UNITED STATES


SECURITIES AND EXCHANGE
COMMISSION


WASHINGTON, D.C.
20549





FORM 10-Q





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


EXCHANGE ACT OF 1934





For the quarter ended March31, 2010


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.


___ YesXNo


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


____ YesXNo


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 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 companyX_


(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)


___     YesXNo


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: $184,661 as of February
16, 2010





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


As of
February 16, 2010 there were 9,383,046 shares, net of treasury
shares,


of common stock
outstanding.





Item 1.
Financial Statements





NowAuto
      Group, IncCondensed
      Consolidated Balance SheetsAssetsMarch
      31,
                    
                    
                    June
      30,2010
                    
                    
                    2009(unaudited)
                    
                    
                    (audited)AssetsCash
      and Cash Equivalents
                    
                    $
                    58,126
                    
                    
                    
                    40,610Investment
      in sales-type leases, net
                    
                    
                    4,434,804
                    
                    
                    
                    3,578,326Inventory
                    
                    
                    87,367
                    
                    
                    
                    148,295Prepaid
      Expenses
                    
                    
                    57,802
                    
                    
                    
                    20,763Equipment
      - net
                    
                    
                    44,641
                    
                    
                    
                    69,882Total
      Assets
                    
                    $
                    4,682,740
                    
                    
                    
                    3,857,876Liabilities
      and Stockholders' DeficitLiabilitiesAccounts
      Payable
                    
                    $
                    421,109
                    
                    
                    
                    267,787Line
      of Credit
                    
                    
                    12,040,071
                    
                    
                    
                    9,996,319Accrued
      Payroll
                    
                    
                    91,570
                    
                    
                    
                    84,370Other
      Liabilities
                    
                    
                    5,359
                    
                    
                    
                    27,984Total
      Liabilities
                    
                    
                    12,558,109
                    
                    
                    
                    10,376,460Stockholders'
      DeficitCommon
      Stock, authorized 1,000,000,000 shares$0.001
      par value; Issued and OutstandingMarch
      31, 2010 and June 30, 2009 - 9,843,046 shares issued;9,383,046
      shares outstanding
                    
                    
                    9,843
                    
                    
                    
                    9,843Paid
      in Capital
                    
                    
                    4,649,931
                    
                    
                    
                    4,649,931Accumulated
      Deficit
                    
                    
                    (12,507,644
                    )
                    
                    
                    (11,150,859
                    )Less:
      treasury stock, 460,000 shares at cost asof
      March 31, 2010 and June 30, 2009respectively
                    
                    
                    (27,499
                    )
                    
                    
                    (27,499
                    )Total
      Stockholders' Deficit
                    
                    
                    (7,875,369
                    )
                    
                    
                    (6,518,584
                    )Total
      Liabilities and Stockholders' Deficit
                    
                    $
                    4,682,740
                    
                    
                    
                    3,857,876





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











NowAuto
      Group, IncCondensed
      Consolidated Statements of Operations(unaudited)3
      Months
                      
                      
                      3
      Months
                      
                      
                      9
      Months
                      
                      
                      9
      MonthsEnded
                      
                      
                      Ended
                      
                      
                      Ended
                      
                      
                      EndedMarch
      31,
                      
                      
                      March
      31,
                      
                      
                      March
      31,
                      
                      
                      March
      31,2010
                      
                      
                      2009
                      
                      
                      2010
                      
                      
                      2009As
      Restated
                      
                      
                      
                      
                      
                      As
      RestatedIncomeSales-type
      leases and other
                      
                      $
                      959,942
                      
                      
                      $
                      1,094,550
                      
                      
                      
                      3,291,954
                      
                      
                      $
                      3,049,452Finance
      Income
                      
                      
                      301,272
                      
                      
                      
                      244,123
                      
                      
                      
                      877,428
                      
                      
                      
                      757,097Total
      revenue
                      
                      
                      1,261,214
                      
                      
                      
                      1,338,673
                      
                      
                      
                      4,169,382
                      
                      
                      
                      3,806,549Cost
      of Goods Sold
                      
                      
                      478,175
                      
                      
                      
                      712,262
                      
                      
                      
                      1,852,805
                      
                      
                      
                      2,283,520Gross
      Profit
                      
                      
                      783,039
                      
                      
                      
                      626,411
                      
                      
                      
                      2,316,577
                      
                      
                      
                      1,523,029Gross
      Margin
                      
                      
                      62.1
                      %
                      
                      
                      46.8
                      %
                      
                      
                      55.6
                      %
                      
                      
                      40.0
                      %ExpensesSelling
      and Financing Costs
                      
                      
                      510,843
                      
                      
                      
                      645,281
                      
                      
                      
                      1,632,396
                      
                      
                      
                      1,642,963General
      and Administrative
                      
                      
                      400,408
                      
                      
                      
                      270,074
                      
                      
                      
                      1,269,076
                      
                      
                      
                      863,020Loss
      from Operations
                      
                      
                      (128,211
                      )
                      
                      
                      (288,944
                      )
                      
                      
                      (584,894
                      )
                      
                      
                      (982,954
                      )Interest
      Expense
                      
                      
                      263,204
                      
                      
                      
                      212,670
                      
                      
                      
                      771,891
                      
                      
                      
                      656,699Net
      Loss
                      
                      $
                      (391,415
                      )
                      
                      $
                      (501,615
                      )
                      
                      
                      (1,356,785
                      )
                      
                      $
                      (1,639,654
                      )Basic
      and Diluted Loss per Share
                      
                      $
                      (0.04
                      )
                      
                      $
                      (0.05
                      )
                      
                      $
                      (0.14
                      )
                      
                      $
                      (0.17
                      )Weighted
      Average Number ofCommon
      Shares Outstanding
                      
                      
                      9,383,046
                      
                      
                      
                      9,383,046
                      
                      
                      
                      9,383,046
                      
                      
                      
                      9,383,046





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











NowAuto
      Group, IncCondensed
      Consolidated Changes in Stockholders' DeficitPaid
      in
                        
                        
                        Treasury
                        
                        
                        Accumulated
                        
                        
                        TotalShares
                        
                        
                        Amount
                        
                        
                        Capital
                        
                        
                        Stock
                        
                        
                        Deficit
                        
                        
                        DeficitBalance
      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 (Unaudited)
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        
                        (1,356,785
                        )
                        
                        
                        (1,356,785
                        )Balance
      March 31, 2010 (Unaudited)
                        
                        
                        9,843,046
                        
                        
                        $
                        9,843
                        
                        
                        $
                        4,649,931
                        
                        
                        $
                        (27,499
                        )
                        
                        $
                        (12,507,644
                        )
                        
                        $
                        (7,875,369
                        )





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











NowAuto
      Group, IncCondensed
      Consolidated Statements of Cash FlowsUnaudited9
      Months
                        
                        
                        9
      MonthsEnded
                        
                        
                        EndedMarch
      31
                        
                        
                        March
      312010
                        
                        
                        2009(As
      restated)Operating
      ActivitiesNet
      Loss
                        
                        $
                        (1,356,785
                        )
                        
                        $
                        (1,639,654
                        )Adjustments
      to reconcile Net Loss to Net Cashused
      in Operating ActivitiesSignificant
      Non-Cash TransactionsDepreciation/Amortization
      Expense
                        
                        
                        15,352
                        
                        
                        
                        7,233Loss
      on disposal of fixed assets
                        
                        
                        14,691
                        
                        
                        
                        39,933Interest
      expense capitalized into principal
                        
                        
                        771,891
                        
                        
                        
                        656,600Provision
      for uncollectible receivables
                        
                        
                        (407,715
                        )
                        
                        
                        68,289Changes
      in assets and liabilitiesInvestment
      in sales-type leases
                        
                        
                        (448,763
                        )
                        
                        
                        (398,080
                        )Inventory
                        
                        
                        60,928
                        
                        
                        
                        373,280Prepaid
      expenses
                        
                        
                        (37,039
                        )
                        
                        
                        23,437Accounts
      payable
                        
                        
                        153,322
                        
                        
                        
                        (126,192
                        )Other
      liabilities
                        
                        
                        (15,425
                        )
                        
                        
                        (106,845
                        )107,242
                        
                        
                        
                        537,655Net
      cash used in operating activities
                        
                        
                        (1,249,543
                        )
                        
                        
                        (1,101,999
                        )Investing
      ActivitiesPurchase
      of Fixed Assets
                        
                        
                        (4,802
                        )
                        
                        
                        (31,092
                        )Net
      Cash provided by (used in) Investing Activities
                        
                        
                        (4,802
                        )
                        
                        
                        (31,092
                        )Financing
      ActivitiesProceeds
      from line of credit
                        
                        
                        3,671,202
                        
                        
                        
                        3,105,490Principal
      payments on line of credit
                        
                        
                        (2,399,341
                        )
                        
                        
                        (1,950,949
                        )Purchase
      of Treasury Stock
                        
                        
                        -
                        
                        
                        
                        (20,999
                        )Net
      cash provided by Financing Activities
                        
                        
                        1,271,861
                        
                        
                        
                        1,133,542Net
      Increase in Cash and Cash Equivalents
                        
                        
                        17,516
                        
                        
                        
                        451Cash,
      Beginning of Period
                        
                        
                        40,610
                        
                        
                        
                        32,508Cash,
      End of Period
                        
                        $
                        58,126
                        
                        
                        $
                        32,959Supplemental
      Information:Period
      interest
                        
                        $
                        -
                        
                        
                        $
                        99Income
      Taxes paid
                        
                        $
                        -
                        
                        
                        $
                        -





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








Condensed
Notes to Consolidated 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 consolidated balance sheet as of June 30, 2009, which has
been derived from audited financial statements and the unaudited interim
condensed financial statements as of March 31, 2010 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 March 31, 2010 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 to 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, 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.





We have
adopted the provisions of Accounting Standards Codification 740-10. As of March
31, 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 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 March 31, 2010 and 2009, amortization of deferred revenue
totaled $301,272 and $244,123, respectively. For the nine months ended March 31,
2010 and 2009, the total is $877,428 and $757,097 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 $16,885 and $26,533
for the quarters ended March 31, 2010 and 2009, respectively. For the nine
months ended March 31, 2010 and 2009, the total is $56,076 and $71,102
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 fiscal 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 March 31, 2010.





Stock Option
Plans





As of
March 31, 2010 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:








March
      31
                  
                  
                  June
      30,2010
                  
                  
                  2009(Unaudited)Total
      Minimum Lease Payment to be Received
                  
                  $
                  6,848,800
                  
                  
                  $
                  6,447,089Residual
      Value
                  
                  
                  405,355
                  
                  
                  
                  260,050Lease
      Carrying Value
                  
                  
                  7,254,155
                  
                  
                  
                  6,707,139Less:
      Allowance for Uncollectible Amounts
                  
                  
                  (1,080,186
                  )
                  
                  
                  (1,487,901
                  )Less:
      Unearned Income
                  
                  
                  (1,739,165
                  )
                  
                  
                  (1,640,912
                  )Net
      Investment in Sales-Type Leases
                  
                  $
                  4,434,804
                  
                  
                  $
                  3,578,326








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








Years
      Ending
                          
                          March
      31,
                            2010
                          
                          
                          June
      30, 2009(Unaudited)2011/2010
                          
                          $
                          3,835,328
                          
                          
                          $
                          3,610,3702012/2011
                          
                          
                          1,643,712
                          
                          
                          
                          1,547,3012013/2012
                          
                          
                          1,369,760
                          
                          
                          
                          1,289,418Total
                          
                          
                          6,848,800
                          
                          
                          
                          6,447,089








Note
4.  Property and Equipment





A summary
of equipment and accumulated depreciation is as follows:








March
      31,
                      2010
                    
                    
                    June
      30, 2009(Unaudited)Furniture,
      fixtures and equipment
                    
                    $
                    45,558
                    
                    
                    $
                    31,740Leasehold
      improvements
                    
                    
                    3,448
                    
                    
                    
                    27,323Computers
      and miscellaneous
                    
                    
                    47,321
                    
                    
                    
                    47,96496,327
                    
                    
                    
                    107,027Less:
      accumulated depreciation
                    
                    
                    (51,686
                    )
                    
                    
                    (37,145
                    )$
                    44,641
                    
                    
                    $
                    69,882





Note
5.  Income Taxes





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





March
      31,
                  
                  
                  June
      30,2010
                  
                  
                  2009(Unaudited)Deferred
      tax assetsNet
      operating losses carryforward
                  
                  $
                  3,800,000
                  
                  
                  $
                  3,257,000Less:
      valuation allowance
                  
                  
                  (3,800,000
                  )
                  
                  
                  (3,257,000
                  )Deferred
      tax assets
                  
                  $
                  -
                  
                  
                  $
                  -





At March
31, 2010, the Company has incurred accumulated net operating losses totaling
approximately 9,500,000, which are available to reduce federal and state taxable
income in future years.








Note
6. Contract Financing





As
of  March 31, 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 $12,500,000 limit. The interest rate is at the prime
lending rate plus 6% (9.25% at March 31, 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 March 31, 2010 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




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, 2009 to have a significant impact on the company’s results of
operations, financial position or cash flow.





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 and continued to sustain material losses through March 31, 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.





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





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 March 31, 2010 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 and Nine Months
Ended March 31, 2010  vs. Three Months and Nine Months Ended March 31,
2009





Total
revenue for the quarter ended March 31, 2010 was $1,261,214 versus revenue of
$1,338,673 for the quarter ended March 31, 2010. Total revenue for the nine
months ended March 31, 2010 and 2009 totaled $4,169,382 and $3,806,549
respectively. For the three months ended March 31, 2010 and 2009, average sales
price per unit increased from approximately $7,600 to $8,200 while unit volume
decreased by approximately 24%. The Company has been able to purchase units at
significantly better prices and therefore are able to offer a lower sales price.
Our customer base has increased due to the current economy increasing volume in
prior periods.





The
Company's gross profit as a percentage of sales during the quarter ending March
31, 2010 was 62.1% vs. 46.8% for the quarter ended March 31, 2009. There are two
reasons for the increase. The first is better capture and recovery of costs in
the sales price. Secondly, the number of active accounts thru March 31, 2010 has
increased 10% from the previous year thus increasing interest earnings on active
accounts.





During
the quarter ended March 31, 2010 the Company experienced an increase in bad
accounts of approximately 6% from the previous year. Bad debt losses for the
nine months ended March 31, 2010 declined 3% from the previous year. The Company
believes the year-to-date improvement in bad debt losses 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 as a percentage of revenue for the
three months ended March 31, 2010 increased over the prior year to 31.7% of
revenue from 20.2% due primarily to increased costs for labor, health insurance,
and professional fees.





Total
operating expenses were 72.3% of total revenues for the quarter ended March 31,
2010 versus 68.4% for the quarter ended March 31, 2009 and 69.6% of total
revenues for the nine months ended March 31, 2010 versus 65.8% for the nine
months ended March 31, 2009.. Most of the change is due to increased labor cost
including increased staff as well as health insurance and professional fees as
stated previously.





Financial
Condition


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





March
      31,
                  
                  
                  June
      30,2010
                  
                  
                  2009(Unaudited)Investments
      in Sale-type leases, net
                  
                  $
                  4,434,804
                  
                  
                  $
                  3,578,326Inventory
                  
                  
                  87,367
                  
                  
                  
                  148,295Equipment
                  
                  
                  44,641
                  
                  
                  
                  69,882Accounts
      Payable
                  
                  
                  421,109
                  
                  
                  
                  267,787Line
      of Credit
                  
                  
                  12,040,071
                  
                  
                  
                  9,996,319





Liquidity and Capital
Resources




The Company’s liabilities exceeded its
assets by approximately $7,900,000 as of March 31, 2010. The deterioration in
our financial condition was primarily the result of our net loss during the
operating period.






Cash and cash equivalents atMarch 31, 2010were approximately $58,000. Our
investment in sales-type leases increased by approximately $856,000during the nine months ended March 31,
2010.  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 March 31, 2010 was approximately
$87,000 versus $148,000 on June 30, 2009, a decrease of $61,000.  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 period was approximately $5,000, compared to net cash used in
investing activities in the nine months ended March 31, 2009 of $31,000. The
current period decrease was primarily due to a reduction in the purchase of
office equipment. Net cash provided by financing activities during the nine
months ended March 31, 2010 was approximately $1,300,000 versus approximately
$1,110,000 for the nine months ended March 31, 2009. This activity is a result
of the revolving credit agreement.




At March 31, 2010, the Company had
approximately a $12 million line of credit balance under a $12.5 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 March 31,
2010).  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 March 31, 2010.  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 March 31, 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.




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 33% of revenue that results
from financed sales or leases. 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
March 31, 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 7 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 weaknessesidentified as of June 30,
2009.  Notwithstanding the existence of the material
weaknessesidentified 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 ofMarch 31, 2010the 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.




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





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:
                By:
                /s/ Scott
      Miller,5/17/10
                Scott
      Miller,Chief
      Executive Officer







NOW
      AUTO GROUP, INC.Date:
                By:
                /s/ Faith
      Forbis5/17/10
                Faith
      ForbisChief
      Financial Officer, Principle Accounting Officer