UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549





FORM
10-Q





x QUARTER REPORT PURSUANT
TO SECTION 13 OR 15(d) OF THE SECURITIES


EXCHANGE
ACT OF 1934





For the
quarterly period ended September 30, 2010




Commission
File Number 000-50709





NOWAUTO GROUP,
INC.


(Exact
name of registrant as specified in its charter)





Nevada
            77-0594821(State
      or other jurisdiction of
            (I.R.S.
      EmployerIncorporation
      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





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 oNo




Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data 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).


oYes xNo





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 o
            Accelerated filer
      o
            Non-accelerated
      filer o
            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) oYes xNo





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 15, 2010 there were 9,383,046 shares, net of treasury shares, of common
stock outstanding.








PART
I – FINANCIAL INFORMATION





Item
1. Financial Statements





NowAuto
      Group, IncCondensed
      Consolidated Balance Sheets




September
      30,
            
            
            June
      30,2010
            
            
            2010(Unauditied)AssetsAssetsCash
      and Cash Equivalents
            
            $
            143,659
            
            
            
            54,551Investment
      in sales-type leases, net
            
            
            4,162,678
            
            
            
            4,085,136Inventory
            
            
            155,136
            
            
            
            118,365Prepaid
      Expenses
            
            
            55,568
            
            
            
            26,194Equipment
      - net
            
            
            40,137
            
            
            
            53,094Total
      Assets
            
            $
            4,557,178
            
            
            
            4,337,340Liabilities
      and Stockholders' DeficitLiabilitiesAccounts
      Payable
            
            $
            198,793
            
            
            
            253,553Line
      of Credit
            
            
            13,062,020
            
            
            
            12,327,572Accrued
      Payroll
            
            
            196,067
            
            
            
            129,523Other
      Liabilities
            
            
            24,712
            
            
            
            39,563Total
      Liabilities
            
            
            13,481,592
            
            
            
            12,750,211Stockholders'
      DeficitCommon
      Stock, authorized 1,000,000,000 shares$0.001 par value; 9,843,046
      shares Issued and 9,383,046 share outstanding as of September 30,
      2010Common
      Stock, authorized 1,000,000,000 shares $0.001 par value; 9,843,046 shares
      Issued and 9,383,046 share outstanding as of September 30, 2010 and June
      30, 2010
            
            
            9,843
            
            
            
            9,843Paid
      in Capital
            
            
            4,649,931
            
            
            
            4,649,931Accumulated
      Deficit
            
            
            (13,556,689
            )
            
            
            (13,045,146
            )(8,896,916
            )
            
            
            (8,385,372
            )Less:
      treasury stock, 460,000 shares at cost as of June 31, 2010 and June 30,
      2009respectively
            
            
            (27,499
            )
            
            
            (27,499
            )Total
      Stockholders' Deficit
            
            
            (8,924,415
            )
            
            
            (8,412,871
            )Total
      Liabilities and Stockholders' Deficit
            
            $
            4,557,178
            
            
            
            4,337,340




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





2




NowAuto
      Group, IncCondensed
      Consolidated Statements of Operations(unaudited)




3
      Months
              
              
              3
      MonthsEnded
              
              
              EndedSeptember
      30,
              
              
              September
      30,2010
              
              
              2009IncomeSales-type
      leases and other
              
              $
              821,039
              
              
              $
              1,146,232Finance
      Income
              
              
              280,650
              
              
              
              280,395Total
      revenue
              
              
              1,101,689
              
              
              
              1,426,627Cost
      of Goods Sold
              
              
              408,288
              
              
              
              692,487Gross
      Profit
              
              
              693,401
              
              
              
              734,140Gross
      Margin
              
              
              62.9
              %
              
              
              51.5
              %ExpensesSelling
      and Financing Costs
              
              
              563,883
              
              
              
              517,939General
      and Administrative
              
              
              357,530
              
              
              
              407,207921,413
              
              
              
              925,146Loss
      from Operations
              
              
              (228,012
              )
              
              
              (191,006
              )Interest
      Expense
              
              
              283,531
              
              
              
              251,696Net
      Loss
              
              $
              (511,543
              )
              
              $
              (442,702
              )Basic
      and Diluted Loss per Share
              
              $
              (0.05
              )
              
              $
              (0.05
              )Weighted
      Average Number ofCommon
      Shares Outstanding
              
              
              9,383,046
              
              
              
              9,383,046





The
accompanying notes are an integral part of these condensed consolidated
financial statements.
  3




NowAuto
      Group, IncCondensed
      Consolidated Statements of Cash FlowsAudited




3
      Months Ended
              
              
              3
      Months EndedSeptember
      30,
              
              
              September
      30,2010
              
              
              2009Operating
      ActivitiesNet
      Loss
              
              $
              (511,543
              )
              
              $
              (442,702
              )Adjustments
      to reconcile Net Loss to Net Cashused
      in Operating ActivitiesSignificant
      Non-Cash TransactionsDepreciation/Amortization
      Expense
              
              
              4,472
              
              
              
              6,118Loss
      on disposal of fixed assets
              
              
              -
              
              
              
              14,691Interest
      expense capitalized into principal
              
              
              283,531
              
              
              
              251,696Provision
      for uncollectible receivables
              
              
              30,510
              
              
              
              201,706Changes
      in assets and liabilitiesInvestment
      in sales-type leases
              
              
              (108,052
              )
              
              
              (594,104
              )Inventory
              
              
              (28,286
              )
              
              
              45,852Prepaid
      expenses
              
              
              (29,374
              )
              
              
              (38,797
              )Accounts
      payable
              
              
              (54,760
              )
              
              
              69,371Accrued
      Payroll
              
              
              66,544Other
      liabilities
              
              
              (14,851
              )
              
              
              1,135149,734
              
              
              
              (42,332
              )Net
      cash used in operating activities
              
              
              (361,809
              )
              
              
              (485,034
              )Investing
      ActivitiesPurchase
      of Fixed Assets
              
              
              -
              
              
              
              (4,705
              )Net
      Cash used in Investing Activities
              
              
              -
              
              
              
              (4,705
              )Financing
      ActivitiesProceeds
      from line of credit
              
              
              1,112,477
              
              
              
              1,361,390Principal
      payments on line of credit
              
              
              (661,560
              )
              
              
              (879,141
              )Purchase
      of Treasury Stock
              
              
              -
              
              
              
              -Net
      cash provided by Financing Activities
              
              
              450,917
              
              
              
              482,249Net
      Increase in Cash and Cash Equivalents
              
              
              89,108
              
              
              
              (7,490
              )Cash,
      Beginning of Period
              
              
              54,551
              
              
              
              40,610Cash,
      End of Period
              
              $
              143,659
              
              
              $
              33,120Supplemental
      Information:Period
      interest
              
              $
              -
              
              
              $
              -Income
      Taxes paid
              
              $
              -
              
              
              $
              -




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


4





NowAuto
Group, Inc.


Notes
to the Condensed Consolidated Financial Statements (Unaudited)





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. The company was originally formed as a Nevada Corporation and
has been operating for the past six years.





General





The
accompanying unaudited condensed consolidated financial statements have been
prepared in accordance with generally accepted accounting principles for interim
financial information and in accordance with the instructions to Form 10-Q.
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, 2010 are not necessarily indicative of the results that may be
expected for the year ending June 30, 2011. 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,
2010.





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, the residual value of
leases, 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.





While we
do have customers outside the Phoenix area, our customer base is concentrated in
Phoenix. Therefore, economic factors influencing this area will also affect
us.





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 initial maturities of
three months or less to be cash equivalents.




5





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 yearsComputer
      Equipment
              3
      to 5 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 payment is received from the customer. 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, if any, associated with unrecognized tax benefits, will be
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.




6





We have
adopted the provisions of Accounting Standards Codification 740-10. As of
September 30, 2010, we had no liabilities, included on the consolidated balance
sheets, associated with uncertain tax positions. We are still subject to
examination of our financial statements, primarily for the last three
years.





Revenue
Recognition





Sales-type
leases





The
Company’s financing agreements are classified as sales-type leases pursuant to
the provisions of Accounting Standards Codification - 840, 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 24 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 18% to 29% per annum.





For the
three months ended September 30, 2010 and 2009, amortization of deferred revenue
totaled $280,650 and $280,395, 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 $19,751 and $22,776
for the quarters ended September 30, 2010 and 2009, respectively.





Loss per
Share





The loss
per share (“EPS”) is presented in accordance with the provisions of Accounting
Standards Codification - 260. 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 the quarters ended September 30, 2010 and 2009, as the Company had losses
from operations during both periods and therefore the effect of all potential
common stock equivalents is antidilutive (reduces loss per
share).  There were no warrants or options outstanding as of September
30, 2010.





Stock Option
Plans





At
September 30, 2010 we had no employee stock ownership plan.




7





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.





Residual Value of
Leases





The
estimate of residual value is a percent of the market value of the vehicle at
the time of the lease.  The percentage is based on the terms and,
therefore, is intended to project the value of the vehicle at the end of the
lease.





Note
2. Non-Classified Balance Sheet





We are a
finance company, originating and financing all of our own leasing
contracts.  These contracts are 24 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
      30,2010
            
            
            June
      30,(Unaudited)
            
            
            2009Total
      Minimum Lease Payments to beReceived
            
            $
            6,511,170
            
            
            $
            6,584,183Residual
      Value
            
            
            628,783
            
            
            
            530,220Lease
      Carrying Value
            
            
            7,139,953
            
            
            
            7,114,403Less:
      Allowance for Uncollectible Amounts
            
            
            (1,472,188
            )
            
            
            (1,441,678
            )Less:
      Unearned Income
            
            
            (1,505,087
            )
            
            
            (1,587,589
            )Net
      Investment in Sales-Type Lease
            
            $
            4,162,678
            
            
            $
            4,085,136





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





Years
      Ending2011
            
            $
            1,914,8322012
            
            
            1,581,8182013
            
            
            666,028$
            4,162,678





8





Note
4.  Income Taxes





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





September
      30,2010
            
            June
      30,(Unaudited)
            
            2010Deferred
      tax assetsNet
      operating loss carryforward
            
            $
            4,220,000
            
            
            $
            4,014,700Less:
      valuation allowance
            
            
            (4,220,000
            )
            
            
            (4,014,700
            )Deferred
      tax assets
            
            $
            -
            
            
            $
            -





At
September 30, 2010, the Company has incurred accumulated net operating losses
totaling approximately 10,550,000, which are available to reduce federal and
state taxable income in future years through approximately 2030 for federal
income.




Note
5. Line of Credit





As of
September 30, 2010 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 $13,500,000 limit. The interest rate is at the prime
lending rate plus 6% (9.25% at September 30, 2010).





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, 2010 we are not in compliance with either of these covenants.
However we believe that we have a strong relationship with our lender and do not
anticipate, without any assurance, that any collection actions are
imminent.





Note
6.  The Effect of Recently Issued Accounting Standards





The
company does not expect the adoption of any accounting pronouncements issued
since those disclosed in the company’s annual report on Form 10-K for the year
ended June 30, 2010 to have a significant impact on the company’s results of
operations, financial position or cash flow.





Note
7. Statement of Cash Flows





Non-Cash Investing and
Financing Activities





The
Company recognized investing and financing activities that affected assets and
liabilities, but did not result in cash receipts or payments. These non-cash
activities are as follows:





During
the quarter ended September 30, 2010 the Company transferred two vehicles with a
total net book value of $8,485 from Property, Plant and Equipment to
Inventory.





Note
7. 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 and continued to sustain material losses through September 30, 2010.
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.




9





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. In addition, 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 on Form 10-K for the year ended June 30,
2010.


10


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 condensed
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") has been 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, 2010 the Company had two retail locations,
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 independently owned 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.





Our
primary focus is on sales and collections. We are responsible for our own
collections through our internal collection department, with the supervisory
involvement of the corporate office. In the past six months we have implemented
new contract terms including lower interest rates and shorter payback periods.
While in the short term these measures contributed to lower total sales, we
believe that our loan portfolio will reflect higher quality loans that
result in lower credit losses in the future. In addition, credit losses are
impacted, to some degree, by economic conditions in the market in which we
operate. In recent months, significant contractions in the local economy,
particularly the construction industry, combined with the resulting increase in
unemployment have had a negative effect on our market and business. While we
believe that the most significant factor affecting credit losses is the proper
execution of our business practices, we also believe that current economic
conditions have had a negative impact on both sales and collection
results.




11





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, 2010  vs. Three Months Ended September 30,
2009





Total
revenue for the quarter ended September 30, 2010 was $1,101,689 versus revenue
of $1,426,627 for the quarter ended September 30, 2009. The average sales price
per unit increased from approximately $8,900 to $9,500 for the same periods;
however, the increase in the unit price was offset by a decrease in unit sales
of approximately 34%. The increase to the unit price and the decline in the unit
volume were primarily caused by the current economy in the Phoenix area. The
supply of vehicles available for purchase has constricted, increasing our cost
and resulting in higher sales prices which has negatively affected
sales.  Sales volume has also been negatively affected by the poor
general economic conditions in the greater Phoenix area.





The
Company's gross profit as a percentage of sales during the quarter ending
September 30, 2010 was 62.9% vs. 51.5% for the quarter ended September 30, 2009.
The increase in our gross margin was primarily caused by the Company’s ongoing
efforts to capture the true costs of our vehicles through an improved tracking
process. Further, we have been able to offset the increase in the cost of our
vehicles discussed above through corresponding increases to the sales price of
the vehicles.





Total
operating expenses were 83.6% of total revenues for the quarter ended September
30, 2010 versus 64.8% for the quarter ended September 30, 2009 which includes
both selling and financing costs as well as general and administrative
expenses.





Selling
and financing costs, which primarily consist of sales and financing salaries and
bad debt expense, were 51.3% of total revenues for the quarter ended September
30, 2010 versus 36.3% for the quarter ended September 30,
2009.  Salary expense for sales and financing staff decreased by 15%
in the current quarter when compared to the prior quarter from approximately
$169,000 in 2009 to approximately $144,000 in 2010.  This was
primarily accomplished through the reduced commissions and bonuses as these are
directly related to sales.  However, the 14% decrease was not at a
level commensurate with the decline in revenues.  Additionally, bad
debt expense has increased in the current quarter by 25% from approximately
$285,000 in 2009 to approximately $355,000 in 2010.  While the Company
believes that proper execution (or lack thereof) of its business practices is
the most significant factor affecting credit losses, we also believe that
general economic conditions, including but not limited to rising unemployment
and troubled credit markets adversely affect collection efforts and have
resulted in higher than normal account losses.  Also contributing to
the increase was the improvement in vehicle cost identification process
(discussed above) which has led to more allocation of costs to selling and
financing versus cost of sales.





General
and administrative expenses, which primarily consist of administrative and
executive salaries, rent and other general corporate expenses, have decreased
from approximately $407,000 to approximately $358,000.  However, this
decrease was not at a level commensurate with the decline in sales as G&A
expenses were 32.4% of total revenues for the quarter ended September 30, 2010
versus 28.5% for the quarter ended September 30, 2009.  The overall
decrease in the expense was primarily from decreases in general corporate
expenditures due in part to closing a low profit lot.  However, these
decreases were partially offset by the improvement in vehicle cost
identification process (discussed above) which has led to more allocation of
costs to general and administrative expenses versus cost of sales.





Liquidity and Capital
Resources




The
Company’s liabilities exceeded its assets by approximately $8,900,000 and
$8,400,000 as of September 30, 2010 and September 30, 2009, respectively. The
deterioration in our financial condition was primarily the result of our net
loss during the current operating period which resulted in additional draws on
our line of credit to fund operations.




12




Cash and
cash equivalents at September 30, 2010 were approximately $144,000 versus
approximately $55,000 at June 30, 2010.




Cash used
by operating activities was approximately $361,000 for the quarter ended
September 30, 2010 which was a $124,000 improvement from cash used by operating
activities of approximately $485,000 for the quarter ended September 30,
2009.  Although the Company has continued to experience net losses
which have resulted in cash used from operations in both periods, an overall
decrease in operating activity resulted in the current period
improvement.  With the decline in sales the Company has not had
significant increases to its Investment in Sales-Type Lease balance to offset
the current period collection of prior period sales.




The
Company did not have cash used in or provided by investing activities during the
quarter ended September 30, 2010.  In the quarter ended September 30,
2009 cash used in investing activities was approximately $5,000. The current
period 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,
2010 was approximately $450,000 versus approximately $482,000 for the three
months ended September 30, 2009. This activity for both periods is a result of
additional draws on the Company’s line of credit.




At
September 30, 2010, the Company had approximately a $13 million line of credit
balance under a $13.5 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, 2010).  The line of credit
agreement has two covenants (see Note 5 to the accompanying condensed
consolidated financial statements), neither of which the Company is in
compliance with as of September 30, 2010.  However, management
believes they have a positive relationship with the independent finance company
and does not expect, although no assurance can be made, that any collection
activity is imminent 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, 2010, 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.  However, we cannot be certain that this financing
will be available.




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. 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, 2010.  However,
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.




Critical
Accounting Policies





Significant
accounting policies are described in the audited consolidated financial
statements and notes thereto included in our Report on Form 10-K for the year
ended June 30, 2010.  We believe our most critical accounting policies
and estimates relate to the determination of the allowance for doubtful
accounts, the realization of deferred financing revenue, the residual value of
leases, and the carrying value of inventory.  Due to the uncertainties
inherent in the estimation process and the significance of these items, it is at
least reasonably possible that the estimates in connection with these items
could be materially revised within the next year.




13





Off-Balance
Sheet Arrangements





As of
September 30, 2010, we did not have any relationship with unconsolidated
entities or financial partnerships, which other companies have been established
for the purpose of facilitating off-balance sheet arrangements. 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 6 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
4.  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 weaknesses identified as
of June 30, 2010.  Notwithstanding the existence of the material
weaknesses identified as of June 30, 2010, 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,
2010.


14




PART
II – OTHER INFORMATION




Item
1.  Legal Proceedings




As of
September 30, 2010 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, 2010.




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




None.




Item
3.  Defaults Upon Senior Securities




The
Company’s 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, 2010 we are not in compliance with either
of these covenants.  However we believe that we have a strong
relationship with our lender and do not anticipate, without any assurance, that
any collection actions are imminent.




Item
4.  [Removed and Reserved]




Item
5.  Other Information




None.




Item
6. Exhibits




3.1.
Consent of Independent Registered Public Accounting Firm




31.1.
Rule 13a-14(a) certification




31.2.
Rule 13a-14(a) certification




32.1.
Rule Section 1350 certification




15




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:11/15/10
              By:
              /s/ Scott
      Miller,Scott
      Miller,Chief
      Executive OfficerNOW
      AUTO GROUP, INC.Date: 11/15/10
              By:
              /s/ Faith
      ForbisFaith
      ForbisChief
      Financial Officer, Principle Accounting Officer




16