduced outstanding liabilities through negotiations with certain vendors, resulting in a net gain on the forgiveness of debt of $21,050 and $112,052 respectively.

Investing activities

There was no net cash used in investing activities in the nine months ended September 30, 2011 and 2010, respectively.

Financing Activities

Net cash provided from financing activities in the nine months ended September 30, 2011 and 2010 was $80,000 and $26,346, 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 and $23,846 from Platinum Long Term Growth IV. The cash flows from financing activities in the first nine months of 2011 were $37,250 in proceeds from Longview Special Finance and $42,750 in proceeds from Platinum Long Term Growth IV.

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, 2010 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, 2011.

 Comparison of Statement of Operations for the three months ended September 30, 2011 and 2010

Revenue and Gross Profit

During the three months ended September 30, 2011 and 2010, the Company recorded $30,136 and $107,874, respectively in consolidated revenue. Third quarter 2011 revenue included $2,000 from shipments of halloysite based products and $28,136 from Combotexs products including medical boards and related products. 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 $12,399 and $59,141 for the shipments completed in the respective quarters. Gross profit of $17,737 and $48,733 was realized for the three months ended September 30, 2011 and 2010, respectively.  Sales decreased in the comparable period from 2010 to 2011 as a result of the delay in an expected quarterly order by a major halloysite customer as well as the loss of a Combotexs sales person early in the third quarter of 2011 which resulted in significantly lower sales volume.

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Gross profit realized in the three months ended September 2011 was 59% compared to 45% for three months ended September 2010. The variance is attributable to the alteration the Company made in 2011 to the method of production of the Combotexs products thereby significantly reducing its costs of production. 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 September 30,				Variance increase
Sales, Cost of Goods, and Gross Profit	2011		2010		(decrease)
Halloysite based products	$	2,000	$	33,150	$	(31,150	)
Combotexs		28,136		74,724		(46,588	)
		30,136		107,874		(77,738	)
Halloysite cost of goods		355		15,177		(14,822	)
Combotexs cost of goods		12,044		43,964		(31,920	)
Consolidated Gross Profit	$	17,737	$	48,733	$	(30,996	)

Operating Expenses

Research and development expenses for the three months ended September 30, 2011 were $39,556 compared to $108,323 for the three months ended September 30, 2010.  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.  There were no fees for the three months ended September 30, 2011.  This reflects the re-negotiated license with the Naval Research Laboratory effective November 5, 2010 which eliminated the minimum royalties and now requires an annual license fee of $5,000 payable each October.

	For the three months ended September 30,				Variance increase
Research and Development	2011		2010		(decrease)
Salaries & benefits	$	-	$	4,705	$	(4,705	)
Consulting services		4,688		3,799		889
Patent costs  & licensing fees		2,580		61,370		(58,790	)
Depreciation		22,457		28,400		(5,943	)
Rent & utilities		8,397		8,506		(109	)
All other		1,434		1,543		(109	)
	$	39,556	$	108,323	$	(68,767	)

Total general and administrative expenses for the three months ended September 30, 2011 was $115,069 as compared to $150,534 for the three months ended September 30, 2010. The overall decrease in general and administrative expenses reflects a decrease in consulting services related to the hiring of a public relations firm for a web and sales campaign during the third quarter of 2010.  There was no similar expense in same period of 2011.  In addition to this, there was a reduction in the accounting fees related to the third quarter filings.  The increase in shareholder expense is related to the compensation of three new board members in 2011, of which $11,250 relates to stock based compensation. 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 September 30,					Variance Increase
General and Administrative	2011		2010			(decrease)
Salaries & benefits	$	62,521	$	61,494		$	1,027
Consulting services		7,588		24,626			(17,038	)
Legal & professional fees		15,000		29,750			(14,750	)
Depreciation & amortization of intangible assets		240		10,083			(9,843	)
Insurance expense		1,076		1,122			(46	)
Shareholder expense		11,383		2,861			8,522
State tax		775		(775	)		1,550
All other		16,486		21,373			(4,887	)
	$	115,069	$	150,534		$	(35,465	)

17

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 2011 amortization of this maturing debt discount was $0 as compared to $2,701 for the three months ending September 2010. During the fourth quarter of 2009, the Company issued $225,000 in 10% Subordinated Convertible Notes which resulted in interest expenses of $14,758 for the three months ending September 30, 2011 as compared to $5,671 for the three months ending September 30, 2010.  The increase in interest expense on these notes relates to the increase from 10% to 18% interest in March 2011 in consideration of the forbearance agreement.

	For the three months ended September 30,						Variance increase
Other (Expense) Income	2011			2010			(decrease)
Amortization of debt discount	$	-		$	(2,701	)	$	(2,701	)
Interest to Senior convertible and promissory notes		(82,409	)		(89,216	)		(6,807	)
Interest to Subordinated Secured Convertible Notes		(14,758	)		(5,671	)		9,087
Amortization of financing costs		-			(5,974	)		(5,974	)
Interest earned on cash		2			-			2
	$	(97,165	)	$	(103,562	)	$	(6,397	)
Net gain (loss) on derivative liability	$	80,179		$	(12,313	)	$	(92,492	)
Gain (loss) on forgiveness/modification of debt	$	(30,000	)	$	64,691		$	94,691

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 gain of $78,722 in the third quarter of 2011 and a loss of $12,313 during the third quarter of 2010.

As of March 1, 2011 the Company had $225,000 in principal that was outstanding and due under the terms of the 10% Subordinated Secured Convertible Promissory Agreement (the “10% Convertible Note”) with Cape One Financial LP (“Cape One”). On March 15, 2011 the Company and Cape One entered into a forbearance agreement which altered the due date of the 10% Convertible Note from March 1, 2011 to June 30, 2011.  As consideration for this forbearance, Cape One was paid $30,000 which was added to the principal balance of the note.  In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.  The forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended March 31, 2011 reported in the statement of operations.  Effective June 30, 2011, the Company and Cape One entered into a forbearance agreement which altered the due date of the Convertible Note from June 30, 2011 to October 1, 2011.  Effective September 30, 2011, the Company and Cape One entered into another forbearance agreement which altered the due date of the Convertible note from October 1, 2011 to November 22, 2011.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principal balance of the note.  This forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended September 30, 2011 reported in the statement of operations.

Comparison of Statement of Operations for the nine months ended September 30, 2011and 2010

Revenue and Gross Profit

During the nine months ended September 30, 2011 and 2010, the Company recorded $233,951 and $239,719, respectively in revenue. For the nine months ending September 30, 2011 $162,791 came from Combotexs sales and the $71,160 from shipments of halloysite based product samples; the sales for the same period 2010 came from $168,010 of Combotexs sales and $71,709 from shipments of halloysite based product samples. The related cost of goods sold was $70,351 and $144,790 for these shipments completed in the respective quarters. Gross profit of $163,600 and $94,929 was realized for the nine months ended September 30, 2011 and 2010, respectively.

Gross profit realized in the first nine months of 2011 was 70% compared to 40% in the first nine months of 2010.  The variance is attributable to the alteration the Company made in 2011 to the method of production of the Combotexs products thereby significantly reducing its costs of production. 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.    In 2010, the Combotexs business was only part of the Company’s financial statements for the second quarter while in 2011, the Combotexs business was incorporated for the entire nine month period.

18

	For the nine months ended September 30,				Variance increase
Sales, Cost of Goods, and Gross Profit	2011		2010		(decrease)
Halloysite based products	$	71,160	$	71,709	$	(549	)
Combotexs		162,791		168,010		(5,219	)
		233,951		239,719		(5,768	)
Halloysite cost of goods		21,544		24,894		(3,350	)
Combotexs cost of goods		48,807		119,896		(71,089	)
Consolidated Gross Profit	$	163,600	$	94,929	$	68,671

Operating Expenses

Total research and development expenses for the nine months ended September 30, 2011 were $122,741 compared to $320,915 for the nine months ended September 30, 2010.  The Company recognized minimum licensing fees under the agreement with the Naval Research Laboratory of $169,000 in the first nine months of 2010 while having no expense related to the licensing agreement in the first nine months of 2011. This reflects the re-negotiated license with the Naval Research Laboratory effective November 5, 2010 which eliminated the minimum royalties and now requires an annual license fee of $5,000 payable each October.

	For the nine months ended				Variance
	September 30,				increase
Research and Development	2011		2010		(decrease)
Salaries & benefits	$	-	$	5,653	$	(5,653	)
Consulting services		13,387		19,891		(6,504	)
Patent costs and licensing fees		1,933		178,561		(176,628	)
Depreciation		75,010		85,579		(10,569	)
Rent & utilities		26,961		26,411		550
All other		5,450		4,820		630
	$	122,741	$	320,915	$	(198,174	)

Total general and administrative expenses for the nine months ended September 30, 2011 were $306,766 as compared to $509,894 for the nine months ended September 30, 2010. The Company incurred $233,700 in compensation for its sole officer during the first nine months of 2010 and only $121,220 in the comparable period in 2011. Included in the 2010 officer’s compensation was $83,700 of warrant expense.  In addition to the officer compensation variance, in 2011 the company has negotiated the reduction in costs of the quarterly review by the external auditors and received the New York State tax refund of $60,073 which partially offsets the costs of recertifying the Company’s legal status in the state of Nevada for the prior three years ($9,935), the costs of Combotexs, and the additional compensation of the new board members ($20,495) during the same first nine months.  Management continues to actively assess the Company’s operating structure with the objective of aligning cash expenditures and expenses with growth in total revenue.

	For the nine months ended					Variance
	September 30,					increase
General and Administrative	2011			2010		(decrease)
Salaries & Benefits	$	194,529		$	255,259	$	(60,730	)
Consulting services		33,538			48,238		(14,700	)
Legal & professional fees		15,000			99,960		(84,960	)
Depreciation & amortization of intangible assets		720			29,930		(29,210	)
Insurance expense		3,258			3,251		7
Shareholder expense		20,638			9,594		11,044
State tax		(48,723	)		1,262		(49,985	)
All other		87,806			62,400		25,406
	$	306,766		$	509,894	$	(203,128	)

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 $1,799 in the first nine months of 2011. During the fourth quarter of 2009, the Company issued $225,000 in 10% Subordinated Convertible Notes which resulted in interest expenses of $32,050 for the first nine months of 2011 as compared to $16,921 for the first nine months of 2010.  The increase in interest expense on these notes relates to the increase from 10% to 18% interest in March 2011 in consideration of the forbearance agreement. In April 2011, the Company received a settlement of $31,589 on an insurance claim submitted in July 2010 for a June 29, 2010 warehousing fire at a vendor location for inventory damaged in the fire.

19

	For the nine months ended						Variance
	September 30,						increase
Other (Expense) Income	2011			2010			(decrease)
Amortization of debt discount	$	(1,799	)	$	(87,084	)	$	(85,285	)
Interest on Senior convertible and promissory notes		(244,194	)		(253,726	)		(9,532	)
Interest to Subordinated Secured Convertible Notes		(32,050	)		(16,921	)		15,129
Amortization of financing costs		(3,815	)		(33,103	)		(29,288	)
Interest earned on cash		6			32			(26	)
	$	(281,852	)	$	(390,802	)	$	(108,950	)
Net gain (loss) on derivative liability	$	41,927		$	(26,133	)	$	(68,060	)
Income from insurance settlement	$	31,589		$	4,490		$	31,589
Net gain on forgiveness/modification of debt	$	(21,050	)	$	112,052		$	(133,102	)

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 2011 and 2010, respectively, the Company recognized a net gain of $41,927 and a net loss of $26,133 relating to the changes in fair market value for these derivative liabilities.

During the first quarter of 2010, 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 item of debt forgiveness during the first quarter of 2010, in the amount of $45,235, reflects 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.

The vendor concessions of $550 and $112,052 and were treated as gains in the first nine months of 2011 and first quarter and third quarters of 2010, which are the periods the related vendor agreements were reached.  The 2011 net vendor concession total of $29,450 reflects the $60,000 charge related to the forbearance agreements signed with Cape One in March and September offset by the $38,950 credit received in May from the negotiation of the Company’s past accounting fees.  The common stock settlement resulted in a loss on vendor concessions because the fair market value of the stock exceeded the actual invoice amounts on the day of settlement.

20

Item 4. - Controls and Procedures

Evaluation of Disclosure Controls and Procedures

The Company’s 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, 2010 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.

The Company did not maintain a sufficient complement of qualified accounting personnel and controls associated with the segregation of duties were ineffective.  During the fourth quarter of 2008 and the first half of 2009 the Company experienced the resignations in the positions of controller, Chief Financial Officer and Chief Executive Officer. These roles have been filled since the first quarter of 2009 by part time and contract staffing. 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

There were no changes in our internal control over financial reporting that occurred during the last fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

21

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments to the legal proceeding disclosed in the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2010.

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

 None.

Item 3. Defaults Upon Senior Securities

Effective as of June 30, 2011 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 November 22, 2011 unless extended by the lenders in their discretion.

Effective as of June 30, 2011 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 $152,923 (together the “Notes”).

Also, effective as of June 30, 2011 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 June 30, 2011 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 November 22, 2011 unless extended by Longview Special Finance Inc. at 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,

$3,846 Senior Secured Promissory Note due January 1, 2011,

$3,077 Senior Secured Promissory Note due January 15, 2011, and

$9,000 Senior Secured Promissory Note due January 15, 2011.

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 November 22, 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 (“Cape One”) 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.  On March 15, 2011, the Company entered into a forbearance agreement with Cape One which extended the due date from March 1, 2011 to June 30, 2011.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note.  In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted to 18%.  Effective June 30, 2011, the Company entered into a forbearance agreement with Cape One which extended the due date from June 30, 2011 to October 1, 2011.  Effective September 30, 2011, the Company and Cape One entered into another forbearance agreement which altered the due date of the Convertible note from October 1, 2011 to November 22, 2011.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principal balance of the note.  This forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended September 30, 2011 reported in the statement of operations.

22

Item 4. Submission of Matters to a Vote of Security Holders

 None.

Item 5. Other Information

None.

23

Item 6. Exhibits.  

Exhibit No.	Description	Location
10.97	8% Senior Secured Promissory Note dated as of September 21, 2011 in the original principal amount of $15,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC.	**
10.98	8% Senior Secured Promissory Note dated as of October 11, 2011 in the original principal amount of $15,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC.	**
10.99	Letter Agreement effective as of September 30, 2011 with Cape One Financial regarding their forbearance with respect to the $225,000 10% Senior Secured Convertible Note due March 1, 2011.	**
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	**
*	Previously filed
**	Filed herewith

24

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 14, 2011	/s/ James Wemett
		James Wemett
		President and Director (Principal Executive, Financial and Accounting Officer)

25

EX-10.97

EX-10.98

EX-10.99

EX-31.1

EXHIBIT 31.1

CERTIFICATION OF

PRINCIPAL EXECUTIVE AND FINANCIAL OFFICER

PURSUANT TO SECTION 302(a) OF THE SARBANES-OXLEY ACT OF 2002

I, James Wemett, certify that:

1) I have reviewed this quarterly report on Form 10-Q of NaturalNano, Inc. (the “registrant”) for the period ended September 30, 2011,

2) Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;

3) Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;

4) As the registrant's certifying officer I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;

b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) Evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and

d) Disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting; and

5) As the registrant's certifying officer, I have disclosed, based on my most recent evaluation of internal control over financial reporting, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent functions):

a)  all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting.

Date: November 14, 2011

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

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, 2011, 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 14, 2011

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

XML

CONSOLIDATED BALANCE SHEETS [PARENTHETICAL] (USD $)	Sep. 30, 2011	Dec. 31, 2010
Discount on subordinated secured convertible note, current	$ 0	$ 1,799
Preferred Stock, par value (in dollars per share)	$ 0.001	$ 0.001
Preferred Stock, shares authorized	10,000,000	10,000,000
Common Stock, par value (in dollars per share)	$ 0.001	$ 0.001
Common Stock, shares authorized	5,000,000,000	5,000,000,000
Common Stock, shares issued	352,946,557	207,366,477
Common Stock, shares outstanding	352,946,557	207,366,477
Series B Preferred Stock
Preferred Stock, aggregate liquidation preference	1,295	1,460
Preferred Stock, shares issued	647,500	730,000
Preferred Stock, shares outstanding	647,500	730,000
Series C Preferred Stock
Preferred Stock, aggregate liquidation preference	$ 8,500	$ 8,500
Preferred Stock, shares issued	4,250,000	4,250,000
Preferred Stock, shares outstanding	4,250,000	4,250,000

XML

CONSOLIDATED STATEMENTS OF OPERATIONS (USD $)	3 Months Ended		9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010	Sep. 30, 2011	Sep. 30, 2010
Income:
Revenue	$ 30,136	$ 107,874	$ 233,951	$ 239,719
Cost of goods sold	12,399	59,141	70,351	144,790
Gross profit	17,737	48,733	163,600	94,929
Operating expenses:
Research and development	39,556	108,323	122,741	320,915
General and administrative	115,069	150,534	306,766	509,894
Operating Expenses, Total	154,625	258,857	429,507	830,809
Loss from Operations	(136,888)	(210,124)	(265,907)	(735,880)
Other income (expense):
Interest expense, net	(97,165)	(103,562)	(281,852)	(390,802)
Net gain (loss) on derivative liability	80,179	(12,313)	41,927	(26,133)
Net gain (loss) on forgiveness/modification of debt	(30,000)	64,691	(21,050)	112,052
Gain on insurance settlement	0	4,490	31,589	4,490
Nonoperating Income (Expense), Total	(46,986)	(46,694)	(229,386)	(300,393)
Consolidated net loss	(183,874)	(256,818)	(495,293)	(1,036,273)
Less: Consolidated net (income) loss attributable to noncontrolling interest in subsidiary	7,297	1,097	(1,813)	874
Consolidated net loss attributable to the controlling interest	$ (176,577)	$ (255,721)	$ (497,106)	$ (1,035,399)
Loss per common share - basic and diluted (in dollars per share)	$ 0	$ 0	$ 0	$ (0.01)
Weighted average shares outstanding (in shares)	306,056,346	132,544,494	260,786,397	130,004,447

XML

Document And Entity Information	9 Months Ended
	Sep. 30, 2011	Nov. 11, 2011
Entity Registrant Name	NaturalNano, Inc.
Entity Central Index Key	0000863895
Current Fiscal Year End Date	--12-31
Entity Filer Category	Smaller Reporting Company
Trading Symbol	nnan
Entity Common Stock, Shares Outstanding		388,037,466
Document Type	10-Q
Amendment Flag	false
Document Period End Date	Sep. 30, 2011
Document Fiscal Period Focus	Q3
Document Fiscal Year Focus	2011

XML

DERIVATIVE LIABILITY

9 Months Ended

Sep. 30, 2011

Derivative Instruments and Hedging Activities Disclosure [Abstract]

Derivative Instruments and Hedging Activities Disclosure [Text Block]

5.  DERIVATIVE LIABILITY

The Company’s derivative liabilities as of September 30, 2011 and December 31, 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.  These warrants expired unexercised during the second quarter of 2011 resulting in the elimination of the liability as of June 30, 2011.

· 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.

· The 15,000,000 warrant shares granted to the CEO of the Company at an exercise price of $0.01 per share on January 2011 which vest over three years.

The fair value of the derivatives is as follows:

Derivative Liability	September 30, 2011		December 31, 2010
Platinum Advisor’s warrants	$	-	$	16,197
Senior Secured Convertible Notes conversion feature		32,963		57,022
10% Subordinated Secured Convertible Note conversion feature		1,636		3,448
Cape One warrants		14		-
CEO warrants		127		-
Total	$	34,740	$	76,667

 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:

· Level 1 inputs 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).

	For the nine months ended
	September 30,
	2011			2010
Fair value – beginning	$	76,667		$	84,603
Loss (gain) recognized in Q1		67,914			(194	)
Loss (gain) recognized in Q2		(29,662	)		14,014
Loss (gain) recognized in Q3		(80,179	)		12,313
Fair value – ending	$	34,740		$	110,736

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CONTINGENCIES

9 Months Ended

Sep. 30, 2011

Commitments and Contingencies Disclosure [Abstract]

Commitments and Contingencies Disclosure [Text Block]

10.  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.  No further communication has been had regarding this notice. 

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 in exchange for shares of common stock.

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PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

9 Months Ended

Sep. 30, 2011

Principal Business Activity and Significant Accounting Policies [Abstract]

Organization, Consolidation and Presentation of Financial Statements Disclosure and Significant Accounting Policies [Text Block]

1.   PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements

The consolidated financial statements as of September 30, 2011 and for the three and nine months ended September 30, 2011 and 2010 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, 2010.

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.

Fair Value of Financial Instruments

Financial instruments include cash and cash equivalents, accounts payable and accrued expenses, notes payable, capital leases and derivative liabilities. Fair values for all instruments except for derivative liabilities were assumed to approximate carrying values for these financial instruments since they are short-term in nature and their carrying amounts approximate fair values or they are receivable or payable on demand. The fair value of the Company’s convertible notes payable is estimated based upon the quoted market prices for the same or similar issues or on the current rates offered to the Company for debt of the same remaining maturities. The carrying value approximates the fair value of these debt instruments as of September 30, 2011 and December 31, 2010 based on rates charges being consistent with current market rates available to the Company.

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 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.

Divergence from Development Stage Company

The Company has previously presented its financial statements as a development stage enterprise.  Effective January 1, 2011, the Company has diverged from reporting as a development stage company.  In addition to selling samples of halloysite tubes for research and testing, the Company is also generating revenue from the sale of this product for use in commercial products.  Also, as a result of the Combotexs business combination in 2010, the Company has normal recurring revenue.

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, 2011 of $497,106 and had negative working capital of $5,927,676 and a stockholders’ deficiency of $5,859,425 at September 30, 2011. 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, 2011, 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.

QETC rebate for fiscal year ended December 31, 2009

The QETC tax rebate for 2009 had been in audit since its filing in September of 2010.  The Company received notice in March 2011 that the audit was complete and that the rebate for 2009 would be for $60,073.  NaturalNano received the first payment of $43,615 in March of 2011 and that amount was reflected in the financial statements for the first quarter of 2011.  The Company received the final payment of $16,458 on April 14, 2011 and that amount was reflected in the financial statements for the second quarter of 2011.  These amounts were presented as a reduction of general and administrative expenses.

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, 2011, there were 310,138,210 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.

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STOCKHOLDERS EQUITY

9 Months Ended

Sep. 30, 2011

Stockholders Equity Note [Abstract]

Stockholders' Equity Note Disclosure [Text Block]

7.  STOCKHOLDERS EQUITY

During the first three months of 2011, the Company issued an aggregate of 3,750,000 shares of common stock to three individuals in connection with board services provided to the Company in an aggregate amount of $11,250.  Each of the 3 individuals received 1,000,000 shares that vested immediately and 1,000,000 shares that vest quarterly throughout 2011 for services provided.  The value of the shares will be recognized over the requisite service period resulting in $11,250 of compensation expense during the 3 months ended March 31, 2011.  Expense related to the third quarter of 2011 is not considered material.    

On January 3, 2011, Mr. Jim Wemett was awarded 15,000,000 warrant shares, each warrant share grants the right to purchase one share of common stock, at an exercise price of $0.01 per warrant share, vesting over three years. The warrants expire January 3, 2016 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 $34,879.  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 3.36% has been derived from the U.S. treasury yield. The market price of the Company’s common stock on January 3, 2011 was $0.0028 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 fair value of the warrant will be recorded monthly over the 36 month life of the warrant.  During the three and nine months ended September 30, 2011, the Company recorded $2,907 and $8,720 respectively of expense for the vested portion of the warrant.

During the first nine months of 2011, the Company issued 79,612,680 shares of common stock to Platinum in payment of $398,063 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 February 11, 2011, Alpha Capital Partners (“Alpha”) converted $35,000 of principal on the Longview Senior Secured Convertible Notes into 7,000,000 common shares.  In accordance with the debt agreement, these shares were issued to Alpha using a conversion price of $0.005 per common share.

During the first nine months of 2011, the Company issued 12,517,400 shares of common stock to Cape One in payment of $17,587 of interest expense obligations and $45,000 of principal obligations on the Convertible Notes. In accordance with the debt agreement, these shares were issued to Cape One using a conversion price of $0.005 per common share.

During the first nine months of 2011, the Company issued an aggregate of 29,500,000 shares of common stock to various individuals or entities in connection with professional consulting provided to the Company in an aggregate amount of $30,300.  

The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of September 30, 2011, there were common stock warrants outstanding to purchase an aggregate 112,440,741 shares of common stock pursuant to various warrant grant agreements.  In May of 2011, 162,093,910 warrants originally issued to Platinum Advisors in March of 2007 expired unexercised.

On May 20, 2011, June 8, 2011 and August 26, 2011 Alpha Capital Anstalt converted 20,000, 31,250 and 31,250 preferred shares held by Longview Special Finance into 3,200,000, 5,000,000 and 5,000,000 common shares respectively.

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SUBSEQUENT EVENTS

9 Months Ended

Sep. 30, 2011

Subsequent Events [Abstract]

Subsequent Events [Text Block]

12. SUBSEQUENT EVENTS

Subsequent to September 30, 2011 and prior to the filing of this report, the following occurred:

Promissory Notes

· On October 11, 2011, the Company borrowed $15,000 from Platinum Long Term Growth IV, LLC pursuant to the terms of a Senior Secured Promissory Note.  The note bears interest at the rate of 8% per annum and is due and payable on December 31, 2011.

Stock Transactions

· On October 6, 2011, 17,000,000 shares of common stock were issued to Platinum Long Term Growth IV, LLC to settle $85,000 of outstanding interest.

· On November 9, 2011, 18,000,000 shares of common stock were issued to Platinum Long Term Growth, IV, LLC to settle $90,000 of outstanding interest.

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INCENTIVE STOCK PLANS

9 Months Ended

Sep. 30, 2011

Disclosure Of Compensation Related Costs, Share-Based Payments [Abstract]

Disclosure of Compensation Related Costs, Share-based Payments [Text Block]

8.  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”), the 2009 Incentive Stock Plan (the “2009 Plan”), and the 2011 Stock Incentive Plan (the “2011 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.

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, the 2009 Plan is authorized to grant up to 20 million unit share awards and the 2011 Plan is authorized to grant up to 25 million unit share awards.

A summary of the option activity for the nine months ended September 30, 2011 is presented below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Life-years
Outstanding at January 1, 2011		12,673,333	$	0.21		4.99
Granted/Exercises/Cancelled/Forfeited		0
Options outstanding at September 30, 2011		12,673,333	$	0.21		4.23
Options exercisable at September 30, 2011		12,673,333	$	0.21		4.23

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WARRANT AGREEMENT WITH TECHNOLOGY INNOVATIONS, LLC

9 Months Ended

Sep. 30, 2011

Warrant Agreement With Holding Company [Abstract]

Warrant Agreement With Holding Company [Text Block]

6.  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.  These warrants expired unexercised on February 11, 2011.

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CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIENCY) [PARENTHETICAL] (USD $)	9 Months Ended
	Sep. 30, 2011
Range of Per share value of Common stock granted for services	0.001 to 0.003
Grant of common stock for services per share, issue 1	$ 0.0006
Common stock per share issued for payment of interest	$ 0.005

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DEBT AGREEMENTS

9 Months Ended

Sep. 30, 2011

Debt Disclosure [Abstract]

Debt Disclosure [Text Block]

2.  DEBT AGREEMENTS

As of September 30, 2011, the Company had $3,898,557 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 2010 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 1, 2011. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances to November 22, 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 November 22, 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.

On January 23, 2011, the Company borrowed a total of $50,000 with $15,000 from Platinum and $35,000 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 June 30, 2011.  A forbearance agreement was entered into with both Platinum and Longview effective June 30, 2011 which extended the due date of the outstanding principal balance to November 22, 2011.

On April 15, 2011, the Company borrowed a total of $15,000 with $12,750 from Platinum and $2,250 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 June 30, 2011.  A forbearance agreement was entered into with both Platinum and Longview effective June 30, 2011 which extended the due date of the outstanding principal balance to November 22, 2011.

On September 21, 2011, the Company borrowed a total of $15,000 from Platinum.  This promissory note was pursuant to the terms of the Senior Secured Promissory Note.  The note bears interest at the rate of 8% per annum and is due and payable on December 31, 2011.

During the first nine months of 2011, the Company issued 79,612,680 shares of common stock to Platinum in payment of $398,063 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.

During the first nine months of 2011, the Company issued 7,000,000 shares of common stock to Alpha Capital Partners in payment of $35,000 of principal obligations on the Senior Secured Convertible Notes with Longview Special Finance. In accordance with the debt agreement, these shares were issued to Alpha Capital Partners using a conversion price of $0.005 per common share.

As of March 1, 2011 the Company had $225,000 in principal that was outstanding and due under the terms of the 10% Subordinated Secured Convertible Promissory Agreement (the “Convertible Note”) with Cape One Financial LP (“Cape One”). On March 15, 2011 the Company and Cape One entered into a forbearance agreement which altered the due date of the Convertible Note from March 1, 2011 to June 30, 2011.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principal balance of the note.  In addition, the interest rate on the outstanding amount during the forbearance period will be adjusted from 10% to 18%.  The forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended March 31, 2011 reported in the statement of operations.  Effective June 30, 2011, the Company and Cape One entered into a forbearance agreement which altered the due date of the Convertible Note from June 30, 2011 to October 1, 2011.  Effective September 30, 2011, the Company and Cape One entered into another forbearance agreement which altered the due date of the Convertible note from October 1, 2011 to November 22, 2011.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principal balance of the note.  This forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $30,000 for the three months ended September 30, 2011 reported in the statement of operations.

During the first nine months of 2011, the Company issued 9,000,000 and 3,517,400 shares of common stock to Cape One in payment of $45,000 of principal obligations and $17,587 of interest expense obligations, respectively, on the 10% Convertible Note.  In accordance with the debt agreement, these shares were issued to Cape One 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, 2011, 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 with a forbearance agreement related to this default through November 22, 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, 2011 and December 31, 2010 the outstanding balance for this obligation was $82,489.

Related Party Unsecured Promissory Notes

During the first nine months of 2011, the Company borrowed a total of $18,080 from the chief executive officer.  The notes bear no interest and were repaid in full as of September 30, 2011.

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51% ACQUISITION of COMBOTEXS, LLC

9 Months Ended

Sep. 30, 2011

Business Combinations [Abstract]

Business Combination Disclosure [Text Block]

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 40,000,000 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 5).

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.

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INSURANCE SETTLEMENT

9 Months Ended

Sep. 30, 2011

Insurance [Abstract]

Insurance Disclosure [Text Block]

11. INSURANCE SETTLEMENT

In April 2011, the Company received a settlement payment of $31,589 on an insurance claim submitted in July 2010 for a warehousing fire at a vendor location that occurred on June 29, 2010. The Company stored halloysite clay inventory at the vendor location.  The Company recorded the settlement payment as Other Income in the second quarter of 2011.

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SEGMENT INFORMATION

9 Months Ended

Sep. 30, 2011

Segment Reporting [Abstract]

Segment Reporting Disclosure [Text Block]

4.  SEGMENT INFORMATION

In conjunction with the acquisition a 51% voting equity interest in Combotexs, the Company adopted ASC 280 Segment Reporting. The Company's reportable segments are strategic business units that offer different products and services. The Company’s reportable segments are organized, managed and internally reported separately because each business requires different technology and marketing strategies. The Company currently has two operating segments, NaturalNano and Combotexs.  A summary of the two segments is as follows:

NaturalNano	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 and polymers, plastics and composites.
Combotexs	Production and marketing of Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining, as well as certain marketing and distributions agreements for various household products.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies of the Company.  The Company accounts for intersegment sales and transfers as if the sales or transfers were to third parties, that is, at current market prices. The Company relies on intersegment cooperation and management does not represent that these segments, if operated independently, would report the results contained herein.  For purposes of determining segment loss, corporate overhead is primarily included in NaturalNano, other than direct expense of Combotexs. The Company only operated in the NaturalNano business during the three months ended March 31, 2010.  

Approximate information concerning the Company’s operations by reportable segment as of and for the three and nine months ended September 30, 2011 are as follows:

	NaturalNano						Combotexs					Consolidated
	For the three months ended						For the three months ended					For the three months ended
	September 30,						September 30,					September 30,
	2011			2010			2011			2010		2011			2010
Segment profit (loss) from operations	$	(124,575	)	$	(231,954	)	$	(12,313	)	$	21,830	$	(136,888	)	$	(210,124	)
Revenues from external customers	$	2,000		$	33,193		$	28,136		$	74,681	$	30,136		$	107,874
Revenues from intersegment sales	$	2,580		$	27,330		$	-		$	-	$	2,580		$	27,330
Interest expense and amortization of debt discount	$	24,370		$	103,562		$	-		$	36	$	24,370		$	103,598
Depreciation and amortization	$	22,457		$	38,243		$	240		$	240	$	22,697		$	38,483
Significant non-cash items:
Equity based payments	$	13,107		$	19,300		$	-		$	-	$	13,107		$	19,300

	NaturalNano						Combotexs				Consolidated
	For the nine months ended						For the nine months ended				For the nine months ended
	September 30,						September 30,				September 30,
	2011			2010			2011		2010		2011			2010
Segment profit (loss) from operations	$	(284,368	)	$	(794,298	)	$	18,461	$	58,418	$	(265,907	)	$	(735,880	)
Revenues from external customers	$	71,460		$	72,245		$	162,491	$	167,474	$	233,951		$	239,719
Revenues from intersegment sales	$	14,760		$	70,940		$	-	$	-	$	14,760		$	70,940
Interest expense and amortization of debt discount	$	209,056		$	390,801		$	-	$	36	$	209,056		$	390,837
Depreciation and amortization	$	75,010		$	116,603		$	720	$	400	$	75,730		$	117,003
Significant non-cash items:
Equity based payments	$	50,270		$	188,497		$	-	$	-	$	50,270		$	188,497

Total Assets - As of September 30, 2011, the Company had total assets of approximately $237,175 ($283,029 at December 31, 2010) of which approximately $184,866 ($178,005 at December 31, 2010) was for NaturalNano and approximately $52,309 ($105,024 at December 31, 2010) was for Combotexs.

Geographic Areas - The Company had no revenue and no long-lived assets in any country other than the United States for any period presented.

Major Customers - During the three months and nine months ended September 30, 2011, the Company derived 44% (included in the Combotexs operating segment) and 31% (included in the NaturalNano operating segment), respectively of its revenue from two different customers.

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CONSOLIDATED STATEMENT OF STOCKHOLDERS EQUITY (DEFICIENCY) (USD $)	Common Stock [Member]	Preferred Stock [Member]	Additional Paid-In Capital [Member]	Retained Earnings [Member]	Noncontrolling Interest [Member]	Total
Balance at Dec. 31, 2010	$ 207,366	$ 4,980	$ 19,028,358	$ (25,175,681)	$ 33,325	$ (5,901,652)
Balance (in shares) at Dec. 31, 2010	207,366,477	4,980,000
Grant of common stock for services @ $0.001 to $.003 per share	8,250		9,500			17,750
Grant of common stock for services @ $0.001 to $.003 per share (in shares)	8,250,000
Grant of common stock for services @ $0.0006 per share	25,000		(9,600)			15,400
Grant of common stock for services @ $0.0006 per share (in shares)	25,000,000
Issuance of common stock as interest payment $0.005 per share	83,130		332,520			415,650
Issuance of common stock as interest payment $0.005 per share (in shares)	83,130,080
Warrant issued for services			8,720			8,720
Shares issued on debt conversion	16,000		64,000			80,000
Shares issued on debt conversion (in shares)	16,000,000
Series B preferred shares converted to common shares	13,200	(82)	(13,118)			0
Series B preferred shares converted to common shares (in shares)	13,200,000	(82,500)
Net income (loss) for the nine months ended 09/30/11				(497,106)	1,813	(495,293)
Balance at Sep. 30, 2011	$ 352,946	$ 4,898	$ 19,420,380	$ (25,672,787)	$ 35,138	$ (5,859,425)
Balance (in shares) at Sep. 30, 2011	352,946,557	4,897,500

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CONSOLIDATED STATEMENTS OF CASH FLOWS (USD $)	9 Months Ended
	Sep. 30, 2011	Sep. 30, 2010
Cash flows from operating activities:
Net loss attributable to controlling interest	$ (497,106)	$ (1,035,399)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization	75,730	117,003
Amortization of discount on convertible notes	1,799	87,084
Amortization of deferred financing costs	3,815	33,103
Non-cash gain on forgiveness of debt	(38,950)	(112,052)
Fair value adjustment of derivative liabilities	(41,927)	26,133
Issuance of stock for services	33,150	60,258
Issuance of stock for interest	415,650	94,855
Issuance of warrants for services	8,720	83,700
Loss on modification of debt	60,000	0
Income (loss) from non-controlling interest in subsidiary	1,813	(874)
Changes in operating assets and liabilities:
(Increase) decrease in inventory	(39,790)	2,488
Increase in accounts receivable	1,587	0
Decrease in other current assets	5,303	356,365
(Decrease) increase in accounts payable, accrued payroll and accrued expenses	(62,233)	176,756
(Decrease) increase in deferred revenue	(2,270)	0
Decrease in other liability	(4,500)	(4,500)
Net cash used in operating activities	(79,209)	(115,080)
Cash flows from financing activities:
Proceeds from senior secured promissory notes	80,000	23,846
Proceeds from unsecured promissory notes	18,080	5,000
Payment on unsecured promissory notes	(18,080)	(2,500)
Net cash provided by financing activities	80,000	26,346
Increase (decrease) in cash	791	(88,734)
Cash at beginning of period	6,861	89,901
Cash at end of period	7,652	1,167
Supplemental disclosure of cash flow information:
Cash paid for interest during the period	5,671	12,874
Schedule of non-cash investing and financing activities:
Common stock issued for convertible notes	80,000	0
Acquisition of subsidiary through issuance of common stock and warrants	0	87,836
Conversion of preferred shares into common shares	$ 13,200	$ 3,200

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CREDITOR CONCESSIONS

9 Months Ended

Sep. 30, 2011

Creditor Concessions Disclosure [Abstract]

Creditor Concessions Disclosure [Text Block]

9.  CREDITOR CONCESSIONS

During the nine months that ended September 30, 2010 and September 30, 2011, 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.  Included in the 2010 gain was a reduction in accrued consulting expenses payable to TI in the amount of $45,235 resulting in a final settlement agreement between TI and the Company dated March 17, 2010.  No future payments are required under the TI consulting agreement.  In the first nine months of 2011, the Company recorded a gain on forgiveness of debt of $21,050.

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CONSOLIDATED BALANCE SHEETS (USD $)	Sep. 30, 2011	Dec. 31, 2010
Assets
Cash	$ 7,652	$ 6,861
Accounts receivable	12,107	13,694
Inventory	56,528	16,738
Prepaid expenses and other current assets	11,109	16,412
Total current assets	87,396	53,705
Property and equipment, net	69,447	145,177
Goodwill	80,332	80,332
Deferred financing costs, net	0	3,815
Total non-current assets	149,779	229,324
Total Assets	237,175	283,029
Liabilities and Stockholders' Deficiency
Senior secured convertible notes	3,569,000	3,604,000
Senior secured promissory notes	329,557	249,557
Subordinated secured convertible note, net of discount of $0 and $1,799, respectively	240,000	223,201
Accounts payable	491,002	507,556
Accrued expenses	81,441	103,368
Accrued interest	437,481	582,559
Accrued payroll	703,283	620,907
Deferred revenue	70,000	72,270
Registration rights liability	82,489	82,489
Derivative liability	10,819	60,909
Total current liabilities	6,015,072	6,106,816
Derivative liability	23,921	15,758
Contingent consideration related to business combination	22,107	22,107
Other long term liabilities	35,500	40,000
Total Liabilities	6,096,600	6,184,681
Stockholders' Deficiency
Common Stock - $.001 par value 5 billion authorized, issued and outstanding 352,946,557 and 207,366,477, respectively	352,946	207,366
Additional paid in capital	19,420,380	19,028,358
Noncontrolling interest in subsidiary	35,138	33,325
Accumulated deficit	(25,672,787)	(25,175,681)
Total stockholders' deficiency	(5,859,425)	(5,901,652)
Total Liabilities and Stockholders' Deficiency	237,175	283,029
Series B Preferred Stock
Stockholders' Deficiency
Preferred stock value	648	730
Series C Preferred Stock
Stockholders' Deficiency
Preferred stock value	$ 4,250	$ 4,250