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 :                                    June 30, 2012                                                    

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:

54,633,539 as of August 17, 2012

Table of Contents

PART I—FINANCIAL INFORMATION
	Item 1.	Financial Statements (unaudited)
		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.	22
PART II—OTHER INFORMATION
	Item 1.	Legal Proceedings	23
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds.	23
	Item 3.	Defaults Upon Senior Securities.	23
	Item 4.	Submission of Matters to a Vote of Security Holders	24
	Item 5.	Other Information.	24
	Item 6.	Exhibits.	25
SIGNATURES			26

2

PART I—FINANCIAL INFORMATION

Item 1.  Financial Statements

NATURALNANO, INC.

CONSOLIDATED BALANCE SHEETS

	June 30,			December 31,
	2012			2011
	(Unaudited)
Assets
Current assets:
Cash	$	-		$	1,732
Accounts receivable		8,350			11,536
Inventory		22,996			20,593
Prepaid expenses and other current assets		12,544			10,033
Total current assets		43,890			43,984
Property and equipment, net		10,398			44,451
Total non-current assets		10,398			44,451
Total Assets	$	54,288		$	88,345
Liabilities and Stockholders' Deficiency
Liabilities
Current liabilities:
Senior secured convertible notes	$	3,134,415		$	3,819,000
Senior secured promissory notes		446,557			374,557
Subordinated secured convertible note, net of discount of $0 and $1,799, respectively		265,000			240,000
Accounts payable		509,590			498,080
Accrued expenses		82,850			98,851
Accrued interest		274,623			307,283
Accrued payroll		808,157			736,181
Deferred revenue		70,000			70,000
Registration rights liability		82,489			82,489
Derivative liability		21,658			21,658
Total current liabilities		5,695,339			6,248,099
Other long term liabilities		31,000			34,000
Total Liabilities		5,726,339			6,282,099
Stockholders’ Deficiency
Preferred Stock - $.001 par value, 10 million shares authorized
Series B - issued and outstanding 185,000 and 647,500 with an aggregate liquidation preference of $370 and $1,295 respectively		185			648
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 294,117,647 authorized, issued and outstanding 49,031,708 and 23,403,670, respectively		49,032			23,403
Additional paid in capital		21,179,526			19,977,330
Noncontrolling interest in subsidiary		14,264			14,264
Accumulated deficit		(26,919,308	)		(26,213,649	)
Total stockholders' deficiency		(5,672,051	)		(6,193,754	)
Total liabilities and stockholders' deficiency	$	54,288		$	88,345

See notes to consolidated financial statements

3

NATURALNANO, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited)

	For the three months ended						For the six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Income:
Revenue	$	26,900		$	127,527		$	70,423		$	203,815
Cost of goods sold		6,237			35,996			13,986			57,953
Gross profit		20,663			91,531			56,437			145,862
Operating expenses:
Research and development		29,322			38,903			68,707			83,184
General and administrative		79,613			96,357			174,888			191,697
		108,935			135,260			243,595			274,881
Loss from Operations		(88,272	)		(43,729	)		(187,158	)		(129,019	)
Other income (expense):
Interest expense, net		(110,153	)		(92,175	)		(208,501	)		(184,686	)
Net gain (loss) on derivative liability		-			29,662			-			(38,252	)
Net gain (loss)  on forgiveness/modification of debt		(235,000	)		38,950			(310,000	)		8,950
Gain  on insurance settlement		-			31,589			-			31,589
		(345,153	)		8,026			(518,501	)		(182,399	)
Consolidated net loss		(433,425	)		(35,703	)		(705,659	)		(311,418	)
Less: Consolidated net income attributable to noncontrolling interest in subsidiary		-			(5,725	)		-			(9,111	)
Consolidated net loss attributable to the controlling interest	$	(433,425	)	$	(41,428	)	$	(705,659	)	$	(320,529	)
Less: Preferred stock conversion inducement		(12,235	)		-			(12,235	)		-
Consolidated net loss attributable to common stockholders	$	(445,660	)	$	(41,428	)	$	(717,894	)	$	(320,529	)
Loss per common share - basic and diluted	$	(0.01	)	$	-		$	(0.02	)	$	(0.02	)
Weighted average shares outstanding		40,969,987			15,057,705			35,357,306			13,986,839

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, 2011		23,403,671	$	23,403		4,897,500		$	4,898		$	19,977,330		$	(26,213,649	)	$	14,264	$	(6,193,754	)
Grant of common stock for services @:
$0.005 to $.007 per share		1,764,706		1,765								9,035								10,800
Issuance of common stock as interest payment		6,221,156		6,221								234,943								241,164
Warrant issued for services												5,813								5,813
Shares issued on debt conversion		11,406,881		11,407								958,178								969,585
Series B preferred shares converted to common shares		6,235,294		6,235		(462,500	)		(463	)		(5,773	)							-
Net income (loss) for the six months ended 06/30/12															(705,659	)				(705,659	)
Balance at June 30, 2012		49,031,708	$	49,032		4,435,000		$	4,435		$	21,179,526		$	(26,919,308	)	$	14,264	$	(5,672,051	)

See notes to consolidated financial statements

5

NATURALNANO, INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

(unaudited)

	For the six months ended
	June 30,
	2012			2011
Cash flows from operating activities:
Net loss attributable to controlling interest	$	(705,659	)	$	(320,529	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization		34,053			53,033
Amortization of discount on convertible notes		-			1,799
Amortization of deferred financing costs		-			3,815
Fair value adjustment of derivative liabilities		-			38,252
Non cash gain on forgiveness of debt		-			(38,950	)
Issuance of stock for services		10,800			31,350
Inducement to convert interest		24,221			147,587
Issuance of warrants for services		5,813			5,813
Loss on modification of debt		310,000			30,000
Income from non-controlling interest in subsidiary		-			9,111
Changes in operating assets and liabilities:
(Increase) decrease in inventory		(2,403	)		(35,817	)
Increase in accounts receivable		3,186			(25,976	)
Decrease in other current assets		(2,511	)		800
Decrease in accounts payable, accrued
payroll and accrued expenses		251,768			59,924
(Decrease) increase in deferred revenue		-			(2,270	)
Decrease in other liability		(3,000	)		(3,000	)
Net cash used in operating activities		(73,732	)		(45,058	)
Cash flows from financing activities:
Proceeds from 10% senior secured promissory notes		72,000			65,000
Proceeds from unsecured promissory note		-			3,000
Net cash provided by financing activities		72,000			68,000
Increase (decrease) in cash		(1,732	)		22,942
Cash at beginning of period		1,732			6,861
Cash at end of period	$	-		$	29,803
Supplemental disclosure of cash flow information:
Cash paid for interest during the period	$	-		$	5,671
Schedule of non-cash investing and financing activities:
Common stock issued for convertible notes	$	969,585		$	80,000
Common stock issued for accrued interest	$	216,943		$	-
Conversion of preferred shares into common shares	$	6,236		$	8,200

See notes to consolidated financial statements

6

NATURALNANO, INC.

FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2012 and 2011

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1.   PRINCIPAL BUSINESS ACTIVITY AND SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Statements

The consolidated financial statements as of June 30, 2012 and for the three and six months ended June 30, 2012 and 2011 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, 2011. Certain prior period amounts have been adjusted to reflect the Company’s 1-for-17 reverse stock split (see Note 9 Reverse Stock Split, for further details).

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 June 30, 2012 and December 31, 2011 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 was a technology company organized on October 28, 2009 that marketed Error Prevention/Safety Checklist Boards and Safety Training to hospitals and other industries such as healthcare, petrochemical and mining.  Combotexs also had certain marketing and distribution 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.

7

During the fourth quarter of 2011, the Company determined that the relationship with Combotexs was not operating in the manner it was intended. The sales were not to the volume expected and the continued operations, as structured, were not sustainable. During the month of December, the board of directors authorized the Company CEO to wind down the operations of Combotexs resulting in a write down of assets and the inventory revalued and assumed by NaturalNano. No further activity will occur with Combotexs beyond December 31, 2011 and the entity is expected to be legally dissolved in 2012.

During the fourth quarter of 2011, the Company entered into a supply agreement with another company, which is 50% owned by NaturalNano’s CEO, to manufacture and sell Error Prevention/Safety Checklist Boards which the related party will then market to the end user. NaturalNano will continue to outsource the manufacture of the boards to a third-party and then re-sell them to the new company. Accordingly, the Company will still have continuing cash flows from the business in 2012 and beyond.

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

Liquidity and Going Concern

Going Concern – The accompanying consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. As shown in the accompanying consolidated financial statements, the Company incurred a net loss for the six months ended June 30, 2012 of $705,659 and had negative working capital of $5,651,449 and a stockholders’ deficiency of $5,672,051 at June 30, 2012. 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 June 30, 2012, 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 is reflected in the financial for the second quarter of 2011. These amounts are 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. See Note 9 regarding the reverse split of the Company’s common stock which occurred on June 14, 2012.

As of June 30, 2012, there are 107,820,194 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.

As a result of the forbearance agreements signed subsequent to June 30, 2012, the potentially issuable shares based on the Company’s stock price as of June 30, 2012, has increased to, 1,227,738,642. As a result of this change, there is not an adequate number common shares of stock authorized.

8

2.  DEBT AGREEMENTS

As of June 30, 2012, the Company had $3,580,972 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 2012 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 beginning March 6, 2009. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances to September 30, 2012, and waived the application of the 16% default interest rate. In consideration for their forbearance effective April 16, 2012, Platinum Advisors will be paid $125,000 which was added to the principle balance of the note. This forbearance was considered and accounted for as a modification of debt and a loss of $125,000 for the three months ending June 30, 2012 and reported in the statement of operations. By way of two separate forbearance agreements dated January 1, 2012 and April 16, 2012, Longview has granted waivers of default, extended the due dates of all the outstanding principal balances to July 1, 2012, 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. In consideration for their forbearance, Longview will be paid $50,000 each for the forbearance which was added to the principle balance of the note. These forbearance amounts were considered and accounted for as a modification of debt and a loss of $50,000 for the three months ending March 31, 2012 and June 30, 2012 respectively and reported in the statement of operations. By way of a third forbearance agreement dated June 15, 2012, Longview has granted waivers of default, extended the due dates of all the outstanding principal balances to September 30, 2012, and waived the application of the 16% default interest rate. In consideration for their forbearance, Longview will be paid $30,000 for the forbearance which was added to the principle balance of the note. This forbearance amount was considered and accounted for as a modification of debt and recorded as a loss of $30,000 for the three months ending June 30, 2012 in the statement of operations.

The Convertible Notes discussed above mature and all outstanding principal is due and payable on September 30, 2012, as amended.

On February 10, 2012, the Company borrowed $25,000 from Platinum. This promissory note is 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 September 30, 2012 with the forbearance agreement extension.

On March 5, 2012, the Company borrowed $12,000 from Platinum. This promissory note is 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 September 30, 2012 with the forbearance agreement extension.

On April 16, 2012, the Company borrowed $15,000 from Platinum. This promissory note is 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 September 1, 2012.

On May 11, 2012, the Company borrowed $20,000 from Platinum. This promissory note is 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 September 1, 2012.

During the first six months of 2012, until the Reverse Stock Split (see Note 9), the Company issued 1,729,412 and 11,053,941 split adjusted shares of common stock to Platinum in payment of $147,000 of interest expense obligations and $939,585 of principal obligations, respectively, on the Senior Secured Convertible Notes. In accordance with the debt agreement, these shares were issued to Platinum using a split adjusted conversion price of $0.085 per common share. Subsequent to the Reverse Stock Split, the Company issued 3,967,626 shares of common stock to Platinum in payment of $25,393 of interest expense obligations on the Senior Secured Convertible Notes. These shares were issued to Platinum using a conversion price of $0.0064 per common share. The issuance of shares in excess of the conversion rate in place at the time of $0.085 were considered an inducement to convert and resulted in an expense of $24,221 based on the market value at the time the excess shares were issued. This expense is included in interest expense for the three months ended June 30, 2012.

The anti-dilution provisions of the above instruments would be triggered as a result of this inducement, as well as the preferred share inducement disclosed in Note 6. The holders of these notes have agreed to waive their rights to adjustment of the conversion rate of the debt and exercise price of their warrants as a result of these transactions.

9

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 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. Effective January 17, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to April 16, 2012.  As consideration for this forbearance, Cape One will be paid $25,000 which will be added to the principal balance of the note. The forbearance agreement was considered and accounted for as modification of debt and a loss of $25,000 for the three months ending March 31, 2012 and reported in the statement of operations. Effective April 16, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to July 01, 2012. Effective June 30, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to September 30, 2012.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note. The forbearance agreement was considered and accounted for as modification of debt and a loss of $30,000 for the three months ending June 30, 2012 and reported in the statement of operations.

During the first six months of 2012, the Company issued 524,118 and 352,941 shares of common stock to Cape One in payment of $30,000 of principal obligations and $44,550 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 split adjusted conversion price of $0.085 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 June 30, 2012, 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 September 30, 2012. 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 June 30, 2012 and December 31, 2011 the outstanding balance for this obligation was $82,489.

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.

As a result of the changes in the relationship with Combotexs, the carrying values of the related assets as of December 31, 2011 were evaluated. Certain inventory was sold to the related party, certain demonstration inventory was written off resulting in a $36,875 charge to cost of goods sold, and future cash flows were determined to be inestimable and as a result, the Goodwill was impaired to $0 value resulting in an impairment loss of $80,332 during the year ended December 31, 2011.

10

During the fourth quarter of 2011, the Company entered into a supply agreement with another company, which is 50% owned by NaturalNano’s CEO, to manufacture and sell Error Prevention/Safety Checklist Boards which the related party will then market to the end user. NaturalNano will continue to outsource the manufacture of the boards to a third-party and then re-sell them to the new company. Accordingly, the Company will still have continuing cash flows from the business in 2012 and beyond..

4. SEGMENT INFORMATION

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, Nanotechnology and Medical Boards.  A summary of the two segments is as follows:

Nanotechnology	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.
Medical Boards	Production of Error Prevention/Safety Checklist Boards for sale to a related party.

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.  Approximate information concerning the Company’s operations by reportable segment as of and for the three and six months ended June 30, 2011 and June 30, 2012 is as follows:

	Nanotechnology						Medical Boards				Consolidated
	For the three months ended						For the three months ended				For the three months ended
	June 30,						June 30,				June 30,
	2012			2011			2012		2011		2012			2011
Segment profit (loss) from operations	$	(92,712	)	$	(61,938	)	$	4,441	$	18,209	$	(88,271	)	$	(43,729	)
Revenues from external customers	$	17,275		$	68,301		$	9,625	$	59,226	$	26,900		$	127,527
Revenues from intersegment sales	$	-		$	6,540		$	-	$	-	$	-		$	6,540
Interest expense and amortization of debt discount	$	110,153		$	92,175		$	-	$	-	$	110,153		$	92,175
Depreciation and amortization	$	13,033		$	24,654		$	-	$	240	$	13,033		$	24,894
Significant non-cash items:
Equity based payments	$	-		$	13,600		$	-	$	-	$	-		$	13,600
Loss on modification of debt	$	235,000		$	-		$	-	$	-	$	235,000		$	-

	Nanotechnology						Medical Boards				Consolidated
	For the six months ended						For the six months ended				For the six months ended
	June 30,						June 30,				June 30,
	2012			2011			2012		2011		2012			2011
Segment profit (loss) from operations	$	(198,178	)	$	(170,302	)	$	11,020	$	41,283	$	(187,158	)	$	(129,019	)
Revenues from external customers	$	48,548		$	69,460		$	21,875	$	134,355	$	70,423		$	203,815
Revenues from intersegment sales	$	-		$	12,180		$	-	$	-	$	-		$	12,180
Interest expense and amortization of debt discount	$	208,501		$	184,686		$	-	$	-	$	208,501		$	184,686
Depreciation and amortization	$	34,053		$	52,553		$	-	$	480	$	34,053		$	53,033
Significant non-cash items:
Equity based payments	$	10,800		$	37,163		$	-	$	-	$	10,800		$	37,163
Loss on modification of debt	$	310,000		$	-		$	-	$	-	$	310,000		$	-

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 six months ended June 30, 2012, the Company derived 57% and 62%, respectively of its revenue from one customer, which is included in the Nanotechnology operating segment.

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5.  DERIVATIVE LIABILITY

The Company’s derivative liabilities as of June 30, 2012 and December 31, 2011 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 debt conversion feature and the 2,647,059 warrants exercisable at $0.0425 per share (split adjusted) 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 882,353 warrant shares granted to the CEO of the Company at a split adjusted exercise price of $0.17 per share on January 2011 which vest over three years.

The fair value of the derivatives is as follows:  

Derivative Liability	June 30, 2012		December 31, 2011
8% Notes conversion feature		20,531		20,531
10% Notes conversion feature and warrants		1,127		1,127
CEO Warrants		-		-
Total	$	21,658	$	21,658

 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). Management has determined that the value has not changed materially during the six months ended June 30, 2012.

	For the six months ended
	June 30,
	2012		2011
Fair value – beginning	$	21,658	$	76,667
Loss (gain) recognized in Q1		-		67,914
Loss (gain) recognized in Q2		-		(29,662	)
Fair value – ending	$	21,658	$	114,919

6.  STOCKHOLDERS EQUITY

On January 3, 2011, Mr. Jim Wemett was awarded 882,353 warrant shares, each warrant share grants the right to purchase one share of common stock, at an exercise price of $0.17 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 $0.0476 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 six months ended June 30, 2011 and 2012, the Company recorded $5,813 and $5,813, respectively of expense for the vested portion of the warrant.

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During the first six months of 2012, until the Reverse Stock Split (see Note 9), the Company issued 1,729,412 and 11,053,941 split adjusted shares of common stock to Platinum in payment of $147,000 of interest expense obligations and $939,585 of principal obligations, respectively, on the Senior Secured Convertible Notes. In accordance with the debt agreement, these shares were issued to Platinum using a split adjusted conversion price of $0.085 per common share. Subsequent to the Reverse Stock Split, the Company issued 3,967,626 shares of common stock to Platinum in payment of $25,393 of interest expense obligations on the Senior Secured Convertible Notes. These shares were issued to Platinum using a conversion price of $0.0064 per common share. The issuance of shares in excess of the conversion rate in place at the time of $0.085 were considered an inducement to convert and resulted in an expense of $24,221 based on the market value at the time the excess shares were issued. This expense s included in interest expense for the three months ending June 30, 2012.

Prior to the Reverse Stock Split (see Note 9), on February 15, 2012, March 16, 2012, March 22, 2012 and May 8, 2012 Alpha Capital Anstalt converted 62,500, 62,500, 125,000 and 200,000 and preferred shares held by Longview Special Finance into 588,235, 588,235, 1,176,471 and 1,882,353 common shares respectively. Subsequent to the Reverse Stock split, on June 18, 2012 Alpha Capital Anstalt converted 12,500 preferred shares held by Longview Special Finance into 2,000,000 common shares. As the post-split conversion rate for the shares held by Longview Special Finance was 9.41 common shares per 1 share of preferred stock, the excess shares were recorded as an expense attributable to common stockholders in the statement of operations for the three months ended June 30, 2012 at their conversion date market value of $12,235.

During the first six months of 2012, the Company issued 877,059 shares of common stock to Cape One in payment of $44,500 of interest expense obligations and $30,000 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 $0.085 per common share.

During the first six months of 2012, the Company issued an aggregate of 1,764,706 shares of common stock to various individuals or entities in connection with professional consulting provided to the Company in an aggregate amount of $10,800.  

The Company has issued warrants to purchase shares of its common stock to certain consultants and debt holders. As of June 30, 2012, there were common stock warrants outstanding to purchase an aggregate 4,247,059 shares of common stock pursuant to various warrant grant agreements. In April of 2012, 14,162 warrants originally issued to a consultant in April of 2007 expired unexercised.

7.  INCENTIVE STOCK PLANS

Under the Company’s 2005 Incentive Stock Plan (the “2005 Plan”), the Amended and Restated 2007 Incentive Stock Plan (the “2007 Plan”), the 2008 Incentive Stock Plan (the “2008 Plan”), the 2009 Incentive Stock Plan (the “2009 Plan”), the 2011 Stock Incentive Plan (the “2011 Plan”), and the 2012 Stock Incentive Plan (the “2012 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 823,530 share unit awards, the 2007 Plan is authorized to grant up to 1,000,000 share unit awards, the 2008 Plan is authorized to grant up to 47,058,824 unit share awards, the 2009 Plan is authorized to grant up to 1,176,471 unit share awards, the 2011 Plan is authorized to grant up to 1,470,589 unit share awards and the 2012 Plan is authorized to grant up to 1,764,706 unit share awards.

A summary of the option activity for the six months ended June 30, 2012 is presented below:

	Shares		Weighted Average Exercise Price		Weighted Average Remaining Life-years
Outstanding at January 1, 2012		741,373	$	3.52		4.00
Granted/Exercises/Cancelled/Forfeited		0
Options outstanding at June 30, 2012		741,373	$	3.52		3.50
Options exercisable at June 30, 2012		741,373	$	3.52		3.50

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8.  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.

9. REVERSE STOCK SPLIT

On June 14, 2012, the Company filed a Certificate of Amendment to its Restated Certificate of Incorporation, as amended, with the Secretary of State of the State of Nevada, to effect a 1-for-17 reverse stock split of its common stock, or the Reverse Stock Split. This action had previously been approved by the Company’s Board of Directors on March 23, 2012. As a result of the Reverse Stock Split, every seventeen shares of the Company’s pre-reverse split common stock were combined and reclassified into one share of its common stock. No fractional shares were issued in connections with the Reverse Stock Split. Stockholders who would have been entitled to receive a fractional share in connection with the Reverse Stock Split received one whole share. The par value and other terms of the common stock were not affected by the Reverse Stock Split.

The Company’s authorized shares immediately prior to the Reverse Stock Split totaled 5,000,000,000. These were adjusted to 294,117,647. The Company’s shares outstanding immediately prior to the Reverse Stock Split totaled 732,073,557. These were adjusted to 43,063,150 shares outstanding as a result of the Reverse Stock Split. The Company’s common stock began trading at its post-Reverse Stock Split price at the beginning of trading on June 14, 2012. Share, per share, and stock option amounts for all periods presented within this quarterly report on Form 10-Q and the December 31, 2011 Balance Sheet amounts for common stock and additional paid-in-capital have been retroactively adjusted to reflect the Reverse Stock Split.

10. SUBSEQUENT EVENTS

Subsequent to June 30, 2012 and prior to the filing of this report, the following items occurred:

Promissory Notes

· On July 16, 2012, the Company and Platinum Long Term Growth IV entered into a forbearance agreement which altered the due date of the 8% Senior Secured Promissory Note from July 1, 2012 to September 30, 2012 This forbearance agreement also alters the conversion prices for the convertible notes held by Platinum Long Term Growth IV to the lowest of (a) 75% of the lowest average VWAP (as defined in such notes) for the one business day, five business day or ten business day period immediately preceding the date of the conversion request, such period to be selected by the lender or (b) $0.01 per share. Additionally, this forbearance agreement alters the conversion rate of the 4,250,000 shares of preferred stock held by platinum from a post-split adjusted rate of 9.41 shares of common stock per share of preferred to 160 shares of common stock per share of preferred.

· On July 19, 2012, the Company borrowed $7,000 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 September 30, 2012.

· On July 19, 2012, the Company borrowed $24,000 from Longview Special Finance 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 September 30, 2012.

· On July 25, 2012, the Company and Platinum Advisors entered into a forbearance agreement which altered the due date of the Senior Secured Promissory Note from July 1, 2012 to September 30, 2012. This forbearance agreement also alters the conversion prices for the convertible notes held by Platinum Adviors to the lowest of (a) 75% of the lowest average VWAP (as defined in such notes) for the one business day, five business day or ten business day period immediately preceding the date of the conversion request, such period to be selected by the lender or (b) $0.01 per share.

· On July 26, 2012, the Company issued 2,000,000 shares of common stock to Alpha Capital who elected to convert 12,500 shares of Series B preferred shares owned by Longview at a conversion rate of 160 common shares per each Series B share.

· On July 26, 2012, the Company issued 3,601,831 shares of common stock to Platinum Long Term Growth IV, LLC who elected to convert 22,511 shares of Series C preferred shares at the conversion rate of 160 common shares per each Series C share.

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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 six months ended June 30, 2012 of $705,659 and had negative working capital of $5,651,449 and a stockholders’ deficiency of $5,672,051 at June 30, 2012. 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 June 30, 2012, the Company had $3,580,972 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 September 30, 2012. Platinum and Platinum Advisors have granted waivers of default, extended the due dates of all the outstanding principal balances to September 30, 2012, 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 September 30, 2012, 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 June 30, 2012, the Company had $265,000 in principal that was outstanding and due under the terms of the Convertible Note with Cape One. Through a series of forbearance agreements, the Convertible Note matures and all outstanding principal is due and payable on September 30, 2012.

As of June 30, 2012, 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 six months ended June 30, 2012 and 2011 was $73,732 and $45,058, respectively. Cash used 2012 versus 2011 is up over 63% as a result of paying fewer vendors – subcontractors, consultants, rent, interest and other vendor expenses – with common stock in the comparative period. The net loss generated in the first half of 2012 was $385,130 higher than the prior year period.  $310,000 of this amount is attributed to the consideration paid on the forbearance agreements. 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 2012 to be equal if not slightly greater than the 2011 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 $384,887 in the first half of 2012 and $281,810 in first half of 2011. The change in these non-cash items reflects decreases in the amount of interest that was converted to stock by the lenders year over year as well as the addition of the consideration for the forbearance agreements. For the six months ended June 30, 2012 and 2011 the Company recognized non-cash expenses of $0 and $5,614, 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 six months of 2012 the Company recognized a loss adjustment to derivatives of $0 and for the same period 2011 a loss adjustment to derivatives of $38,252 a net decrease of $38,252.

During the first six months of 2012 and 2011, the Company reduced outstanding liabilities through negotiations with certain vendors, resulting in a net gain on the forgiveness of debt of $0 and $38,950 respectively.

Investing activities

There was no net cash used in investing activities in the six months ended June 30, 2012 and 2011, respectively.

Financing Activities

Net cash provided from financing activities in the six months ended June 30, 2012 and 2011 was $72,000 and $68,000, respectively. The cash flows from financing activities in the first half of 2011 were a receipt of $3,000 in proceeds from a non-interest bearing Unsecured Promissory Note with the CEO, $37,250 in proceeds from Longview Special Finance and $27,750 in proceeds from Platinum Long Term Growth IV. The cash flows from financing activities in the first half of 2012 were a receipt of $72,000 in proceeds from Platinum Long Term Growth IV.

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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 six months ended June 30, 2012.

 Comparison of Statement of Operations for the three months ended June 30, 2012 and 2011

Revenue and Gross Profit

During the three months ended June 30, 2012 and 2011, the Company recorded $26,900 and $127,527, respectively in consolidated revenue. Second quarter 2012 revenue included $17,275 from shipments of Nanotechnology based products and $9,625 from Medical Board products. Second quarter 2011 revenue included $68,000 from shipments of Nanotechnology based products and $59,527 from Medical Board products. Consolidated cost of goods sold was $6,237 and $35,996 for the shipments completed in the respective quarters. Gross profit of $20,663and $91,531 was realized for the three months ended June 30, 2012 and 2011, respectively.

The reduction in the Medical Boards sales year over year is a result of the reduction of sales staff for the medical checklist boards business in addition to the changes to the relationship with Combotexs and the new supply agreement with the related party. Gross margin realized in the three months ended June 30, 2012 was 77% compared to 72% for three months ended June 30, 2011. The variance is attributable to the increase in shipments of Nanotechnology products, which have a higher margin, over Medical Board products which have a much lower margin. The Company expects that it will experience significant variations in gross margins with its Nanotechnology 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 June 30,				Variance increase
Sales, Cost of Goods, and Gross Profit	2012		2011		(decrease)
Halloysite based products	$	17,275	$	68,000	$	(50,725	)
Combotexs		9,625		59,527		(49,902	)
		26,900		127,527		(100,627	)
Halloysite cost of goods		1,053		19,689		(18,636	)
Combotexs cost of goods		5,184		16,307		(11,123	)
Consolidated Gross Profit	$	20,663	$	91,531	$	(70,868	)

Operating Expenses

Research and development expenses for the three months ended June 30, 2012 were $29,322 compared to $38,903 for the three months ended June 30, 2011.The reduction in costs is attributed to the reduction in depreciation due to the life of several long lived assets. This is partially offset by the slight increase in spending on patent maintenance costs.  

	For the three months ended June 30,					Variance increase
Research and Development	2012		2011			(decrease)
Consulting services	$	5,062	$	4,679		$	383
Patent costs		1,840		(702	)		2,542
Depreciation		13,033		24,654			(11,621	)
Rent & utilities		7,413		8,021			(608	)
All other		1,974		2,251			(277	)
	$	29,322	$	38,903		$	(9,581	)

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Total general and administrative expenses for the three months ended June 30, 2012 was $79,613 as compared to $96,357 for the three months ended June 30, 2011. The decrease is a result of a combination of activities that changed year over year. There is only one employee in 2012 as opposed to three in 2011 thus reducing salaries and benefits. This is partially offset by the 2011 receipt of the New York State tax credit/refund ($16,418) in April of 2011. 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 June 30,					Variance increase
General and Administrative	2012		2011			(decrease)
Salaries & benefits	$	46,710	$	64,664		$	(17,954	)
Consulting services		8,306		15,881			(7,575	)
Legal & professional fees		7,500		6,000			1,500
Depreciation & amortization of intangible assets		-		240			(240	)
Insurance expense		717		1,076			(359	)
Shareholder expense		12,192		13,044			(852	)
State tax		650		(16,418	)		17,068
Travel & entertainment		1,500		3,628			(2,128	)
All other		2,038		8,242			(6,204	)
	$	79,613	$	96,357		$	(16,744	)

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.

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. In May 2011, the Company recorded a gain on forgiveness of debt of $38,950 representing a negotiated reduction in past accounting fees. In 2012, the consideration for the forbearance agreements with the lenders totaled $235,000 for the three months ended June 30, 2012. Included in interest expense during the three months ended June 30, 2012, the Company incurred $24,221 of expense related to additional shares issued upon the conversion of interest into common shares. This cost was treated as an inducement.

	For the three months ended June 30,						Variance increase
Other (Expense) Income	2012			2011			(decrease)
Interest to Senior convertible and promissory notes	$	(99,607	)	$	(81,460	)	$	18,147
Interest to Subordinated Secured Convertible Notes		(10,546	)		(10,719	)		(173	)
Interest earned on cash		-			4			4
	$	(110,153	)	$	(92,175	)	$	17,978
Net gain (loss) on derivative liability	$	-		$	29,662		$	29,662
Income from insurance settlement	$	-		$	31,589		$	31,589
Gain (loss) on forgiveness/modification of debt	$	(235,000	)	$	38,950		$	273,950

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 $0 in the second quarter of 2012 and a gain of $29,662 during the second quarter of 2011.

18

Comparison of Statement of Operations for the six months ended June 30, 2012 and 2011

Revenue and Gross Profit

During the six months ended June 30, 2012 and 2011, the Company recorded $70,423 and $203,815, respectively in revenue. For the six months ending 2012 $21,875 came from Medical Boards sales and the $48,548 from shipments of Nanotechnology based product samples; the sales for the same period 2011 came from $134,655 of Medical Boards sales and $69,160 from shipments of Nanotechnology based product samples. The related cost of goods sold was $13,985 and $57,953 for these shipments completed in the respective quarters. Gross profit of $56,439 and $145,862 was realized for the six months ended June 30, 2012 and 2011, respectively.

The reduction in the Medical Boards sales year over year is a result of the reduction of sales staff for the medical checklist boards business in addition to the changes to the relationship with Combotexs and the new supply agreement with the related party. Gross margin realized in the six months ended June 30, 2012 was 80% compared to 72% for six months ended June 30, 2011. The variance is attributable to the increase in shipments of Nanotechnology products, which have a higher margin, over Medical Board products which have a much lower margin. The Company expects that it will experience significant variations in gross margins with its Nanotechnology 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 six months ended June 30,				Variance increase
Sales, Cost of Goods, and Gross Profit	2012		2011		(decrease)
Nanotechnology products	$	48,548	$	69,160	$	(20,612	)
Medical Boards		21,875		134,655		(112,780	)
		70,423		203,815		(133,392	)
Nanotechnology cost of goods		3,130		21,189		(18,059	)
Medical Boards cost of goods		10,855		36,764		(25,909	)
Consolidated Gross Profit	$	56,439	$	145,862	$	(89,423	)

Operating Expenses

Total research and development expenses for the six months ended June 30, 2012 were $68,707 compared to $83,184 for the six months ended June 30, 2011. The reduction in costs is attributed to the negotiated reduction in rent for the Emerson Street facility in addition to the reduction in depreciation due to the life of several long lived assets. This is partially offset by the slight increase in spending on patent maintenance costs.  

	For the six months ended					Variance
	June 30,					increase
Research and Development	2012		2011			(decrease)
Consulting services	$	10,262	$	8,699		$	1,563
Patent costs and licensing fees		4,651		(647	)		5,298
Depreciation		34,053		52,553			(18,500	)
Rent & utilities		15,766		18,564			(2,798	)
All other		3,975		4,015			(40	)
	$	68,707	$	83,184		$	(14,477	)

Total general and administrative expenses for the six months ended June 30, 2012 were $174,888 as compared to $191,697 for the six months ended June 30, 2011. Salaries and benefits are reduced in 2012 because there is only one employee as opposed to three in the same period of 2011. In addition there is only one external board member in 2012 as opposed to three in 2011 which reduces the shareholder and board expense. These items are offset by several transactions from 2011. In 2011 the Company 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), during the same first six 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.

19

	For the six months ended					Variance
	June 30,					increase
General and Administrative	2012		2011			(decrease)
Salaries & Benefits	$	94,897	$	132,007		$	(37,110	)
Consulting services		21,367		25,950			(4,583	)
Legal & professional fees		24,500		6,000			18,500
Depreciation & amortization of intangible assets		-		480			(480	)
Insurance expense		1,793		2,182			(389	)
Shareholder expense		17,579		33,969			(16,390	)
Travel & entertainment		5,458		6,976			(1,518	)
State tax		1,759		(49,498	)		51,257
All other		7,535		33,631			(26,096	)
	$	174,888	$	191,697		$	(16,809	)

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 half of 2011 amortization of this maturing debt discount was $1,799 as compared to $0 in the first half of 2012. During the fourth quarter of 2009, the Company issued $225,000 in 10% Subordinated Convertible Notes which resulted in interest expenses of $20,776 for the first six months of 2012 as compared to $17,292 for the first six months of 2011. The slight increase in interest expense is related to the consideration paid for the forbearance agreements. 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. Included in interest expense during the three months ended June 30, 2012, the Company incurred $24,221 of expense related to additional shares issued upon the conversion of interest into common shares. This cost was treated as an inducement.

	For the six months ended						Variance
	June 30,						increase
Other (Expense) Income	2012			2011			(decrease)
Amortization of debt discount	$	-		$	(1,799	)	$	(1,799	)
Interest on Senior convertible and promissory notes		(187,725	)		(161,785	)		25,940
Interest to Subordinated Secured Convertible Notes		(20,776	)		(17,292	)		3,484
Amortization of financing costs		-			(3,815	)		(3,815	)
Interest earned on cash		-			5			5
	$	(208,501	)	$	(184,686	)	$	23,815
Net loss on derivative liability	$	-		$	(38,252	)	$	(38,252	)
Income from insurance settlement	$	-		$	31,589		$	31,589
Net gain (loss) on forgiveness/modification of debt	$	(310,000	)	$	8,950		$	318,950

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 half of 2012 and 2011, respectively, the Company recognized a net loss of $0 and $38,252 relating to the changes in fair market value for these derivative liabilities.

The vendor concessions of $0 and $8,950 and were treated as gains in the second quarter of 2012 and first quarter of 2011, which is the period the related vendor agreements were reached. The 2011 net vendor concession total of $8,950 reflects the $30,000 charge related to the forbearance agreement signed with Cape One in March offset by the $38,950 credit received in May from the negotiation of the Company’s past accounting fees.

20

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 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 January 17, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to April 16, 2012.  As consideration for this forbearance, Cape One will be paid $25,000 which will be added to the principle balance of the note. The forbearance agreement will be considered and accounted for as modification of debt and a loss of $25,000 for the three months ending March 31, 2012 and reported in the statement of operations. Effective April 16, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to July 1, 2012. Effective June 30, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to September 30, 2012.  As consideration for this forbearance, Cape One will be paid $30,000 which will be added to the principle balance of the note. The forbearance agreement will be considered and accounted for as modification of debt and a loss of $30,000 for the three months ending June 30, 2012 and reported in the statement of operations.

Longview has granted waivers of default on its notes, extended the due dates of all the outstanding principal balances 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 consideration for this forbearance agreement, effective January 1, 2012, Longview will be paid $50,000 which will be added to the principle balance of the note. The forbearance agreement was considered and accounted for as modification of debt and a loss of $50,000 for the three months ending March 31, 2012 and reported in the statement of operations. Effective April 16, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to July 1, 2012. In consideration for their forbearance, Longview will be paid $50,000 which will be added to the principle balance of the note. This forbearance will be considered and accounted for as a modification of debt and a loss of $50,000 for the three months ending June 30, 2012 and reported in the statement of operations. Effective June 15, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to September 30, 2012. In consideration for their forbearance, Longview will be paid $30,000 which will be added to the principle balance of the note. This forbearance will be considered and accounted for as a modification of debt and a loss of $30,000 for the three months ending September 30, 2012 and reported in the statement of operations.

Platinum has granted waivers of default on its notes, extended the due dates of all the outstanding principal balances and waived the application of the 16% default interest rate.  Additionally, Platinum waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services. As consideration for this forbearance agreement, effective December 31, 2011, Platinum will be paid $125,000 which will be added to the principle balance of the note. The forbearance agreement was considered and accounted for as modification of debt and a loss of $125,000 for the three months ending December 31, 2011 and reported in the statement of operations. Effective April 16, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to July 1, 2012. Effective July 16, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to September 30, 2012.

Platinum Advisors has granted waivers of default on its notes, extended the due dates of all the outstanding principal balances and waived the application of the 16% default interest rate.  Additionally, Platinum waived the automatic adjustment of the conversion rate for past and future S-8 stock issuances made for compensation and payments of services. As consideration for this forbearance agreement, effective December 31, 2011, Platinum will be paid $125,000 which will be added to the principle balance of the note. The forbearance agreement was considered and accounted for as modification of debt and a loss of $125,000 for the three months ending December 31, 2011 and reported in the statement of operations. Effective April 16, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to July 1, 2012. In consideration for their forbearance, Platinum Advisors will be paid $125,000 which will be added to the principle balance of the note. This forbearance will be considered and accounted for as a modification of debt and a loss of $125,000 for the three months ending June 30, 2012 and reported in the statement of operations. Effective July 25, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to September 30, 2012.

21

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.

22

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, 2011.

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

 None.

Item 3. Defaults Upon Senior Securities

Effective as of April 16, 2012 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 July 1, 2012 unless extended by the lenders in their discretion. As consideration for these forbearance agreements, effective December 8, 2011, Platinum and Platinum Advisors will each be paid $125,000 which will be added to the principal balance of each of their notes. The forbearance agreement was considered and accounted for as a modification of debt and resulted in a loss of $250,000 at December 31, 2011 reported in the statement of operations. As consideration for the forbearance agreement effective April 16, 2012, Platinum Advisors will be paid $125,000 which will be added to the principal balance of their note. The forbearance agreement will be considered and accounted for as a modification of debt and will result in a loss of $125,000 for the three months ending June 30, 2012 and will be reported in the statement of operations.

Effective as of July 16, 2012 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,

$136,376 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 $212,673 (together the “Notes”).

Also, effective as of July 25, 2012 the Company entered into a Forbearance Agreement with Platinum Advisors LLC relating to the Company’s default on various terms and conditions under the borrowing agreement for $97,500 of 8% Senior Secured Notes due March 6, 2009.

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 September 30, 2012 unless extended by the lenders in their discretion.

Effective as of April 16, 2012 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 July 30, 2012 unless extended by Longview Special Finance Inc. in their discretion. As consideration for this forbearance agreement, effective January 1, 2012, Longview will be paid $50,000 which will be added to the principle balance of the note. The forbearance agreement was considered and accounted for as modification of debt and a loss of $50,000 for the three months ending March 31, 2012 and reported in the statement of operations. As consideration for the forbearance agreement, effective April 16, 2012, Longview will be paid $50,000 which will be added to the principle balance of the note. The forbearance agreement will be considered and accounted for as modification of debt and a loss of $50,000 for the three months ending June 30, 2012 and will be reported in the statement of operations. Effective as of June 15, 2012 the Company entered into a Forbearance Agreement with Longview Special Finance relating to the Company’s default on various terms and conditions under the following borrowing agreements:

23

$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,

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

$35,000 Senior Secured Promissory Note due June 30, 2011 and

$2,250 Senior Secured Promissory Note due December 11, 2011.

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 September 30, 2012 unless extended by Longview Special Finance Inc. at their discretion.

The above 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 September 30, 2012, respectively. As consideration for this forbearance, Longview will be paid $30,000 which will be added to the principal balance of the note. The forbearance agreement will be considered and accounted for as modification of debt and a loss of $30,000 for the three months ending June 30, 2012 and reported in the statement of operations.

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. Effective January 17, 2012, the Company entered into a forbearance agreement which extends the due date of all the outstanding principal and interest balances to April 16, 2012.  As consideration for this forbearance, Cape One will be paid $25,000 which will be added to the principle balance of the note. The forbearance agreement will be considered and accounted for as modification of debt and a loss of $25,000 for the three months ending March 31, 2012 and reported in the statement of operations. Effective as of June 30, 2012 the Company entered into a Forbearance Agreement with Cape One Financial LP relating to the Company’s default on various terms and conditions under the borrowing agreement for the $225,000 Subordinated Secured Convertible Note due February 28, 2011. Cape One Financial LP 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, other than the imposition of the default interest rate of 18% ,due to the events of default under the existing Notes until September 30, 2012 unless extended by the lenders in their discretion. As consideration for this forbearance, Cape One will be paid $30,000 which was added to the principle balance of the note. The forbearance agreement will be considered and accounted for as modification of debt and a loss of $30,000 for the three months ending June 30, 2012 and reported in the statement of operations.

Item 4. Mine Safety Disclosures

 None.

Item 5. Other Information

None.

24

Item 6. Exhibits.  

Exhibit No.	Description	Location
10.113	Letter Agreement effective as of June 30, 2012 with Cape One Financial regarding their forbearance with respect to the $225,000 10% Senior Secured Convertible Note due March 1, 2010.	**
10.114	Letter Agreement effective as of July 16, 2012 with Platinum Long Term Growth IV, LLC regarding their forbearance with respect to the $2,750,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $150,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $190,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $59,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008 and one or more secured bridge notes in the current principal amount of $212,673 (together the “Notes”).	**
10.115	8% Senior Secured Promissory Note dated as of July 19, 2012 in the original principal amount of $7,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Platinum Long Term Growth IV, LLC.	**
10.116	8% Senior Secured Promissory Note dated as of July 19, 2012 in the original principal amount of $24,000 issued by NaturalNano, Inc. and NaturalNano Research, Inc. to Longview Special Finance.	**
10.117	Letter Agreement effective as of July 25, 2012 with Platinum Advisors LLC regarding their forbearance with respect to the $97,500 8% Senior Secured Promissory Note due March 6, 2009.	**
10.118	Letter Agreement effective as of June 15, 2012 with Longview Special Finance Inc. regarding their forbearance with respect to  the $500,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about March 6, 2007, the $20,000 8% Senior Secured Promissory Note due March 6, 2009, issued on or about August 4, 2008, the $30,000 Senior Secured Promissory Note due January 31, 2010, issued on or about September 29, 2008, the $25,500 Senior Secured Promissory Note due January 31, 2010, issued on or about October 31, 2008, the $34,750 16% Senior Secured Promissory Note due January 31, 2010 issued on or about April 3, 2009, the $40,000 16% Senior Secured Promissory Note due November 1, 2009 issued on or about October 22, 2009, and one or more secured bridge notes in the current principal amount of $127,923.	**
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	**
101	Interactive data files formatted in XBRL (eXtensible Business Reporting Language):  (i) the Consolidated Balance Sheets, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statement of Stockholders Deficiency (iv) the Consolidated Statements of Cash Flows, and (v) the Notes to the Consolidated Financial Statements.	***
	101.INS    XBRL Instance Document
	101.SCH   XBRL Taxonomy Extension Schema Document
	101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
	101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
	101.LAB   XBRL Taxonomy Extension Label Linkbase Document
	101.PRE    XBRL Taxonomy Extension Presentation Linkbase Document
**	Filed herewith
***	To be filed by amendment to take advantage of the 30-day grace period for the first XBRL exhibit with detailed tagging requirements, as permitted by Rule 405 of Regulation S-T.

25

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:	August 20, 2012	/s/ James Wemett
		James Wemett
		President and Director
		(Principal Executive, Financial and Accounting Officer)

26

EX-10.113

EX-10.114

 

 

 

 

 

EX-10.115

EX-10.116

EX-10.117

EX-10.118

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 June 30, 2012,

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: August 20, 2012

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 June 30, 2012, 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: August 20, 2012

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