##### Table of Contents



United States Securities and Exchange Commission
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 For the Quarter Ended September 30, 2010
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 Commission File No. 0-12185
 
 
 NGAS Resources, Inc.
 (Exact name of registrant as specified in its charter)
 
 Province of British Columbia
(State or other jurisdiction of incorporation)
    
    Not Applicable
(I.R.S. Employer Identification No.)120 Prosperous Place, Suite 201
Lexington, Kentucky
(Address of principal executive offices)
    
    40509-1844
(Zip Code)
 (859) 263-3948
Registrants telephone number, including area code:
 
 þ o
 o þ
  Large accelerated filer o
    
    Accelerated filer þ
    
    Non-accelerated filer o
    
    Smaller Reporting Company o(Do not check if a smaller reporting company)
 o þ




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##### 



NGAS Resources, Inc.  120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
 Form 10-Q  September 30, 2010
 Table of Contents
 PagePart I Financial InformationItem 1 Financial Statements:Condensed Consolidated Balance Sheets 
September 30, 2010 (unaudited) and December 31, 2009
    
    
    1Condensed Consolidated Statement of Operations 
Three months ended September 30, 2010 and 2009
    
    
    2Condensed Consolidated Statement of Cash Flows 
Three months ended September 30, 2010 and 2009
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    21Item 4 Controls and Procedures
    
    
    22Part II Other InformationItem 1A Risk Factors
    
    
    22Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    22Item 6 Exhibits
    
    
    22EX-31.1EX-31.2EX-32.1
 
 Additional Information
 NGAS Company we our us NGL Dth Mcf Mcfe Mmcf Mmcf/d Bcf EUR




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##### Table of Contents



NGAS Resources, Inc.
 
 CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSCurrent assets:Cash
    
    $
    5,105,017
    
    
    $
    4,332,650Accounts receivable
    
    
    5,535,965
    
    
    
    7,277,311Note receivable
    
    
    6,632,906
    
    
    
    6,247,880Prepaid expenses and other current assets
    
    
    697,614
    
    
    
    633,884Loans to related parties
    
    
    75,141
    
    
    
    75,679Total current assets
    
    
    18,046,643
    
    
    
    18,567,404Bonds and deposits
    
    
    258,945
    
    
    
    258,695Note receivable
    
    
    1,742,524
    
    
    
    6,766,451Oil and gas properties
    
    
    175,109,611
    
    
    
    182,189,679Property and equipment
    
    
    9,590,271
    
    
    
    5,113,093Loans to related parties
    
    
    171,429
    
    
    
    171,429Deferred financing costs
    
    
    837,908
    
    
    
    1,235,705Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    206,070,508
    
    
    $
    214,615,633LIABILITIESCurrent liabilities:Accounts payable
    
    $
    3,016,509
    
    
    $
    5,587,290Accrued liabilities
    
    
    892,858
    
    
    
    938,829Long-term debt, current portion
    
    
    49,892,193
    
    
    
    32,534,084Fair value of derivative financial instruments
    
    
    52,306
    
    
    
    111Customer drilling deposits
    
    
    2,511,856
    
    
    
    5,581,877Total current liabilities
    
    
    56,365,722
    
    
    
    44,642,191Deferred compensation
    
    
    1,112,198
    
    
    
    651,287Deferred income taxes
    
    
    10,289,262
    
    
    
    12,559,549Long-term debt
    
    
    15,256,975
    
    
    
    40,949,836Fair value of derivative financial instruments
    
    
    146,668
    
    
    
    Other long-term liabilities
    
    
    4,292,132
    
    
    
    3,962,254Total liabilities
    
    
    87,462,957
    
    
    
    102,765,117SHAREHOLDERS EQUITYCapital stockAuthorized:5,000,000 Preferred shares100,000,000 Common sharesIssued:42,530,766 Common shares (2009  30,484,361)
    
    
    132,034,607
    
    
    
    117,142,63921,100 Common shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in capital  options and warrants
    
    
    4,735,629
    
    
    
    4,467,246To be issued:9,185 Common shares
    
    
    45,925
    
    
    
    45,925136,792,531
    
    
    
    121,632,180Deficit
    
    
    (18,184,980
    )
    
    
    (9,781,664
    )Total shareholders equity
    
    
    118,607,551
    
    
    
    111,850,516Total liabilities and shareholders equity
    
    $
    206,070,508
    
    
    $
    214,615,633
 See accompanying notes.
 1




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009REVENUEContract drilling
    
    $
    4,555,485
    
    
    $
    3,831,250
    
    
    $
    15,667,095
    
    
    $
    16,328,000Oil and gas production
    
    
    5,616,269
    
    
    
    6,239,324
    
    
    
    17,644,686
    
    
    
    20,198,187Gas transmission, compression
and processing
    
    
    784,750
    
    
    
    1,123,921
    
    
    
    2,835,327
    
    
    
    6,528,132Total revenue
    
    
    10,956,504
    
    
    
    11,194,495
    
    
    
    36,147,108
    
    
    
    43,054,319DIRECT EXPENSESContract drilling
    
    
    3,196,824
    
    
    
    2,913,418
    
    
    
    11,574,230
    
    
    
    12,328,110Oil and gas production
    
    
    3,988,755
    
    
    
    2,658,985
    
    
    
    11,007,455
    
    
    
    7,598,044Gas transmission, compression
and processing
    
    
    91,902
    
    
    
    960,879
    
    
    
    512,452
    
    
    
    2,955,204Total direct expenses
    
    
    7,277,481
    
    
    
    6,533,282
    
    
    
    23,094,137
    
    
    
    22,881,358OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    2,479,006
    
    
    
    2,601,514
    
    
    
    7,811,382
    
    
    
    8,404,519Options, warrants and deferred compensation
    
    
    226,066
    
    
    
    285,309
    
    
    
    729,295
    
    
    
    1,022,774Depreciation, depletion and amortization
    
    
    3,388,841
    
    
    
    3,304,139
    
    
    
    9,906,178
    
    
    
    10,610,630Interest expense
    
    
    1,603,067
    
    
    
    2,196,091
    
    
    
    5,073,965
    
    
    
    6,892,550Interest income
    
    
    (191,430
    )
    
    
    (52,698
    )
    
    
    (667,686
    )
    
    
    (67,708
    )Loss (gain) on sale of assets
    
    
    209,206
    
    
    
    (3,356,177
    )
    
    
    218,709
    
    
    
    (3,369,082
    )Fair value loss (gain) on
derivative financial instruments
    
    
    (359,398
    )
    
    
    4,847
    
    
    
    337,195
    
    
    
    (4,477
    )Refinancing costs
    
    
    
    
    
    
    
    
    
    
    625,344
    
    
    
    Other, net
    
    
    (91,228
    )
    
    
    292,073
    
    
    
    (307,808
    )
    
    
    600,896Total other expenses
    
    
    7,264,130
    
    
    
    5,275,098
    
    
    
    23,726,574
    
    
    
    24,090,102LOSS BEFORE INCOME TAXES
    
    
    (3,585,107
    )
    
    
    (613,885
    )
    
    
    (10,673,603
    )
    
    
    (3,917,141
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    (1,075,874
    )
    
    
    508,116
    
    
    
    (2,270,287
    )
    
    
    571,357NET LOSS
    
    $
    (2,509,233
    )
    
    $
    (1,122,001
    )
    
    $
    (8,403,316
    )
    
    $
    (4,488,498
    )NET LOSS PER SHAREBasic
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.23
    )
    
    $
    (0.16
    )Diluted
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.23
    )
    
    $
    (0.16
    )SHARES OUTSTANDINGBasic
    
    
    41,044,918
    
    
    
    28,873,105
    
    
    
    36,709,848
    
    
    
    27,508,925Diluted
    
    
    41,044,918
    
    
    
    28,873,105
    
    
    
    36,709,848
    
    
    
    27,508,925
 See accompanying notes.
 2




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009OPERATING ACTIVITIESNet loss
    
    $
    (2,509,233
    )
    
    $
    (1,122,001
    )
    
    $
    (8,403,316
    )
    
    $
    (4,488,498
    )Adjustments to reconcile net loss to net cashprovided by (used in) operating activities:Incentive bonus paid in common shares
    
    
    80,002
    
    
    
    68,001
    
    
    
    80,002
    
    
    
    426,251Options, warrants and deferred compensation
    
    
    226,066
    
    
    
    285,309
    
    
    
    729,295
    
    
    
    1,022,774Depreciation, depletion and amortization
    
    
    3,388,841
    
    
    
    3,304,139
    
    
    
    9,906,178
    
    
    
    10,610,630Loss (gain) on sale of assets
    
    
    209,206
    
    
    
    (3,356,177
    )
    
    
    218,709
    
    
    
    (3,369,082
    )Fair value loss (gain) loss on
derivative financial instruments
    
    
    (359,398
    )
    
    
    4,847
    
    
    
    337,195
    
    
    
    (4,477
    )Accretion of debt discount
    
    
    640,674
    
    
    
    1,004,682
    
    
    
    2,093,135
    
    
    
    2,869,276Deferred income taxes (benefit)
    
    
    (1,075,874
    )
    
    
    508,116
    
    
    
    (2,270,287
    )
    
    
    571,357Changes in assets and liabilitiesAccounts receivable
    
    
    37,767
    
    
    
    311,360
    
    
    
    1,741,346
    
    
    
    5,077,373Prepaid expenses and other current assets
    
    
    (269,700
    )
    
    
    (353,376
    )
    
    
    (63,730
    )
    
    
    (328,971
    )Accounts payable
    
    
    (868,681
    )
    
    
    (144,533
    )
    
    
    (2,570,781
    )
    
    
    (7,269,488
    )Accrued liabilities
    
    
    (68,916
    )
    
    
    (46,040
    )
    
    
    (45,971
    )
    
    
    (56,024
    )Deferred compensation
    
    
    
    
    
    
    (2,094,700
    )
    
    
    
    
    
    
    (2,209,700
    )Customers drilling deposits
    
    
    279,941
    
    
    
    1,923,271
    
    
    
    (3,070,021
    )
    
    
    358,716Other long-term liabilities
    
    
    99,025
    
    
    
    155,091
    
    
    
    329,878
    
    
    
    477,917Net cash provided by (used in)
operating activities
    
    
    (190,280
    )
    
    
    444,989
    
    
    
    (988,368
    )
    
    
    3,688,054INVESTING ACTIVITIESProceeds from sale of assets
    
    
    1,646,534
    
    
    
    35,857,613
    
    
    
    5,444,311
    
    
    
    35,911,646Purchase of property and equipment
    
    
    (64,413
    )
    
    
    (195,261
    )
    
    
    (5,922,029
    )
    
    
    (2,683,061
    )Change in bonds and deposits
    
    
    (250
    )
    
    
    5,000
    
    
    
    (250
    )
    
    
    15,203Change in oil and gas properties, net
    
    
    (703,023
    )
    
    
    (3,841,799
    )
    
    
    (1,840,808
    )
    
    
    (7,918,894
    )Net cash provided by (used in)
investing activities
    
    
    878,848
    
    
    
    31,825,553
    
    
    
    (2,318,776
    )
    
    
    25,324,894FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    
    
    
    
    890
    
    
    
    538
    
    
    
    3,164Proceeds from issuance of common shares
    
    
    
    
    
    
    6,089,476
    
    
    
    4,701,968
    
    
    
    6,089,476Payments of deferred financing costs
    
    
    (2,499
    )
    
    
    (10,882
    )
    
    
    (166,773
    )
    
    
    (383,442
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    
    
    
    
    4,480,000
    
    
    
    Payments of long-term debt
    
    
    (65,494
    )
    
    
    (45,021,578
    )
    
    
    (4,936,222
    )
    
    
    (34,733,578
    )Net cash provided by (used in)
financing activities
    
    
    (67,993
    )
    
    
    (38,942,094
    )
    
    
    4,079,511
    
    
    
    (29,024,380
    )Change in cash
    
    
    620,575
    
    
    
    (6,671,552
    )
    
    
    772,367
    
    
    
    (11,432
    )Cash, beginning of period
    
    
    4,484,442
    
    
    
    7,642,019
    
    
    
    4,332,650
    
    
    
    981,899Cash, end of period
    
    $
    5,105,017
    
    
    $
    970,467
    
    
    $
    5,105,017
    
    
    $
    970,467SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    997,811
    
    
    $
    1,204,354
    
    
    $
    2,608,802
    
    
    $
    4,026,548Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 See accompanying notes.
 3




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##### Table of Contents



NGAS Resources, Inc.
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1 Summary of Significant Accounting Policies
 General. NGAS GAAP annual report
 Basis of Consolidation. NGAS Production Sentra NGAS Securities we our us
 Estimates.
 Convertible Note Restructuring. 2005 notes 2010 notes
 Subsequent Events.
 Comprehensive Income and Loss.
 Note 2  Recently Adopted Accounting Standards
  Note 3 Oil and Gas Properties
 DD&A
 4




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##### Table of Contents



September 30,
    
    
    December 31,2010
    
    
    2009Proved oil and gas properties
    
    $
    203,725,293
    
    
    $
    203,670,153Unproved oil and gas properties
    
    
    6,140,187
    
    
    
    5,441,933Gathering facilities and well equipment
    
    
    16,154,695
    
    
    
    15,411,788226,020,175
    
    
    
    224,523,874Accumulated DD&A
    
    
    (50,910,564
    )
    
    
    (42,334,195
    )Net oil and gas properties and equipment
    
    $
    175,109,611
    
    
    $
    182,189,679
 Note 4  Other Property and Equipment
  September 30,
    
    
    December 31,2010
    
    
    2009Land
    
    $
    12,908
    
    
    $
    12,908Building and improvements
    
    
    5,664,265
    
    
    
    64,265Machinery and equipment
    
    
    5,414,634
    
    
    
    5,866,853Office furniture and fixtures
    
    
    175,862
    
    
    
    175,862Computer and office equipment
    
    
    717,130
    
    
    
    688,261Vehicles
    
    
    1,735,852
    
    
    
    1,810,06413,720,651
    
    
    
    8,618,213Accumulated depreciation
    
    
    (4,130,380
    )
    
    
    (3,505,120
    )Net other property and equipment
    
    $
    9,590,271
    
    
    $
    5,113,093
 Note 5  Note Receivable
 Appalachian Gathering System Seminole Energy
 Note 6  Loans to Related Parties
  Note 7  Deferred Financing Costs
  5




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##### Table of Contents



Note 8  Goodwill
  Note 9  Customer Drilling Deposits
  Note 10  Long-Term Debt
 Convertible Notes. VWAP
 ASC Debt Derivatives and Hedging
 Credit Facility.
  Building Loan.
 6




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##### Table of Contents



Installment Loan.
 Acquisition Debt.
 Total Long-Term Debt and Maturities.
 September 30,
    
    
    December 31,Principal Amount Outstanding
    
    2010
    
    
    2009Total long-term debt (including current portion)
    
    $
    65,149,168
    
    
    $
    73,483,920Less current portion
    
    
    49,892,193
    
    
    
    32,534,084
    (1)Total long-term debt
    
    $
    15,256,975
    
    
    $
    40,949,836Debt Maturities(1)Remainder of 2010
    
    $
    3,092,8792011
    
    
    50,252,6152012
    
    
    7,533,0242013
    
    
    182,0292014
    
    
    189,9072015 and thereafter
    
    
    3,898,714
 
 (1)
    
    Excludes allocations of $2,047,378 for the unaccreted debt discount on the 2010 notes at
September 30, 2010 and $4,555,513 for the unaccreted debt discount on the 2005 notes at
December 31, 2009. Note 11  Capital Stock
 Preferred Shares.
 Common Shares.
 Common Shares Issued
    
    Shares
    
    
    AmountBalance, December 31, 2008
    
    
    26,543,646
    
    
    $
    110,626,912Issued in underwritten offering
    
    
    3,480,000
    
    
    
    6,089,476Issued as stock awards under incentive plan
    
    
    460,715
    
    
    
    426,251Balance, December 31, 2009
    
    
    30,484,361
    
    
    
    117,142,639Issued in convertible note restructuring
    
    
    3,037,151
    
    
    
    5,188,333Issued in underwritten offering
    
    
    3,960,000
    
    
    
    4,701,968Issued in payment of amortization installments under 2010 notes
    
    
    4,973,062
    
    
    
    4,921,665Issued as stock awards under incentive plan
    
    
    76,192
    
    
    
    80,002Balance, September 30, 2010
    
    
    42,530,766
    
    
    $
    132,034,607
 7




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##### Table of Contents



Paid In Capital  Options and Warrants
    
    
    
    
    
    AmountBalance, December 31, 2008
    
    
    
    
    
    $
    3,774,600Recognized
    
    
    
    
    
    
    692,646Balance, December 31, 2009
    
    
    
    
    
    
    4,467,246Recognized
    
    
    
    
    
    
    268,383Balance, September 30, 2010
    
    
    
    
    
    $
    4,735,629
 Common Shares to be Issued
    
    Shares
    
    
    AmountBalance, September 30, 2010 and December 31, 2009
    
    
    9,185
    
    
    $
    45,925
 Stock Options and Awards.
 Weighted AverageStock Options
    
    Issued
    
    
    Exercisable
    
    
    Exercise PriceBalance, December 31, 2008
    
    
    4,613,668
    
    
    
    1,413,668
    
    
    $
    3.95Vested
    
    
    
    
    
    
    1,225,000
    
    
    
    4.69Expired
    
    
    (740,000
    )
    
    
    (740,000
    )
    
    
    4.06Balance, December 31, 2009
    
    
    3,873,668
    
    
    
    1,898,668
    
    
    
    3.92Vested
    
    
    
    
    
    
    317,500
    
    
    
    6.53Expired
    
    
    (1,553,668
    )
    
    
    (1,553,668
    )
    
    
    5.37Forfeited
    
    
    (75,000
    )
    
    
    (27,500
    )
    
    
    3.71Balance, September 30, 2010
    
    
    2,245,000
    
    
    
    635,000
    
    
    $
    2.93
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AveragePrice
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    Exerciseor Range
    
    Number
    
    
    Life (years)
    
    
    Price
    
    
    Number
    
    
    Price$1.51
    
    
    1,610,000
    
    
    
    4.61
    
    
    $
    1.51
    
    
    
    
    
    
    $
    6.51  7.64
    
    
    635,000
    
    
    
    1.57
    
    
    
    6.53
    
    
    
    635,000
    
    
    
    6.532,245,000
    
    
    
    
    
    
    
    
    
    
    
    635,000
  Common Stock Purchase Warrants.
 8




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##### Table of Contents



Note 12   Loss Per Share
 EPS Earnings per Share
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net loss as reported for basic EPS
    
    $
    (2,509,233
    )
    
    $
    (1,122,001
    )
    
    $
    (8,403,316
    )
    
    $
    (4,488,498
    )Adjustments to loss for diluted EPS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for diluted EPS
    
    $
    (2,509,233
    )
    
    $
    (1,122,001
    )
    
    $
    (8,403,316
    )
    
    $
    (4,488,498
    )Denominator:Weighted average shares for basic
and diluted EPS
    
    
    41,044,918
    
    
    
    28,873,105
    
    
    
    36,709,848
    
    
    
    27,508,925Basic and diluted EPS
    
    $
    (0.06
    )
    
    $
    (0.04
    )
    
    $
    (0.23
    )
    
    $
    (0.16
    )
 Note 13  Related Party Transactions
  Note 14  Segment Information
 egment Reporting.
 Note 15  Commitments
 Operating Lease Obligations.
 Future Lease ObligationsRemainder of 2010
    
    $
    579,8622011
    
    
    1,853,8372012
    
    
    616,0872013
    
    
    77,4952014 and thereafter
    
    
    31,959Total
    
    $
    3,159,240
 Gas Gathering and Sales Commitments.
 9




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##### Table of Contents



Note 16  Subsequent Events
 Convertible Note Amortization
 Credit Facility Noncompliance.
 10




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##### Table of Contents



NGAS Resources, Inc.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
 General
  Capital Structure
 Appalachian
Gathering System 2010 notes
 Business Strategy
  
    
    Organic Growth with Reduced Capital Spending. We have addressed the
challenging conditions in our industry by funding our capital budget from cash flow and
opening up our core properties to joint development with industry partners and
sponsored drilling partnerships. Our 2009 drilling partnership raised over $19 million
for participation in 22 horizontal wells. We have a 20% interest in that program,
increasing to 35% after payout. This enabled us to meet our near-term drilling
commitments and objectives with a reduced budget of $12 million in 2009. We have
retained this structure for participation by our current drilling partnership in up to
57 horizontal wells on our core Appalachian properties through the first quarter of
2011, while continuing to maintain our capital expenditures in line with our operating
cash flows.
 
    
    Horizontal Drilling Advances. Horizontal drilling has enhanced the value
proposition of our properties by substantially increasing recovery volumes and rates at
dramatically lower finding costs. The ability to drill extended lateral legs also
allows us to develop areas that would otherwise be inaccessible due to challenging
terrain or coal mining activities. Most of our horizontals traverse one or more
sections of the Devonian shale formation, which blankets our Appalachian properties at
an average depth of 4,500 feet, or the New Albany shale in the Illinois Basin at depths
from 2,600 to 2,800 feet. By extending the laterals and increasing the number of
completion stages, we continue to improve the performance of our horizontal shale
wells. We have also drilled our first two horizontals through the Weir sandstone
formation in the Roaring Fork field. Although the wells are at the beginning stages of
production, we are very encouraged by initial results We have over 70,000 undeveloped
acres that are prospective for this play and plan to drill additional Weir horizontals
at an accelerated pace, with a view to shifting more of our production to crude oil.
 11




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##### Table of Contents




    
    Infrastructure Position. We operate the Appalachian Gathering System and
have firm capacity rights for 30 Mmcf/d of controlled gas through the system, which
interconnects to Spectra Energy Partners East Tennessee Interstate pipeline network.
This ensures long-term deliverability from our connected fields, representing over 90%
of our Appalachian production. Our operating and capacity rights also preserve our
competitive advantages in assembling additional undeveloped acreage around our core
properties in the region as coal mining operations wind down. The sale of the
Appalachian Gathering System did not include our 50% interest in a processing plant for
extracting natural gas liquids (NGL) from system throughput at its delivery point in
Rogersville, Tennessee. This is within 5.5 miles of an 880-megawatt gas-fired power
plant under construction by the Tennessee Valley Authority, which will substantially
increase regional demand when completed next year.
 Drilling Operations
 Geographic Focus EUR
 Horizontal Air Drilling
 Drilling Results
 Development Wells
    
    
    Exploratory WellsProductive
    
    
    Dry
    
    
    Productive
    
    
    DryGross
    
    
    Net
    
    
    Gross
    
    
    Gross
    
    
    GrossYear ended December 31, 2009Vertical
    
    
    10
    
    
    
    1.6972
    
    
    
    
    
    
    
    
    
    
    
    Horizontal
    
    
    24
    
    
    
    5.0588
    
    
    
    
    
    
    
    
    
    
    
    Subtotal(1)
    
    
    34
    
    
    
    6.7560
    
    
    
    
    
    
    
    
    
    
    
    Nine months ended September 30, 2010Vertical
    
    
    1
    
    
    
    1.0000
    
    
    
    
    
    
    
    
    
    
    
    Horizontal
    
    
    22
    
    
    
    3.5000
    
    
    
    
    
    
    
    Subtotal
    
    
    23
    
    
    
    4.5000
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    57
    
    
    
    11.2650
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Includes 9 gross (1.9560 net) non-operated wells. Participation Rights
 12




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##### Table of Contents



Drilling Partnerships
 Benefits
 Structure
 Producing Activities
 Regional Advantages
 Liquids Extraction
 Production Profile, Volumes and Prices
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year EndedSeptember 30,
    
    
    September 30,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2009Production volumes:Natural gas (Mcf)
    
    
    652,780
    
    
    
    816,393
    
    
    
    2,028,711
    
    
    
    2,521,223
    
    
    
    3,321,146Oil (Bbl)
    
    
    12,769
    
    
    
    11,887
    
    
    
    36,886
    
    
    
    37,313
    
    
    
    48,737Natural gas liquids (gallons)
    
    
    1,540,637
    
    
    
    1,458,541
    
    
    
    3,489,610
    
    
    
    3,895,199
    
    
    
    4,858,044Equivalents (Mcfe)
    
    
    844,944
    
    
    
    997,103
    
    
    
    2,511,748
    
    
    
    3,037,238
    
    
    
    3,977,920Average sales prices:Natural gas (per Mcf)
    
    $
    5.74
    
    
    $
    5.67
    
    
    $
    5.98
    
    
    $
    6.31
    
    
    $
    6.17Oil (per Bbl)
    
    
    69.12
    
    
    
    60.76
    
    
    
    70.52
    
    
    
    48.03
    
    
    
    52.63Natural gas liquids (per gallon)
    
    
    0.64
    
    
    
    0.61
    
    
    
    0.83
    
    
    
    0.64
    
    
    
    0.73
 13




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##### Table of Contents



Future Gas Sales Contracts
 Results of Operations  Three Months Ended September 30, 2010 and 2009
 Revenues
 Three Months Ended September 30,% of
    
    
    
    
    
    
    %Revenue:
    
    2010
    
    
    Revenue
    
    
    2009
    
    
    ChangeContract drilling
    
    $
    4,555,485
    
    
    
    42
    %
    
    $
    3,831,250
    
    
    
    19
    %Oil and gas production
    
    
    5,616,269
    
    
    
    51
    
    
    
    6,239,324
    
    
    
    (10
    )Gas transmission, compression and processing
    
    
    784,750
    
    
    
    7
    
    
    
    1,123,921
    
    
    
    (30
    )Total
    
    $
    10,956,504
    
    
    
    100
    %
    
    $
    11,194,495
    
    
    
    (2
    )
     14




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##### Table of Contents



Expenses
 Three Months Ended September 30,Direct Expenses:
    
    2010
    
    
    Margin
    
    
    2009
    
    
    MarginContract drilling
    
    $
    3,196,824
    
    
    
    30
    %
    
    $
    2,913,418
    
    
    
    24
    %Oil and gas production
    
    
    3,988,755
    
    
    
    29
    
    
    
    2,658,985
    
    
    
    57Gas transmission, compression and processing
    
    
    91,902
    
    
    
    88
    
    
    
    960,879
    
    
    
    15Total direct expenses
    
    $
    7,277,481
    
    
    
    34
    
    
    $
    6,533,282
    
    
    
    42
 Other Expenses (Income):
    
    
    
    
    
    % Revenue
    
    
    
    
    
    
    % RevenueSelling, general and administrative
    
    $
    2,479,006
    
    
    
    23
    %
    
    $
    2,601,514
    
    
    
    23
    %Options, warrants and deferred compensation
    
    
    226,066
    
    
    
    2
    
    
    
    285,309
    
    
    
    3Depreciation, depletion and amortization
    
    
    3,388,841
    
    
    
    31
    
    
    
    3,304,139
    
    
    
    30Interest expense, net of interest income
    
    
    1,411,637
    
    
    
    13
    
    
    
    2,143,393
    
    
    
    19Loss (gain) on sale of assets
    
    
    209,206
    
    
    
    2
    
    
    
    (3,356,177
    )
    
    
    N/AFair value loss (gain) on derivative financial instruments
    
    
    (359,398
    )
    
    
    N/A
    
    
    
    4,847
    
    
    
    Other, net
    
    
    (91,228
    )
    
    
    N/A
    
    
    
    292,073
    
    
    
    3Total other expenses
    
    $
    7,264,130
    
    
    
    
    
    
    $
    5,275,098
    SG&A
  DD&A
 15




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##### Table of Contents



Net Loss and EPS EPS
 Results of Operations  Nine Months Ended September 30, 2010 and 2009
 Revenues
 Nine Months Ended September 30,% of
    
    
    
    
    
    
    %Revenue:
    
    2010
    
    
    Revenue
    
    
    2009
    
    
    ChangeContract drilling
    
    $
    15,667,095
    
    
    
    43
    %
    
    $
    16,328,000
    
    
    
    (4
    )%Oil and gas production
    
    
    17,644,686
    
    
    
    49
    
    
    
    20,198,187
    
    
    
    (13
    )Gas transmission, compression and processing
    
    
    2,835,327
    
    
    
    8
    
    
    
    6,528,132
    
    
    
    (57
    )Total
    
    $
    36,147,108
    
    
    
    100
    %
    
    $
    43,054,319
    
    
    
    (16
    )
    Expenses
 16




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##### Table of Contents



Nine Months Ended September 30,Direct Expenses:
    
    2010
    
    
    Margin
    
    
    2009
    
    
    MarginContract drilling
    
    $
    11,574,230
    
    
    
    26
    %
    
    $
    12,328,110
    
    
    
    24
    %Oil and gas production
    
    
    11,007,455
    
    
    
    38
    
    
    
    7,598,044
    
    
    
    62Gas transmission, compression and processing
    
    
    512,452
    
    
    
    82
    
    
    
    2,955,204
    
    
    
    55Total direct expenses
    
    $
    23,094,137
    
    
    
    36
    
    
    $
    22,881,358
    
    
    
    47
 Other Expenses (Income):
    
    
    
    
    
    % Revenue
    
    
    
    
    
    
    % RevenueSelling, general and administrative
    
    $
    7,811,382
    
    
    
    22
    %
    
    $
    8,404,519
    
    
    
    20
    %Options, warrants and deferred compensation
    
    
    729,295
    
    
    
    2
    
    
    
    1,022,774
    
    
    
    2Depreciation, depletion and amortization
    
    
    9,906,178
    
    
    
    27
    
    
    
    10,610,630
    
    
    
    25Interest expense, net of interest income
    
    
    4,406,279
    
    
    
    12
    
    
    
    6,824,842
    
    
    
    16Loss (gain) on sale of assets
    
    
    218,709
    
    
    
    1
    
    
    
    (3,369,082
    )
    
    
    N/AFair value loss (gain) on derivative financial instruments
    
    
    337,195
    
    
    
    1
    
    
    
    (4,477
    )
    
    
    Refinancing costs
    
    
    625,344
    
    
    
    2
    
    
    
    
    
    
    
    N/AOther, net
    
    
    (307,808
    )
    
    
    N/A
    
    
    
    600,896
    
    
    
    Total other expenses
    
    $
    23,726,574
    
    
    
    
    
    
    $
    24,090,102
         17




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Net Loss and EPS
  Liquidity and Capital Resources
 Liquidity
   Capital Resources
   18




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##### Table of Contents



2005 notes
      19




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##### Table of Contents



Forward Looking Statements
  
    
    uncertainty about future production levels, required
capital expenditures and credit agreement compliance;
 
    
    commodity price volatility;
 
    
    increases in the cost of developing and producing our reserves;
 
    
    unavailability or increased costs of drilling rigs, services and materials;
 
    
    drilling, operational and environmental risks;
 
    
    regulatory changes and litigation risks; and
 
    
    uncertainties in estimating oil and gas reserves and projecting future production
rates.
 Contractual Obligations and Commercial Commitments
 General
 Operating
    
    
    DebtYear
    
    Leases
    
    
    Maturities(1)Remainder of 2010
    
    $
    579,862
    
    
    $
    3,092,8792011
    
    
    1,853,837
    
    
    
    50,252,6152012
    
    
    616,087
    
    
    
    7,533,0242013
    
    
    77,495
    
    
    
    182,0292014
    
    
    25,567
    
    
    
    189,9072015 and thereafter
    
    
    6,392
    
    
    
    3,898,714Total
    
    $
    3,159,240
    
    
    $
    65,149,168
 
 (1)
    
    Excludes an allocation of $2,047,378 for the unaccreted debt discount on the 2010 notes. Gas Gathering and Sales Commitments
 
    
    Base monthly gathering fees of $862,750, with annual escalations at the rate of
1.5%;
 
    
    Base monthly operating fees of $182,612, plus $0.20 per Mcf of purchased gas; and
 
    
    Monthly capital fees in amounts intended to yield a 20% internal rate of return for
all capital expenditures on the Appalachian Gathering System by Seminole Energy.
 Related Party Transactions
 General
 20




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##### Table of Contents



Purchase of Office Building
 Critical Accounting Policies and Estimates
 General
 Estimates of Proved Reserves and Future Net Cash Flows
 Impairment of Long-Lived Assets .
 Allowance for Doubtful Accounts .
 Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Commodity Price Risk
  21




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Financial Market Risks
 Interest Rate Risk
 Foreign Market Risk
 
 Item 4. Controls and Procedures
 Managements Responsibility for Financial Statements
  Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
 Internal Control 
Integrated Framework
 Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 1A Risk Factors
  Our cash flow is not sufficient to maintain compliance with the covenants of our existing credit
facility.
   
 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6 Exhibits
  22




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##### Table of Contents



SIGNATURES
  NGAS Resources, Inc.Date: November 9, 2010
    By:
    /s/William S. DaughertyWilliam S. DaughertyChief Executive Officer 
(Duly Authorized Officer)
(Principal Executive Officer) 23




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Exhibit Index
 ExhibitNumber
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.