UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x


EXCHANGE
ACT OF 1934





For the
quarter ended September 30,
2009


Commission
file number 000-50709





NOWAUTO GROUP,
INC.


(Exact
name of small business issuer as specified in its charter)





Nevada
77-0594821


(State or
other jurisdiction of (I.R.S. Employer


Incorporation
or organization) Identification No.)





4240 East Elwood Street,
Phoenix, Arizona 85040


(Address
of principal executive offices) (Zip Code)


Registrant's
Telephone Number: (480) 431-0015


Securities
registered pursuant to Section 12(b) of the Act: None


Securities
registered pursuant to Section 12(g) of the Act





COMMON
STOCK


(Title of
Class)




Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act.


 ̈ Yes
xNo




Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act.


 ̈ Yes
xNo




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. xYes  ̈
No




Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant’s knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-Q or any amendment to this
Form 10-Q. xYes  ̈
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. (Check one):




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


(Do not
check if a smaller reporting company)




Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act)


 ̈ Yes     x No




State the
aggregate market value, based upon the closing bid price of the Common Stock as
quoted on NASDAQ, of the voting stock held by non-affiliates of the registrant:
$184,427 as of November 16, 2009.




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




As of November 16, 2009
there were 9,383,046 shares, net of treasury shares, of common stock
outstanding.








Item 1.
Financial Statements





NowAuto
Group, Inc


Condensed
Consolidated Balance Sheets





September 30,
                            
                            
                            June 30,2009
                            
                            
                            2009(unaudited)
                            
                            
                            (audited)AssetsAssetsCash
      and Cash Equivalents
                            
                            $
                            33,120
                            
                            
                            $
                            40,610Investment
      in Sales-type Leases - Net
                            
                            
                            3,970,724
                            
                            
                            
                            3,578,326Inventory
                            
                            
                            102,443
                            
                            
                            
                            148,295Prepaid
      Expenses
                            
                            
                            59,560
                            
                            
                            
                            20,763Equipment
      - net
                            
                            
                            53,778
                            
                            
                            
                            69,882Total
      Assets
                            
                            $
                            4,219,625
                            
                            
                            $
                            3,857,876Liabilities
      and Stockholders' Equity (Deficit)LiabilitiesAccounts
      Payable
                            
                            $
                            337,158
                            
                            
                            $
                            267,787Line
      of Credit
                            
                            
                            10,730,265
                            
                            
                            
                            9,996,319Accrued
      Payroll
                            
                            
                            77,793
                            
                            
                            
                            84,370Other
      Liabilities
                            
                            
                            35,695
                            
                            
                            
                            27,984Total
      Liabilities
                            
                            
                            11,180,911
                            
                            
                            
                            10,376,460Stockholders'
      DeficitCommon
      Stock, authorized 1,000,000,000 shares $0.001 par value;September
      30, 2009 - 9,843,046 shares issued;
                              less
      400,000 Treasury stockfor
      9,383,046 shares outstandingJune
      30, 2008 - 9,843,046 shares issued:less
      400,000 Treasury stockfor
      9,383,046 shares outstanding
                            
                            
                            9,843
                            
                            
                            
                            9,843Treasury
      Stock
                            
                            
                            (27,499
                            )
                            
                            
                            (27,499
                            )Paid
      in Capital
                            
                            
                            4,649,931
                            
                            
                            
                            4,649,931Retained
      Earnings/(Deficit)
                            
                            
                            (11,593,561
                            )
                            
                            
                            (11,150,859
                            )Total
      Stockholder's Deficit
                            
                            
                            (6,961,286
                            )
                            
                            
                            (6,518,584
                            )Total
      Liabilities and Stockholder's Deficit
                            
                            $
                            4,219,625
                            
                            
                            $
                            3,872,876





The
accompanying notes are an integral part of these financial
statements.








NowAuto
Group, Inc


Condensed
Consolidated Statements of Operations


(unaudited)





Quarter
                
                
                QuarterEnded
                
                
                EndedSeptember
                  30,
                
                
                September
                  30,2009
                
                
                2008IncomeSales-type
      leases and other
                
                $
                1,146,232
                
                
                $
                831,724Finance
      Income
                
                
                280,395
                
                
                
                274,502Total
      revenue
                
                
                1,426,627
                
                
                
                1,106,226Cost
      of Goods Sold
                
                
                692,487
                
                
                
                779,253Gross
      Profit/Loss
                
                
                734,140
                
                
                
                326,973Gross
      Margin Percent
                
                
                51.5
                %
                
                
                34.5
                %ExpensesSelling
      and Financing Costs
                
                
                517,939
                
                
                
                471,892General
      and Administrative
                
                
                407,207
                
                
                
                278,228Loss
      from Operations
                
                
                (191,006
                )
                
                
                (368,147
                )Interest
      Expense
                
                
                251,696
                
                
                
                222,677Net
      Loss
                
                $
                (442,702
                )
                
                $
                (590,824
                )Basic
      and Diluted Loss per Share
                
                $
                (0.05
                )
                
                $
                (0.06
                )Weighted
      Average Number of Common Shares O/S
                
                
                9,383,046
                
                
                
                9,443,046





The
accompanying notes are an integral part of these financial
statements.








NowAuto
Group, Inc


Condensed
Consolidated Statement of Stockholders' (Deficit)





Paid in
                          
                          
                          Treasury
                          
                          
                          Accumulated
                          
                          
                          TotalShares
                          
                          
                          Amount
                          
                          
                          Capital
                          
                          
                          Stock
                          
                          
                          Deficit
                          
                          
                          EquityBalance
      June 30, 2008
                          
                          
                          9,843,046
                          
                          
                          $
                          9,843
                          
                          
                          $
                          4,649,931
                          
                          
                          $
                          (12,500
                          )
                          
                          $
                          (8,919,328
                          )
                          
                          $
                          (4,272,054
                          )Stock
      repurchase, 60,000 shares
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (14,999
                          )
                          
                          
                          
                          
                          
                          
                          (14,999
                          )Net
      Loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (2,231,531
                          )
                          
                          
                          (2,231,531
                          )Balance
      June 30, 2009
                          
                          
                          9,843,046
                          
                          
                          $
                          9,843
                          
                          
                          $
                          4,649,931
                          
                          
                          $
                          (27,499
                          )
                          
                          $
                          (11,150,859
                          )
                          
                          $
                          (6,518,584
                          )Net
      Loss
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          
                          (442,702
                          )
                          
                          
                          (442,702
                          )Balance
      September 30, 2009
                          
                          
                          9,843,046
                          
                          
                          $
                          9,843
                          
                          
                          $
                          4,649,931
                          
                          
                          $
                          (27,499
                          )
                          
                          $
                          (11,593,561
                          )
                          
                          $
                          (6,961,286
                          )





The
accompanying notes are an integral part of these financial
statements.








NowAuto
Group, Inc


Condensed
Consolidated Statements of Cash Flows





3 Months
                        
                        
                        3 MonthsEnded
                        
                        
                        EndedSeptember 30,
                        
                        
                        September 30,2009
                        
                        
                        2008(Unaudited)
                        
                        
                        (Unaudited)Operating
      ActivitiesNet
      Loss
                        
                        $
                        (442,702
                        )
                        
                        $
                        (590,824
                        )Adjustments
      to reconcile Net Loss to Net Cash used in Operating
    ActivitiesSignificant
      Non-Cash TransactionsDepreciation/Amortization
      Expense
                        
                        
                        6,118
                        
                        
                        
                        2,681Loss
      on disposal of fixed assets
                        
                        
                        14,691
                        
                        
                        
                        0Interest
      expense capitalized into principal
                        
                        
                        251,696
                        
                        
                        
                        222,677Provision
      for uncollectible receivables
                        
                        
                        201,706
                        
                        
                        
                        0Changes
      in assets and liabilitiesInvestment
      in sales-type leases
                        
                        
                        (594,104
                        )
                        
                        
                        41,993Inventory
                        
                        
                        45,852
                        
                        
                        
                        141,579Prepaid
      expenses
                        
                        
                        (38,797
                        )
                        
                        
                        12,450Accounts
      payable
                        
                        
                        69,371
                        
                        
                        
                        (133,718
                        )Other
      liabilities
                        
                        
                        1,135
                        
                        
                        
                        (46,120
                        )Net
      cash used in operating activities
                        
                        
                        (485,034
                        )
                        
                        
                        (349,282
                        )Investing
      ActivitiesPurchase
      of Fixed Assets
                        
                        
                        (4,705
                        )
                        
                        
                        (25,326
                        )Net
      Cash provided by (used in) Investing Activities
                        
                        
                        (4,705
                        )
                        
                        
                        (25,326
                        )Financing
      ActivitiesProceeds
      from line of credit
                        
                        
                        1,361,390
                        
                        
                        
                        956,493Principal
      payments on line of credit
                        
                        
                        (879,141
                        )
                        
                        
                        (585,718
                        )Net
      cash provided by Financing Activities
                        
                        
                        482,249
                        
                        
                        
                        370,775Net
      Decrease in Cash
                        
                        
                        (7,490
                        )
                        
                        
                        (3,833
                        )Cash,
      Beginning of Period
                        
                        
                        40,610
                        
                        
                        
                        32,508Cash,
      End of Period
                        
                        $
                        33,120
                        
                        
                        $
                        28,675Supplemental
      Information:Period
      interest
                        
                        $
                        
                        
                        
                        $Income
      Taxes paid
                        
                        $
                        
                        
                        
                        $





The
accompanying notes are an integral part of these financial
statements.








Note
1. Nature of Operations and Significant Accounting Policies





Nature of
Operations





NowAuto
Group, Inc primarily leases vehicles in the Buy Here, Pay Here industry through
the use of sales-type leases. Our customers are individuals with sub-prime
credit histories. We currently operate primarily in the Phoenix, Arizona
Metropolitan area.





NowAuto
Group, Inc was originally formed as WH Holdings, Inc., a Nevada Corporation, on
August 19, 1998. On June 8, 2004 the name was changed to Automotive Capital
Group, Inc. and again changed on August 31, 2004 to NowAuto, Inc. NowAuto, Inc.
was purchased by Global-E Investments, Inc. on July 22, 2005. Global-E
Investments was a non-operating public shell. The stockholders of NowAuto, Inc.
became the majority owners of Global-E Investments and as such, the transaction
has been accounted for as a recapitalization of NowAuto, Inc. As such, all
financial statements presented are the activity of NowAuto, Inc. Global-E
Investments subsequently changed their name to NowAuto Group, Inc.





The
Company also has a subsidiary, NavicomGPS, Inc. that was involved in the sales
and installation of global positioning systems. However, this subsidiary has
been largely inactive since approximately June of 2007.





General





The
accompanying condensed balance sheet as of June 30, 2009, which has been derived
from audited financial statements and the unaudited interim condensed financial
statements as of September 30, 2009 have been prepared in accordance with
generally accepted accounting principles for interim financial information and
in accordance with the instructions to Form 10-Q in Article 10 of Regulation
S-X. Accordingly, they do not include all of the information and footnotes
required by the accounting principles generally accepted in the United States
for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair
presentation have been included. Operating results for the three months ended
September 30, 2009 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2010. For further information, refer to
the consolidated financial statements and footnotes thereto included in the
Company’s annual report on Form 10-K for the year ended June 30,
2009.





Principles of
Consolidation





The
consolidated financial statements include the accounts of NowAuto Group, Inc.
and our subsidiary, NavicomGPS, Inc. All significant inter-company accounts and
transactions have been eliminated.





Use of
Estimates





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that affect the reported amount of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements, and the reported amounts of revenues and expenses
during the period. Actual results could differ from those estimates. Material
estimates that are susceptible to significant change in the near term include,
but are not limited to, the determination of the allowance for doubtful
accounts, the realization of deferred financing revenue, and the carrying value
of inventory.





Concentration of
Risk





We
originate our contracts and provide financing in connection with the sale and/or
lease of substantially all of our vehicles. Although we attempt to mitigate our
exposure to credit risk through the use of employment checks, reference checks,
proof of residence, and other procedures, failure of the customers to make
scheduled payments under their lease contracts could have a material near term
impact on our results of operations and financial condition.  In
addition, all of our financing is provided through our revolving credit
agreement which is held by one privately controlled venture capital
fund.








Periodically,
we maintain cash in financial institutions in excess of the amounts insured by
the federal government.





Cash
Equivalents





We
consider all highly liquid instruments purchased with maturities of three months
or less to be cash equivalents.





Inventory





Inventory
consists of used vehicles and is valued at the lower of cost or market on a
specific identification basis. Vehicles purchased at auction, or wholesale, are
typically recorded at their purchase price. Repossessed vehicles are recorded at
the lesser of their original cash value or their fair value, which is determined
based upon the approximate wholesale value. Vehicle reconditioning costs are
capitalized as a component of inventory. The cost of used vehicles sold is
determined using the specific identification method.





Equipment





Property
and equipment are stated at cost. Expenditures for additions, renewals and
improvements are capitalized. Costs of repairs and maintenance are expensed as
incurred. Leasehold improvements are amortized over the shorter of the estimated
life of the improvement or the lease period. The lease period includes the
primary lease term plus any extensions that are reasonably assured. Depreciation
is computed principally using the straight-line method generally over the
following estimated useful lives:





Furniture,
      fixtures and equipment
                    3
      to 7 yearsLeasehold
      improvements
                    Length
      of the lease, typically 1 – 3
years





Property
and equipment are reviewed for impairment whenever events or changes in
circumstances indicate the carrying amount of an asset may not be recoverable.
Recoverability of assets to be held and used is measured by a comparison of the
carrying amount of an asset to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be impaired, the
impairment to be recognized is measured by the amount by which the carrying
values of the impaired assets exceed the fair value of such assets. Assets to be
disposed of are reported at the lower of the carrying amount or fair value less
costs to sell.





Sales
Tax





We pay
sales taxes to local and state governmental agencies on vehicles sold and
leased. For lease agreements, sales tax is paid when funds are received from the
customer. Therefore, a liability is recorded for sales tax purposes in the
period the lease is paid, and remitted as they are collected. For sales
contracts, calculations for sales taxes are made on an accrual basis. Vehicle
repossessions are allowed as a deduction from taxable sales in the month of
repossession. Customers often make their down payments in periodic increments
over a period of four to six weeks. We do not report the sales for tax purposes
until the down payments are fully paid. This is compliant with industry
standards and with most state and local tax codes.





Income
Taxes





Income
taxes are accounted for under the asset and liability method. Under this method,
deferred tax assets and liabilities are determined based on differences between
financial reporting and tax bases of assets and liabilities and are measured
using the enacted tax rates expected to apply in the years in which these
temporary differences are expected to be recovered or settled. Deferred tax
assets are reduced by a valuation allowance when in the opinion of management,
it is more likely than not that some portion or all of the deferred tax assets
will not be realized.








The
effect on deferred tax assets and liabilities of a change in tax rates is
recognized in income in the period that includes the enactment
date.





Interest
and penalties associated with unrecognized tax benefits are classified as
additional income taxes in the statement of income.





The
Company’s policy is to recognize interest accrued related to unrecognized tax
benefits in interest expense and penalties in operating expenses.





We have
adopted the provisions of FIN 48. As of September 30, 2009, we had no
liabilities, included on the consolidated balance sheets, associated with
uncertain tax positions.





Revenue
Recognition





Sales-type
leases





The
Company’s financing agreements are classified as sales-type leases pursuant to
the provisions of SFAS No. 13, Accounting for Leases. As such, revenues
representing the sales price of the vehicles are recognized as income upon
inception of the lease, with the resulting gross profit from the sales included
in operations. Lease terms are typically for a period of 36 to 39 months with
either monthly or bi-monthly payments.





The
portion of revenues representing the difference between the gross investment in
the lease (the sum of the minimum lease payments and the guaranteed residual
value) and the sum of the present value of the two components is recorded as
deferred revenue and amortized over the lease term. This deferred revenue
represents the effective interest rate on the sales-type lease and ranges from
approximately 19% to 29% per annum.





For the
three months ended September 30, 2009 and 2008, amortization of deferred revenue
totaled $280,395 and $274,502, respectively.





Taxes
assessed by governmental authorities that are directly imposed on
revenue-producing transactions between the Company and its customers (which may
include, but are not limited to, sales, use, value added and some excise taxes)
are excluded from revenues.





Lessees
are responsible for all taxes, insurance, and maintenance costs.





Repossessions





If the
lessee ceases making payments pursuant to the lease terms and the decision is
made by the Company to repossess the vehicle the lease is considered
terminated.  In such an event, the remaining balance of the lease is
removed from the Investment in Sales-Type Leases, the repossessed vehicle is
recorded as inventory at the lower of its original cost or its fair value at
wholesale, and any resulting adjustment is charged to income during the
period.





Advertising
Costs





Advertising
costs are expensed as incurred and consist principally of radio, television and
print media marketing costs. Advertising costs amounted to $22,776 and $30,827
for the quarters ended September 30, 2009 and 2008,
respectively.








Loss per
Share





The loss
per share (“EPS”) is presented in accordance with the provisions of Statement of
Financial Accounting Standards No. 128, “Earnings Per Share” (SFAS 128). Basic
EPS is calculated by dividing the income or loss available to common
shareholders by the weighted average number of common shares outstanding for the
period. Diluted EPS reflects the potential dilution that could occur if
securities or other contracts to issue common stock were exercised or converted
into common stock. Basic and diluted EPS were the same for fiscal 2009 and 2008,
as the Company had losses from operations during both years and therefore the
effect of all potential common stock equivalents is antidilutive (reduces loss
per share). As of June 30, 2008 there were 36,750 warrants outstanding to
purchase common stock at $0.25 per share and 34,125 warrants outstanding to
purchase common stock at $0.40 per share that were not included in the
calculation of diluted EPS as they were antidilutive.  There were no
warrants or options outstanding as of September 30, 2009.





Stock Option
Plans





As of
September 30, 2009 we had no employee stock ownership plan.





Allowance for Delinquent
Leases





Provisions
for losses on leases in default are charged to operations in amounts sufficient
to maintain the allowance for delinquent leases at a level considered adequate
to cover probable credit losses.




The
Company established the allowance for delinquent leases based on the
determination of the amount of probable credit losses inherent in the finance
receivables as of the reporting date. The Company reviews charge-off experience
factors, delinquency reports, historical collection rates, estimates of the
value of the underlying collateral, economic trends, such as unemployment rates,
industry standards and other information in order to make the necessary
judgments as to probable credit losses.  Assumptions regarding
probable credit losses and loss confirmation periods are reviewed periodically
and may be impacted by actual performance of finance receivables and changes in
any of the factors discussed above.





Note
2. Non-Classified Balance Sheet





We are a
finance company, originating and financing all of our own leasing
contracts.  These contracts are 36 to 39 months in length. Therefore,
our balance sheet is presented on a non-classified basis.





Note
3.  Investment in Sales-Type Leases – net





The
Company’s leasing operations consist principally of leasing vehicles under
sales-type leases expiring in various years to 2012. Following is a summary of
the components of the Company’s net investment in sales-type
leases:


September 30,
                    
                    
                    June 30,2009
                    
                    
                    2009Total
      Minimum Lease Payment to be Received
                    
                    $
                    7,158,740
                    
                    
                    $
                    6,447,089Residual
      Value
                    
                    
                    317,400
                    
                    
                    
                    260,050Lease
      Carrying Value
                    
                    
                    7,476,140
                    
                    
                    
                    6,707,139Less:
      Allowance for Uncollectible Amounts
                    
                    
                    (1,689,607
                    )
                    
                    
                    (1,487,901
                    )Less:
      Unearned Income
                    
                    
                    (1,815,809
                    )
                    
                    
                    (1,640,912
                    )Net
      Investment in Sales-Type Leases
                    
                    $
                    3,970,724
                    
                    
                    $
                    3,578,326








A
schedule of future minimum lease payments for each of the next three years is as
follows:





Years Ending
                    
                    September 30,
                    
                    
                    June 30,2010
                    
                    
                    4,008,894
                    
                    
                    
                    3,610,3702011
                    
                    
                    1,718,098
                    
                    
                    
                    1,547,3012012
                    
                    
                    1,431,748
                    
                    
                    
                    1,289,418Total
                    
                    
                    7,158,740
                    
                    
                    
                    6,447,089





Note
4.  Property and Equipment





A summary
of equipment and accumulated depreciation as follows:





September 30,
                      2009
                    
                    
                    June 30, 2009Furniture,
      fixtures and equipment
                    
                    $
                    45,558
                    
                    
                    $
                    31,740Leasehold
      improvements
                    
                    
                    3,448
                    
                    
                    
                    27,323Computers
      and miscellaneous
                    
                    
                    48,451
                    
                    
                    
                    47,96497,457
                    
                    
                    
                    107,027Less:
      accumulated depreciation
                    
                    
                    (43,679
                    )
                    
                    
                    (37,145
                    )$
                    53,778
                    
                    
                    $
                    69,882





Note
5.  Income Taxes





The
significant components of the Company’s deferred tax assets are as
follows:





September 30,
                  
                  
                  June 30,2009
                  
                  
                  2009Deferred
      tax assetsNet
      operating losses carryforward
                  
                  $
                  3,433,700
                  
                  
                  $
                  3,257,000Less:
      valuation allowance
                  
                  
                  (3,433,700
                  )
                  
                  
                  (3,257,000
                  )Deferred
      tax assets
                  
                  $
                  0
                  
                  
                  $
                  0





At
September 30, 2009, the Company has incurred accumulated net operating losses
totaling approximately 8,584,300, which are available to reduce federal and
state taxable income in future years.





Note
6. Contract Financing





As of
September 30, 2009 the Company had a revolving credit agreement with a private
equity fund.  The credit agreement is secured by the lease contracts
it agrees to fund, as well as the underlying vehicle.  The monies
advanced under the line of credit are based upon the contract price and vary per
contract, at the discretion of the lender. Substantially all the sales-type
lease contracts financed require our customers to make their monthly payments
directly to the finance company via ACH (automatic account
withdrawal).  The Company retains ownership of the contracts and is
active in the collection of delinquent accounts from the contracts. The line of
credit matures and renews annually on February 6th. At inception, March 31,
2006, our credit limit was $3,000,000. This limit has been expanded by the
lender to its current $11,500,000 limit. The interest rate is at the prime
lending rate plus 6% (9.25% at September 30, 2009).








The
revolving credit agreement has two debt covenants.  The Company must
maintain a tangible net worth of at least $2,000,000 and a leverage ratio that
total liabilities cannot exceed four times the tangible net worth.  As
of September 30, 2009 we are not in compliance with either of these covenants,
however we have a strong relationship with our lender and do not anticipate any
problems as a result.





Note
7.  The Effect of Recently Issued Accounting Standards




Recent
Accounting Pronouncements




In
June 2009, the Financial Accounting Standards Board (“FASB”) issued
authoritative guidance which establishes the FASB Accounting Standards
CodificationTM
(“ASC”) as the single source of authoritative US GAAP, organized by topic, and
creates a new referencing system to identify authoritative guidance such that
references to SFAS, EITF, etc. will no longer be valid. The Codification does
not create any new GAAP standards. In addition, the Securities and Exchange
Commission (“SEC”) rules and releases will remain as sources of authoritative US
GAAP for SEC registrants. The standard is effective for the Company’s first
quarter of fiscal 2010 and did not have a material impact on the Company’s
consolidated financial statements.
 
 In
June 2009, the FASB issued authoritative guidance which changes the
analysis required to determine controlling interest in variable interest
entities and requires additional disclosures regarding a company’s involvement
with such entities. The standard, which is effective beginning the Company’s
fiscal year 2011, is not expected to have a material impact on the Company’s
consolidated financial statements.
 
 In
June 2009, the FASB issued authoritative guidance which eliminates the
concept of qualifying special purpose entities, limits the number of financial
assets and liabilities that qualify for derecognition, and requires additional
disclosures. The standard, which is effective beginning the Company’s fiscal
year 2011, is not expected to have a material impact on the Company’s
consolidated financial statements.
 
 In May
2009, the FASB issued authoritative guidance intended to establish general
standards of accounting for and disclosure of events that occur after the
balance sheet date but before financial statements are issued or are available
to be issued.  It requires disclosure of the date through which an
entity has evaluated subsequent events and the basis for selecting that date,
that is, whether that date represents the date the financial statements were
issued or were available to be issued.  The standard is effective for
the Company’s second quarter of fiscal 2010.  The Company has
evaluated subsequent events through November 16, 2009, which is the date the
financial statements were issued.
 
 In
April 2009, the FASB issued authoritative guidance which requires
disclosure about fair value of financial instruments in interim financial
statements in order to provide more timely information about the effects of
current market conditions on financial instruments. The standard, which is
effective beginning the Company’s first quarter of fiscal 2010, did not have a
material impact on the Company’s consolidated financial statements.
 
 In
February 2008, the FASB issued authoritative guidance which delayed the
effective date of the fair value measurement guidance for all non-financial
assets and non-financial liabilities, except for items that are recognized or
disclosed as fair value in the financial statements on a recurring basis (at
least annually). The standard, which is effective for the Company’s first
quarter of fiscal 2010, did not have a material impact on the Company’s
consolidated financial statements.
 
 In
December 2007, the FASB issued authoritative guidance which establishes the
requirements for how an acquirer recognizes and measures the identifiable assets
acquired, the liabilities assumed, any non-controlling interest in the acquiree
and the goodwill acquired. The standard requires acquisition costs be expensed
instead of capitalized as was required under prior purchase accounting standards
and also establishes disclosure requirements for business combinations. The
standard, which is effective beginning in the Company’s first quarter of fiscal
2010, did not have a material impact on the Company’s consolidated financial
statements.
 
 In
December 2007, the FASB issued authoritative guidance which changes the
accounting and reporting for minority interests, which are now termed
“non-controlling interests.” The standard requires non-controlling interests to
be presented as a separate component of equity and requires the amount of net
income attributable to the parent and to the non-controlling interest to be
separately identified on the consolidated statement of operations. The standard,
which is effective for the Company’s first quarter of fiscal 2010, did not have
a material impact on the Company’s consolidated financial.




Note
8. Going Concern





The
accompanying financial statements have been prepared assuming that we will
continue as a going concern. We sustained a material loss in the year ended June
30, 2005. This loss continued through June 30, 2009. This raises substantial
doubt about our ability to continue as a going concern. The financial statements
do not include any adjustments that might result from this
uncertainty.





Since
that initial loss, great efforts have been made to improve our profitability.
Margins on cars sold have increased. Costs, especially overhead, have been
reduced. Head count is kept to a minimum. Accountability has been greatly
enhanced by development of qualified Accounting staff and the implementation of
an enterprise-wide and fully integrated software system. The Company has been
and continues to develop the financing function whose focus includes, but is not
limited to improved stability scoring and credit approval process, improvement
of the total portfolio aging, and reduction of account losses. On the date of
this report, the corporate office and Service Department relocated to the same
facility. This new facility greatly enhances the Service Department’s efficiency
and capacity and gives upper management closer oversight of
operations.





A
detailed discussion of management’s plans for dealing with this issue is in the
Company’s annual report of Form 10-K for the year ended June 30,
2009.





Note
9. Subsequent Events





On
September 30, 2009 the Company entered into an operating lease for corporate
offices with vehicle servicing capacity in Phoenix, Arizona.  The 38
month lease commenced on October 1, 2009 and calls for monthly payments of
$8,000.





Subsequent
events have been evaluated and disclosed through the date of this filing, which
is the date these consolidated financial statements were
issued.





Item
2. Management's Discussion and Analysis of Financial Condition and Results of
Operations





The
following discussion should be read in conjunction with the Company's
consolidated financial statements and notes thereto appearing elsewhere in this
report.





Forward-looking
Information





The
Private Securities Litigation Reform Act of 1995 provides a "safe harbor" for
certain forward-looking statements. Certain information included in this
Quarterly Report on Form 10-Q contains, and other materials filed or to be filed by
the Company with the Securities and Exchange Commission (as well as information
included in oral statements or other written statements made or to be made by
the Company or its management) contain or will contain, forward-looking
statements within the meaning of Section 21E of the Securities Exchange Act of
1934, as amended, and Section 27A of the Securities Act of 1933, as amended. The
words "believe," "expect," "anticipate," "estimate," project" and similar
expressions identify forward-looking statements, which speak only as of the date
the statement was made. The Company undertakes no obligation to publicly update
or revise any forward-looking statements. Such forward-looking statements are
based upon management's current plans or expectations and are subject
to a number of uncertainties and risks that could significantly affect current
plans, anticipated actions and the Company's future financial conditions and
results. As a consequence, actual results may differ materially from those expressed
in any forward-looking statements made by or on behalf of the Company as a
result of various factors. Any forward-looking statements are made pursuant to
the Private Securities Litigation Reform Act of 1995 and, as such, speak only as
of the date made.





Overview





Since
2004, NowAuto Group, Inc., a Nevada corporation (the "Company") is a publicly
held retailer focused on the "Buy Here/Pay Here" segment of the used vehicle
market. The Company generally sells 1999 and newer model-year used vehicles and
provides financing for substantially all of its customers. Many of the Company's
customers have limited financial resources and would not qualify for
conventional financing as a result of limited credit histories or past credit
problems. As of September 30, 2009 the Company had three stores, all of which
are located in the State of Arizona.





The
market for used vehicle sales in the United States is significant. Used vehicle
retail sales typically occur through franchised new vehicle dealerships that
sell used vehicles, or independent used vehicle dealerships. The
Company


operates
in the "Buy Here/Pay Here" segment of the independent used vehicle sales and
finance market. Buy Here/Pay Here dealers sell and finance used vehicles to
individuals with limited credit histories or past credit problems. Buy Here/Pay
Here dealers typically offer their customers certain advantages over more
traditional financing sources, such as broader and more flexible credit terms,
attractive payment terms, including scheduling payments on a weekly or bi-weekly
basis to coincide with a customer's payday, and the ability to make payments in
person, an important feature to individuals who may not have checking accounts.
In turn, interest rates on vehicle loans provided by the Company are generally
higher than those offered to individuals who purchase from other new or used
vehicle dealers or who have better credit histories.





The
Company's primary focus is on sales and collections. The Company is responsible
for its own collections through its internal collection department with
supervisory involvement of the corporate office. In the past year the Company
implemented new and stricter underwriting criteria at the store level. In
addition the Company implemented stricter contract criteria, which in the short
term, resulted in higher repossessions and charge-off accounts. In addition,
credit losses are also imparted, to some degree, by economic conditions in the
markets in which the Company serves. In recent months, adverse economic
conditions have had a negative impact on collection results. While the Company
believes the most significant factor affecting credit losses is the proper
execution (or lack therefore) of its business practices, the Company also
believes that current economic conditions have had a negative impact on its
operations and results.





Hiring,
training and retaining qualified personnel are critical to the Company's
success. The number of trained managers the Company has at its disposal will
limit the rate at which the Company adds new stores. Excessive turnover,
particularly at the store manager level, could impact the Company's ability to
add new stores. The Company expects to continue to invest in the development of
its workforce.








Three Months Ended September
30, 2009 vs. Three Months Ended September 30, 2008





Total
revenue for the quarter ended September 30, 2009 was $1,426,627 versus revenue
of $1,106,226 for the quarter ended September 30, 2008. While average sales
price per unit declined from approximately $9,300 to $8,900, volume increased by
38%. The Company has been able to purchase units at significantly better prices
and therefore are able to offer a lower sales price. Also, our customer base has
increased due to the current economy. People who would normally make purchases
in the prime market, can’t get financing and are forced into our
market.





The
Company's gross profit as a percentage of sales during the quarter ending
September 30, 2009 was 51.5% vs. 34.5% for the quarter ended September 30, 2008.
There are two reasons for the increase. The first is better capture and recovery
of costs in the sales price. Account losses during the quarter ending September
30, 2009 have declined from previous quarters thus increasing interest earnings
on active accounts.





During
the quarter ended September 30, 2009 the Company experienced lower than normal
bad debt expense. Bad debt expense for the quarter ended September 30, 2009
improved 73% from the year earlier quarter. The Company believes the improvement
in bad debt expense for the quarter is due to, among other things, stricter
underwriting criteria and improved collection practices. While the Company
believes that proper execution (or lack thereof) of its business practices is
the most significant factor affecting credit losses, the Company also believes
that general economic conditions, including but not limited to rising
unemployment and troubled credit markets adversely affect collection efforts and
may result in higher than normal account losses for the foreseeable future.
General and Administrative expenses increased over the prior year to 28.5% of
revenue due primarily to increased costs for labor, health insurance, asset
disposal, and professional fees.





Total
operating expenses were 64.8% of total revenues for the quarter ended September
30, 2009 versus 67.8% for the quarter ended September 30, 2008. The change is
because revenues have increased faster than costs.





Financial
Condition


The
following sets forth the major balance sheet accounts of the Company as of the
dates specified.





September 30,
                  
                  
                  June 30,2009
                  
                  
                  2009Investments
      in Sale-type leases, net
                  
                  $
                  3,970,724
                  
                  
                  $
                  3,578,326Inventory
                  
                  
                  102,443
                  
                  
                  
                  148,295Equipment
                  
                  
                  53,778
                  
                  
                  
                  69,882Accounts
      Payable
                  
                  
                  337,158
                  
                  
                  
                  267,787





Liquidity and Capital
Resources




The
Company’s liabilities exceeded its assets by approximately $7,000,000 as of
September 30, 2009. The deterioration in our financial condition was primarily
the result of our net loss during the operating period.
  Cash and
cash equivalents at September 30, 2009 were approximately $33,000. Our
investment in sales-type leases increased by approximately $392,000 during the
quarter ended September 30, 2009.  As our contract terms are 36 to 39
months, we will be collecting on our investment in these leases over the next
several years.  Inventory of vehicles on September 30, 2009 was
approximately $102,000 versus $148,000 on June 30, 2009, a decrease of
$46,000.  The decrease is due to increases in sales and the Company’s
position of not using a floor plan to carry extra inventory.
  
  Net cash
used in investing activities during the current quarter was approximately
$5,000, compared to net cash used in investing activities in the quarter ended
September 30, 2008 of $25,000. The current quarter decrease was primarily due to
a reduction in the purchase of office equipment. Net cash provided by financing
activities during the three months ended September 30, 2009 was approximately
$482,000 versus approximately $370,000 for the three months ended September 30,
2008. This activity is a result of the revolving credit agreement.
  At
September 30, 2009, the Company had approximately a $10.7 million line of credit
balance under a $11.5 million line of credit agreement with a privately held,
independent finance company. Interest rate on the line of credit agreement is at
prime plus 6% (9.25% at September 30, 2009).  The line of credit
agreement has two covenants (see Note 6 to the accompanying financial
statements), neither of which the Company is in compliance with as of September
30, 2009.  However, management believes they have a positive
relationship with the independent finance company and does not expect any
collection activity as a result of these defaults.  The original line
of credit with the lender at its inception in 2006 was $3,000,000 and the lender
has periodically and consistently increased the limit as the need
arose.
  Considering
the Company’s current working capital position management estimates that the
current cash position will not be adequate to meet cash requirements for the
next twelve months and that additional draws will need to be made against the
line of credit to fund operations. Subsequent to September 30, 2009, the Company
has been allowed to take additional draws under the revolving credit
agreement.  We anticipate that we will be able to continue to draw on
this credit facility as the need arises until such time as we are able to
generate sufficient cash flow from operations to be self sufficient and commence
repaying the debt.
  Although
management cannot assure that future operations will be profitable, or that
additional debt and/or equity financing will be available, we believe our
current cash balance, together with additional debt financing, may provide
adequate capital resources to maintain operations for the next year. If
additional working capital is required during fiscal 2010 and not obtained
through additional debt, equity capital or operations, it could adversely affect
future operations. Management has historically been successful in obtaining
financing and has demonstrated the ability to implement a number of cost-cutting
initiatives to reduce working capital needs. Accordingly, the condensed
consolidated financial statements contained in Item 1 of this Form 10-Q have
been prepared assuming the Company will continue to operate and do not include
any adjustments that might be necessary if the Company is unable to continue as
a going concern. As a result, the Company’s independent registered public
accountants issued a going concern opinion on the consolidated financial
statements of the Company for the year ended June 30, 2009.




Critical
Accounting Policies





The
preparation of financial statements in conformity with accounting principles
generally accepted in the United States of America requires us to make estimates
and assumptions in determining the reported amounts of assets and liabilities
and disclosures of contingent assets and liabilities at the date of the
financial statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from our estimates. We believe
the most significant estimates made in the preparation of the accompanying
consolidated financial statements relates to the determination of our allowance
for doubtful accounts, which is discussed below, as well as our revenue
recognition policy as it relates to sales-type leases, and the carrying value of
our inventory.





We
maintain an allowance for doubtful accounts on an aggregate basis at a level we
considers sufficient to cover estimated losses in the collection of our finance
receivables. This reserve is currently accrued at 21.7% of the Receivables
balance. The rate is periodically reviewed by management and changed to reflect
current operations. Although it is at least reasonably possible that events or
circumstances could occur in the future that are not presently foreseen which
could cause actual credit losses to be materially different from the recorded
allowance for credit losses, we believe that we have given appropriate
consideration to all factors and have made reasonable assumptions in determining
the allowance for doubtful accounts.








The SEC
suggests that all registrants list their most “critical accounting policies” in
Management’s Discussion and Analysis. A critical accounting policy is one which
is both important to the portrayal of the Company’s financial condition and
results and requires management’s most difficult, subjective or complex
judgments, often as a result of the need to make estimates about the effect of
matters that are inherently uncertain. Management has identified the critical
accounting policies presented above as those accounting policies that affect its
more significant judgments and estimates in the preparation of its consolidate
financial statements. The Company’s Board of Directors has reviewed and approved
the critical accounting policies identified.





Off-Balance
Sheet Arrangements





As of
September 30, 2009, we did not have any relationship with unconsolidated
entities or financial partnerships, which other companies have established for
the purpose of facilitating off-balance sheet arrangements as defined in Item
303(c)(2) of SEC Regulation S-B. Therefore, we are not materially exposed to any
financing, liquidity, market or credit risk that could arise if we had engaged
in such relationships.





Recent
Accounting Pronouncements





Recent
accounting pronouncements are more fully addressed in Note 11 to the
accompanying financial statements.




Item
3. Quantitative and Qualitative Disclosures about Market Risk
 
 Not
applicable, as the Company is a smaller reporting company.
 Item
4T.  Controls and Procedures
  (a)
                EVALUATION
      OF DISCLOSURE CONTROLS AND
PROCEDURES
 
 The
Company carried out, under the supervision and with the participation of the
Company’s management, including the Company’s Chief Executive Officer and the
Company’s Chief Financial Officer, an evaluation of the effectiveness of the
design and operation of the Company’s disclosure controls and procedures (as
defined in Rules 13a-15(e) and 15d-15(e) under the Securities and Exchange Act
of 1934, as amended).  Based on their evaluation, the Company’s Chief
Executive Officer and its Chief Financial Officer concluded that, the Company’s
disclosure controls and procedures were not effective as of the end of the
period covered by this report, because of the material weakness identified as of
June 30, 2009.  Notwithstanding the existence of the material weakness
identified as of June 30, 2009, management has concluded that the consolidated
financial statements in this Form 10-Q fairly present, in all material respects,
the Company’s financial position, results of operations and cash flows for the
periods and dates presented.
  (b)
                CHANGES ININTERNAL CONTROL OVER
      FINANCIAL REPORTING
  There
were no changes in our internal control over financial reporting that occurred
during our last fiscal quarter that have materially affected, or are reasonably
likely to materially affect, our internal control over financial
reporting.
 
 The
Company is continuing the process of developing and implementing a remediation
plan to address the material weaknesses as described above, as more fully
discussed in the Form 10-K filing for the year ended June 30,
2009.







PART
II – OTHER INFORMATION
   Item
1.  Legal Proceedings
  As of
September 30, 2009 the Company is not involved in any legal proceedings other
than standard collection activities deemed to be in the normal course of
business.
  Item
1a.  Risk Factors
  No
additional significant risk factors have been identified beyond those discussed
in the Form 10-K filing for the year ended June 30, 2009.
  Item
2.  Unregistered Sales of Equity Securities and Use of
Proceeds
  None.
  Item
3.  Defaults Upon Senior Securities
  None.
  Item
4.  Submission of Matters to a Vote of Security Holders
  None.
  Item
5.  Other Information
  None.








OTHER
INFORMATION





None




Exhibits




31.1.
Rule 13a-14(a) certification


31.2.
Rule 13a-14(a) certification


32.1.
Rule Section 1350 certification





SIGNATURES




In
accordance with Section 13 or 15(d) of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.




NOW
      AUTO GROUP, INC.Date: Novemeber
      16, 2009
            By:
            /s/ Scott
      Miller,Scott
      Miller,Chief
      Executive Officer





NOW
      AUTO GROUP, INC.Date: Novemeber
      16, 2009
            By:
            /s/ Faith
      ForbisFaith
      ForbisChief
      Financial Officer, Principle Accounting Officer