##### 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 OF 1934
 For the Quarter Ended September 30, 2009
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF 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 or organization)
    
    Not Applicable
(I.R.S. Employer
Identification No.)120 Prosperous Place, Suite 201
Lexington, Kentucky
(Address of principal executive offices)
    
    40509-1844
(Zip Code)
 Registrants telephone number, including area code: (859) 263-3948
  þ o
 o o
  Large accelerated filer o
Accelerated filer þ
Non-accelerated filer o(Do not check if a smaller reporting company)
Smaller reporting company o o þ
  Title of Class
    
    Outstanding at November 1, 2009Common Stock
    
    30,484,361




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##### 



NGAS Resources, Inc.
 INDEX TO FORM 10-Q
 PagePart I. Financial InformationItem 1. Financial Statements:Condensed Consolidated Balance Sheets  September 30,
2009 (unaudited) and December 31, 2008
    
    
    1Condensed Consolidated Statement of Operations  Three
months and nine months ended September 30, 2009 and 2008
    
    
    2Condensed Consolidated Statement of Cash Flows  Three
months and nine months ended September 30, 2009 and 2008
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2.Managements Discussion and Analysis of Financial
Condition and Results of Operations
    
    
    10Item 3.Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4.Controls and Procedures
    
    
    21Part II. Other InformationItem 6.Exhibits
    
    
    21EX-31.1EX-31.2EX-32.1
  Additional Information
 NGAS company we our us Dth MMBtu Mcf Mcfe Mmcf Bcf EUR




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NGAS Resources, Inc.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 September 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash
    
    $
    970,467
    
    
    $
    981,899Accounts receivable
    
    
    5,372,800
    
    
    
    10,450,173Note receivable
    
    
    6,124,570
    
    
    
    Prepaid expenses and other current assets
    
    
    869,224
    
    
    
    540,253Loans to related parties
    
    
    76,024
    
    
    
    79,188Total current assets
    
    
    13,413,085
    
    
    
    12,051,513Bonds and deposits
    
    
    258,695
    
    
    
    623,898Note receivable
    
    
    8,375,430
    
    
    
    Oil and gas properties
    
    
    181,158,605
    
    
    
    229,218,344Property and equipment
    
    
    5,278,048
    
    
    
    3,285,925Loans to related parties
    
    
    171,429
    
    
    
    171,429Deferred financing costs
    
    
    1,439,399
    
    
    
    1,689,580Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    210,407,868
    
    
    $
    247,353,866LIABILITIESCurrent liabilities:Accounts payable
    
    $
    5,092,604
    
    
    $
    12,362,092Accrued liabilities
    
    
    619,117
    
    
    
    675,141Deferred compensation
    
    
    
    
    
    
    2,246,439Customer drilling deposits
    
    
    2,621,671
    
    
    
    2,262,955Long-term debt
    
    
    88,643
    
    
    
    24,000Total current liabilities
    
    
    8,422,035
    
    
    
    17,570,627Deferred compensation
    
    
    497,650
    
    
    
    Deferred income taxes
    
    
    13,520,833
    
    
    
    12,949,476Long-term debt
    
    
    74,046,866
    
    
    
    108,580,448Other long-term liabilities
    
    
    4,163,766
    
    
    
    3,685,849Total liabilities
    
    
    100,651,150
    
    
    
    142,786,400
 SHAREHOLDERS EQUITYCapital stockAuthorized:5,000,000
    
    
    Preferred shares100,000,000
    
    
    Common sharesIssued:30,484,361
    
    
    Common shares (2008  26,543,646)
    
    
    117,142,639
    
    
    
    110,626,91221,100
    
    
    Common shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in capital  options and warrants
    
    
    4,336,463
    
    
    
    3,774,600Contributed surplus
    
    
    425,731
    
    
    
    690,370To be issued:9,185
    
    
    Common shares (2008  9,185)
    
    
    45,925
    
    
    
    45,925121,927,128
    
    
    
    115,114,177
 Deficit
    
    
    (12,170,410
    )
    
    
    (10,546,711
    )Total shareholders equity
    
    
    109,756,718
    
    
    
    104,567,466Total liabilities and shareholders equity
    
    $
    210,407,868
    
    
    $
    247,353,866
 See accompanying notes.
 1




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NGAS Resources, Inc.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008REVENUEContract drilling
    
    $
    3,831,250
    
    
    $
    9,799,561
    
    
    $
    16,328,000
    
    
    $
    24,027,035Oil and gas production
    
    
    6,239,324
    
    
    
    11,222,879
    
    
    
    20,198,187
    
    
    
    30,891,933Gas transmission, compression
and processing
    
    
    1,123,921
    
    
    
    2,567,852
    
    
    
    6,528,132
    
    
    
    7,662,504Total revenue
    
    
    11,194,495
    
    
    
    23,590,292
    
    
    
    43,054,319
    
    
    
    62,581,472DIRECT EXPENSESContract drilling
    
    
    2,913,418
    
    
    
    7,570,698
    
    
    
    12,328,110
    
    
    
    18,447,544Oil and gas production
    
    
    2,658,985
    
    
    
    3,922,629
    
    
    
    7,598,044
    
    
    
    9,794,679Gas transmission, compression
and processing
    
    
    960,879
    
    
    
    1,039,597
    
    
    
    2,955,204
    
    
    
    3,087,391Total direct expenses
    
    
    6,533,282
    
    
    
    12,532,924
    
    
    
    22,881,358
    
    
    
    31,329,614OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    2,601,514
    
    
    
    3,551,908
    
    
    
    8,404,519
    
    
    
    10,282,485Options, warrants and deferred compensation
    
    
    285,309
    
    
    
    229,209
    
    
    
    1,022,774
    
    
    
    601,691Depreciation, depletion and amortization
    
    
    3,304,139
    
    
    
    3,318,320
    
    
    
    10,610,630
    
    
    
    9,451,272Bad debt expense
    
    
    
    
    
    
    342,195
    
    
    
    
    
    
    
    749,035Interest expense
    
    
    1,191,409
    
    
    
    1,457,300
    
    
    
    4,023,274
    
    
    
    4,138,913Interest income
    
    
    (52,698
    )
    
    
    (10,774
    )
    
    
    (67,708
    )
    
    
    (89,577
    )Gain on sale of assets
    
    
    (3,356,177
    )
    
    
    
    
    
    
    (3,369,082
    )
    
    
    Other, net
    
    
    292,073
    
    
    
    87,584
    
    
    
    600,896
    
    
    
    115,939Total other expenses
    
    
    4,265,569
    
    
    
    8,975,742
    
    
    
    21,225,303
    
    
    
    25,249,758INCOME (LOSS) BEFORE INCOME TAXES
    
    
    395,644
    
    
    
    2,081,626
    
    
    
    (1,052,342
    )
    
    
    6,002,100INCOME TAX EXPENSE
    
    
    508,116
    
    
    
    1,136,441
    
    
    
    571,357
    
    
    
    3,372,464NET INCOME (LOSS)
    
    $
    (112,472
    )
    
    $
    945,185
    
    
    $
    (1,623,699
    )
    
    $
    2,629,636NET INCOME (LOSS) PER SHAREBasic
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    0.10Diluted
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    0.10WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:Basic
    
    
    28,873,105
    
    
    
    26,508,570
    
    
    
    27,508,925
    
    
    
    26,364,158Diluted
    
    
    28,873,105
    
    
    
    26,977,438
    
    
    
    27,508,925
    
    
    
    27,019,313
 See accompanying notes.
 2




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NGAS Resources, Inc.
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008OPERATING ACTIVITIESNet income (loss)
    
    $
    (112,472
    )
    
    $
    945,185
    
    
    $
    (1,623,699
    )
    
    $
    2,629,636Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Incentive bonus paid in common shares
    
    
    65,001
    
    
    
    228,120
    
    
    
    426,251
    
    
    
    259,690Options, warrants and deferred compensation
    
    
    285,309
    
    
    
    229,209
    
    
    
    1,022,774
    
    
    
    601,691Depreciation, depletion and amortization
    
    
    3,304,139
    
    
    
    3,318,320
    
    
    
    10,610,630
    
    
    
    9,451,272Bad debt expense
    
    
    
    
    
    
    342,195
    
    
    
    
    
    
    
    749,035Gain on sale of assets
    
    
    (3,356,177
    )
    
    
    (10,761
    )
    
    
    (3,369,082
    )
    
    
    (11,116
    )Deferred income taxes
    
    
    508,116
    
    
    
    1,136,441
    
    
    
    571,357
    
    
    
    3,372,464Changes in assets and liabilities:Accounts receivable
    
    
    311,360
    
    
    
    (1,840,648
    )
    
    
    5,077,373
    
    
    
    (5,983,968
    )Prepaid expenses and other current assets
    
    
    (353,376
    )
    
    
    (345,152
    )
    
    
    (328,971
    )
    
    
    (227,538
    )Other non-current assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,242,790Accounts payable
    
    
    (144,533
    )
    
    
    2,979,900
    
    
    
    (7,269,488
    )
    
    
    3,684,584Accrued liabilities
    
    
    (46,040
    )
    
    
    261,981
    
    
    
    (56,024
    )
    
    
    469,599Deferred compensation
    
    
    (2,094,700
    )
    
    
    
    
    
    
    (2,209,700
    )
    
    
    Customers drilling deposits
    
    
    1,923,271
    
    
    
    (1,630,304
    )
    
    
    358,716
    
    
    
    (2,857,806
    )Other long-term liabilities
    
    
    155,091
    
    
    
    
    
    
    
    477,917
    
    
    
    Net cash provided by operating activities
    
    
    444,989
    
    
    
    5,614,486
    
    
    
    3,688,054
    
    
    
    15,380,333INVESTING ACTIVITIESProceeds from sale of assets
    
    
    35,857,613
    
    
    
    15,855
    
    
    
    35,911,646
    
    
    
    54,555Purchase of property and equipment
    
    
    (195,261
    )
    
    
    (155,170
    )
    
    
    (2,683,061
    )
    
    
    (459,671
    )Change in bonds and deposits
    
    
    5,000
    
    
    
    (95,250
    )
    
    
    15,203
    
    
    
    (130,750
    )Additions to oil and gas properties, net
    
    
    (3,841,799
    )
    
    
    (11,615,165
    )
    
    
    (7,918,894
    )
    
    
    (37,940,322
    )Net cash provided by (used in)
investing activities
    
    
    31,825,553
    
    
    
    (11,849,730
    )
    
    
    25,324,894
    
    
    
    (38,476,188
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    890
    
    
    
    1,861
    
    
    
    3,164
    
    
    
    4,538Proceeds from issuance of common shares
    
    
    6,089,476
    
    
    
    81,200
    
    
    
    6,089,476
    
    
    
    1,190,006Payments of deferred financing costs
    
    
    (10,882
    )
    
    
    (297,440
    )
    
    
    (383,442
    )
    
    
    (440,983
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    5,500,000
    
    
    
    
    
    
    
    22,240,000Payments of long-term debt
    
    
    (45,021,578
    )
    
    
    (6,000
    )
    
    
    (34,733,578
    )
    
    
    (2,032,175
    )Net cash provided by (used in)
financing activities
    
    
    (38,942,094
    )
    
    
    5,279,621
    
    
    
    (29,024,380
    )
    
    
    20,961,386Change in cash
    
    
    (6,671,552
    )
    
    
    (955,623
    )
    
    
    (11,432
    )
    
    
    (2,134,469
    )Cash, beginning of period
    
    
    7,642,019
    
    
    
    1,637,832
    
    
    
    981,899
    
    
    
    2,816,678Cash, end of period
    
    $
    970,467
    
    
    $
    682,209
    
    
    $
    970,467
    
    
    $
    682,209SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    1,204,354
    
    
    $
    1,456,786
    
    
    $
    4,026,548
    
    
    $
    4,138,104Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 See accompanying notes.
 3




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##### Table of Contents



NGAS Resources, Inc.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1. Summary of Significant Accounting Policies
 General NGAS U.S. GAAP
 Basis of Presentation DPI company we our us
 Estimates .
 Note 2. Oil and Gas Properties
 Sale of Appalachian Gas Gathering Facilities Gathering System Seminole Seminole Energy
 Capitalized Costs and DD&A DD&A
 4




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September 30,
    
    
    December 31,2009
    
    
    2008Proved oil and gas properties
    
    $
    197,922,674
    
    
    $
    192,186,676Unproved oil and gas properties
    
    
    5,209,182
    
    
    
    5,065,835Gathering facilities and well equipment
    
    
    17,421,334
    
    
    
    67,326,445220,553,190
    
    
    
    264,578,956Accumulated DD&A
    
    
    (39,394,585
    )
    
    
    (35,360,612
    )Net oil and gas properties and equipment
    
    $
    181,158,605
    
    
    $
    229,218,344
 Suspended Well Costs Accounting for Suspended Well Costs
 Note 3. Property and Equipment
  September 30,
    
    
    December 31,2009
    
    
    2008Land
    
    $
    12,908
    
    
    $
    12,908Building improvements
    
    
    64,265
    
    
    
    64,265Machinery and equipment
    
    
    5,839,686
    
    
    
    3,333,981Office furniture and fixtures
    
    
    175,862
    
    
    
    175,862Computer and office equipment
    
    
    690,905
    
    
    
    670,349Vehicles
    
    
    1,811,276
    
    
    
    1,951,2798,594,902
    
    
    
    6,208,644Accumulated depreciation
    
    
    (3,316,854
    )
    
    
    (2,922,719
    )Net other property and equipment
    
    $
    5,278,048
    
    
    $
    3,285,925
 Note 4. Note Receivable
  Note 5. Deferred Financing Costs
  Note 6. Goodwill
 SFAS Goodwill and Other Intangible Assets
 5




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##### Table of Contents



Note 7. Customer Drilling Deposits
  Note 8. Long-Term Debt
 Convertible Notes
 Credit Facility
  Installment Loan
 Acquisition Debt
 Total Long-Term Debt and Maturities
 September 30,
    
    
    December 31,Principal Amount Outstanding
    
    2009
    
    
    2008Total long-term debt (including current portion)(1)
    
    $
    74,135,509
    
    
    $
    108,604,448Less current portion
    
    
    88,643
    
    
    
    24,000Total long-term debt
    
    $
    74,046,866
    
    
    $
    108,580,448
 Maturities of DebtRemainder of 2009
    
    $
    27,8072010
    
    
    36,663,866
    (1)2011
    
    
    35,093,5572012
    
    
    2,157,4612013 and thereafter
    
    
    192,818
 
 (1)
    
    Reflects allocations of $425,731 at September 30, 2009 and $690,370 at December 31, 2008
from our 6% convertible notes in the principal amount of $37,000,000 based on equity
components of their conversion features. 6




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##### Table of Contents



Note 9. Capital Stock
 Preferred Shares
 Common Shares
 Number ofCommon Shares Issued
    
    Shares
    
    
    AmountBalance, December 31, 2007
    
    
    26,136,064
    
    
    $
    108,842,526Issued to employees as incentive bonus
    
    
    50,000
    
    
    
    259,690Issued upon exercise of stock options
    
    
    357,582
    
    
    
    1,524,696Balance, December 31, 2008
    
    
    26,543,646
    
    
    
    110,626,912Issued in registered direct placement
    
    
    3,480,000
    
    
    
    6,089,476Issued as stock awards under incentive plan
    
    
    460,715
    
    
    
    426,251Balance, September 30, 2009
    
    
    30,484,361
    
    
    $
    117,142,639Paid In Capital  Options and WarrantsBalance, December 31, 2007
    
    
    
    
    
    
    3,484,148Recognized
    
    
    
    
    
    
    625,142Exercised
    
    
    
    
    
    
    (334,690
    )Balance, December 31, 2008
    
    
    
    
    
    
    3,774,600Recognized
    
    
    
    
    
    
    561,863Balance, September 30, 2009
    
    
    
    
    
    $
    4,336,463Contributed SurplusBalance, December 31, 2007
    
    
    
    
    
    $
    1,043,222Accreted(1)
    
    
    
    
    
    
    (352,852
    )Balance, December 31, 2008
    
    
    
    
    
    
    690,370Accreted(1)
    
    
    
    
    
    
    (264,639
    )Balance, September 30, 2009
    
    
    
    
    
    $
    425,731Common Shares to be IssuedBalance, September 30, 2009 and December 31, 2008
    
    
    9,185
    
    
    $
    45,925
 
 (1)
    
    Reflects accretion of the equity components allocated to our 6% convertible notes and
related warrants issued in 2005. Stock Options and Awards
 Weighted AverageIssued
    
    Exercisable
    
    Exercise PriceBalance, December 31, 2007
    
    
    2,681,250
    
    
    
    1,739,583
    
    
    $
    4.75Granted
    
    
    2,300,000
    
    
    
    
    
    
    
    2.93Vested
    
    
    
    
    
    
    41,667
    
    
    
    6.02Exercised
    
    
    (357,582
    )
    
    
    (357,582
    )
    
    
    3.33Forfeited
    
    
    (10,000
    )
    
    
    (10,000
    )
    
    
    7.04Balance, December 31, 2008
    
    
    4,613,668
    
    
    
    1,413,668
    
    
    
    3.95Vested
    
    
    
    
    
    
    1,225,000
    
    
    
    4.69Expired
    
    
    (740,000
    )
    
    
    (740,000
    )
    
    
    4.06Balance, September 30, 2009
    
    
    3,873,668
    
    
    
    1,898,668
    
    
    
    3.92
 7




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##### Table of Contents



Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AveragePrice
    
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    Exerciseor Range
    
    
    Number
    
    
    Life (years)
    
    
    Price
    
    
    Number
    
    
    Price$1.51
    
    
    
    
    
    
    1,650,000
    
    
    
    5.61
    
    
    $
    1.51
    
    
    
    
    
    
    $
    4.03
    
    
    
    
    
    
    800,000
    
    
    
    0.41
    
    
    
    4.03
    
    
    
    800,000
    
    
    
    4.036.02
    
    
    7.64
    
    
    
    1,423,668
    
    
    
    1.61
    
    
    
    6.66
    
    
    
    1,098,668
    
    
    
    6.703,873,668
    
    
    
    
    
    
    
    
    
    
    
    1,898,668
 Share-Based Payment
 Common Stock Purchase Warrants
 Note 10. Income (Loss) Per Share
 EPS
 Three Months Ended
    
    
    Nine Months EndedSeptember 30,
    
    
    September 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income (loss) as reported for basic EPS
    
    $
    (112,472
    )
    
    $
    945,185
    
    
    $
    (1,623,699
    )
    
    $
    2,629,636Adjustments to income (loss) for diluted EPS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) for diluted EPS
    
    $
    (112,472
    )
    
    $
    945,185
    
    
    $
    (1,623,699
    )
    
    $
    2,629,636Denominator:Weighted average shares for basic EPS
    
    
    28,873,105
    
    
    
    26,508,570
    
    
    
    27,508,925
    
    
    
    26,364,158Effect of dilutive securities  options/warrants
    
    
    
    
    
    
    468,868
    
    
    
    
    
    
    
    655,155Adjusted weighted average shares and
assumed conversions for diluted EPS
    
    
    28,873,105
    
    
    
    26,977,438
    
    
    
    27,508,925
    
    
    
    27,019,313Basic EPS
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    0.10Diluted EPS
    
    $
    (0.00
    )
    
    $
    0.04
    
    
    $
    (0.06
    )
    
    $
    0.10
 Note 11. Segment Information
 Disclosure about
Segments of an Enterprise and Related Information
 8




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##### Table of Contents



Note 12. Commitments
 General
 Maturities of Lease ObligationsRemainder of 2009
    
    $
    604,7042010
    
    
    2,350,4952011
    
    
    2,095,2242012
    
    
    847,4422013 and thereafter
    
    
    73,284Total
    
    $
    5,971,149
 Gas Gathering and Sales Commitments
 Note 13. Recent Accounting Standards
 SFAS No. 168 Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
 Oil and Gas Reporting Requirements
 9




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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
  Recent Developments
 Liquidity from Gathering System Sale and Equity Raise Gathering System Seminole Seminole Energy
 Expansion of Leatherwood Position
 Business Strategy
  
    
    Organic Growth through Drilling with Reduced Capital Spending. While we are
committed to a long-term strategy of developing our reserves through the drillbit and
retaining most of our available working interest in new wells, we have addressed the
challenging conditions in our industry by reducing our 2009 capital spending budget to $15
million and returning to our successful partnership structure for sharing development
costs on operated properties. We raised over $34 million for a non-operated program last
year through our established sales network. To meet our near-term drilling commitments
and objectives, we are currently sponsoring a partnership to participate in up to 53
horizontal wells throughout our operated
 10




---



##### Table of Contents



properties. The partnership commenced operations following an initial closing of its
private placement in June 2009. We are maintaining a 20% interest in this years program
and will earn an additional 15% reversionary interest after program payout.
 
    
    Horizontal Drilling Initiatives. Recent advances in horizontal drilling and
completion technology have enhanced the value proposition for our operated properties by
substantially increasing our recovery volumes and rates at dramatically lower finding
costs. Horizontal drilling also gives us access to areas where natural gas development
would otherwise be delayed or constrained by coal mining activity or challenging terrain.
We focused these initiatives during 2008 in our Leatherwood field, where we completed 20
horizontal wells last year. Each well has a single lateral leg up to 3,500 feet through
the Devonian shale formation, which is present throughout our Appalachian operating areas.
Initial 30-day flow rates for our Leatherwood horizontals averaged 309 Mcf per day. We
achieved comparable results for our first two New Albany shale horizontals drilled late in
2008 on our Illinois Basin acreage and our initial Devonian shale horizontals completed
this year in our Straight Creek, Fonde and Martins Fork fields. We plan to continue this
transition throughout our operated properties, including 25 horizontal wells planned this
year in Leatherwood.
    
    Advantages from Restructured Infrastructure Position. Although the sale of our
Gathering System during the third quarter of 2009 eliminated the closed-access status for
most of our field-wide infrastructure, we retained long-term capacity rights for the
system, currently established at 30,000 Mcf per day. This ensures continued
deliverability from our operated Appalachian properties serviced by these facilities. We
also retained operating rights for the Gathering System, which provides deliverability
from 90% of our Appalachian properties directly from the wellhead to major east coast
natural gas markets through an interconnect with Spectra Energy Partners East Tennessee
Interstate pipeline network. Our operating and capacity rights also preserve our
competitive advantages from control of regional gas flow, enhancing our opportunities to
acquire undeveloped acreage near our core producing fields upon completion of coal mining
activities. We continue to own a 50% interest in a liquids extraction plant for
production serviced by the Gathering System, located in Rogersville, Tennessee. This is
within 5.5 miles of the proposed site for a 880-megawatt gas-fired power plant to be
constructed by the Tennessee Valley Authority, which may provide us with opportunities for
long-term gas sales arrangements.
 Drilling Operations
 General
 Geological Factors EUR
 11




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##### Table of Contents



Horizontal Drilling
 Staged Completion Technology
 New Albany Shale Play
 Drilling Results
 Development Wells
    
    
    Exploratory WellsProductive
    
    
    Dry
    
    
    Productive
    
    
    DryGross
    
    
    Net
    
    
    Gross
    
    
    Gross
    
    
    Net
    
    
    GrossYear Ended December 31, 2008Vertical
    
    
    137
    
    
    
    58.8522
    
    
    
    
    
    
    
    9
    
    
    
    8.8125
    
    
    
    Horizontal
    
    
    47
    
    
    
    15.7254
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    184
    
    
    
    74.5776
    
    
    
    
    
    
    
    9
    
    
    
    8.8125
    
    
    
    Nine Months Ended September 30, 2009Vertical
    
    
    10
    
    
    
    1.6972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Horizontal
    
    
    14
    
    
    
    2.7588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    24
    
    
    
    4.4560
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Producing Activities
 Regional Advantages Dth
 12




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##### Table of Contents



Liquids Extraction NGL
 Oil and Gas Production
 Three Months Ended
    
    
    Nine Months Ended
    
    
    Year EndedSeptember 30,
    
    
    September 30,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2008Production volumes:Natural gas (Mcf)
    
    
    816,393
    
    
    
    760,401
    
    
    
    2,521,223
    
    
    
    2,268,929
    
    
    
    3,087,596Oil (Bbl)
    
    
    11,887
    
    
    
    16,235
    
    
    
    37,313
    
    
    
    44,718
    
    
    
    57,291Natural gas liquids (gallons)
    
    
    1,458,541
    
    
    
    1,202,292
    
    
    
    3,895,199
    
    
    
    2,930,974
    
    
    
    3,895,649Equivalents (Mcfe)
    
    
    997,103
    
    
    
    947,986
    
    
    
    3,037,238
    
    
    
    2,778,668
    
    
    
    3,745,124Average sales prices:Natural gas (per Mcf)
    
    $
    5.67
    
    
    $
    9.80
    
    
    $
    6.31
    
    
    $
    9.40
    
    
    $
    8.89Oil (per Bbl)
    
    
    60.76
    
    
    
    110.26
    
    
    
    48.03
    
    
    
    106.06
    
    
    
    95.07Natural gas liquids (per gallon)
    
    
    0.61
    
    
    
    1.65
    
    
    
    0.64
    
    
    
    1.64
    
    
    
    1.41
 Future Gas Sales Contracts
 Fixed-Price Contracts for Natural Gas Production
 2009
    
    2010Q4
    
    Q1
    
    Q2
    
    Q3
    
    Q4Percentage of gas contracted
    
    
    54
    %
    
    
    58
    %
    
    
    46
    %
    
    
    51
    %
    
    
    47
    %Average price per Mcf
    
    $
    7.83
    
    
    $
    7.54
    
    
    $
    6.42
    
    
    $
    6.51
    
    
    $
    6.56
 Results of Operations  Three Months Ended September 30, 2009 and 2008
 Revenues
 Three Months Ended September 30,% of
    
    
    
    
    
    
    %2009
    
    
    Revenue
    
    
    2008
    
    
    ChangeRevenue:Contract drilling
    
    $
    3,831,250
    
    
    
    34
    %
    
    $
    9,799,561
    
    
    
    (61
    )%Oil and gas production
    
    
    6,239,324
    
    
    
    56
    
    
    
    11,222,879
    
    
    
    (44
    )Gas transmission, compression and processing
    
    
    1,123,921
    
    
    
    10
    
    
    
    2,567,852
    
    
    
    (56
    )Total
    
    $
    11,194,495
    
    
    
    100
    %
    
    $
    23,590,292
    
    
    
    (53
    )
 13




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##### Table of Contents



Expenses
 Three Months Ended September 30,2009
    
    
    Margin
    
    
    2008
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    2,913,418
    
    
    
    24
    %
    
    $
    7,570,698
    
    
    
    23
    %Oil and gas production
    
    
    2,658,985
    
    
    
    57
    
    
    
    3,922,629
    
    
    
    65Gas transmission, compression and processing
    
    
    960,879
    
    
    
    15
    
    
    
    1,039,597
    
    
    
    60Total direct expenses
    
    
    6,533,282
    
    
    
    42
    
    
    
    12,532,924
    
    
    
    47
 % Revenue
    
    
    
    
    
    
    % RevenueOther Expenses (Income):Selling, general and administrative
    
    
    2,601,514
    
    
    
    23
    %
    
    
    3,551,908
    
    
    
    15
    %Options, warrants and deferred compensation
    
    
    285,309
    
    
    
    3
    
    
    
    229,209
    
    
    
    1Depreciation, depletion and amortization
    
    
    3,304,139
    
    
    
    30
    
    
    
    3,318,320
    
    
    
    14Bad debt expense
    
    
    
    
    
    
    N/A
    
    
    
    342,195
    
    
    
    1Interest expense, net of interest income
    
    
    1,138,711
    
    
    
    10
    
    
    
    1,446,526
    
    
    
    6Gain on sale of assets
    
    
    (3,356,177
    )
    
    
    N/A
    
    
    
    
    
    
    
    N/AOther, net
    
    
    292,073
    
    
    
    3
    
    
    
    87,584
    
    
    
    Total other expenses
    
    $
    4,265,569
    
    
    
    
    
    
    $
    8,975,742
  14




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##### Table of Contents



SG&A
  DD&A
    Net Income (Loss) and EPS EPS
 Results of Operations  Nine Months Ended September 30, 2009 and 2008
 Revenues
 15




---



##### Table of Contents



Nine Months Ended September 30,% of
    
    
    
    
    
    
    %2009
    
    
    Revenue
    
    
    2008
    
    
    ChangeRevenue:Contract drilling
    
    $
    16,328,000
    
    
    
    38
    %
    
    $
    24,027,035
    
    
    
    (32
    )%Oil and gas production
    
    
    20,198,187
    
    
    
    47
    
    
    
    30,891,933
    
    
    
    (35
    )Gas transmission, compression and processing
    
    
    6,528,132
    
    
    
    15
    
    
    
    7,662,504
    
    
    
    (15
    )Total
    
    $
    43,054,319
    
    
    
    100
    %
    
    $
    62,581,472
    
    
    
    (31
    )
    Expenses
 Nine Months Ended September 30,2009
    
    
    Margin
    
    
    2008
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    12,328,110
    
    
    
    24
    %
    
    $
    18,447,544
    
    
    
    23
    %Oil and gas production
    
    
    7,598,044
    
    
    
    62
    
    
    
    9,794,679
    
    
    
    68Gas transmission, compression and processing
    
    
    2,955,204
    
    
    
    55
    
    
    
    3,087,391
    
    
    
    60Total direct expenses
    
    
    22,881,358
    
    
    
    47
    
    
    
    31,329,614
    
    
    
    50
 % Revenue
    
    
    
    
    
    
    % RevenueOther Expenses (Income):Selling, general and administrative
    
    
    8,404,519
    
    
    
    20
    %
    
    
    10,282,485
    
    
    
    16
    %Options, warrants and deferred compensation
    
    
    1,022,774
    
    
    
    2
    
    
    
    601,691
    
    
    
    1Depreciation, depletion and amortization
    
    
    10,610,630
    
    
    
    25
    
    
    
    9,451,272
    
    
    
    15Bad debt expense
    
    
    
    
    
    
    N/A
    
    
    
    749,035
    
    
    
    1Interest expense, net of interest income
    
    
    3,955,566
    
    
    
    9
    
    
    
    4,049,336
    
    
    
    6Gain on sale of assets
    
    
    (3,369,082
    )
    
    
    N/A
    
    
    
    
    
    
    
    N/AOther, net
    
    
    600,896
    
    
    
    1
    
    
    
    115,939
    
    
    
    Total other expenses
    
    $
    21,225,303
    
    
    
    
    
    
    $
    25,249,758
  16




---



##### Table of Contents



Net Income (Loss) and EPS
  Liquidity and Capital Resources
 Liquidity
  17




---



##### Table of Contents



Capital Resources
      18




---



##### Table of Contents



Forward Looking Statements
  
    
    uncertainty about estimates of future natural gas production and required capital
expenditures;
    
    commodity price volatility;
    
    increases in the cost of developing and producing our reserves;
    
    unavailability of drilling rigs and services;
    
    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 Leases
    
    
    Long TermYear
    
    Equipment
    
    
    Premises
    
    
    Total
    
    
    DebtRemainder of 2009
    
    $
    542,940
    
    
    $
    61,764
    
    
    $
    604,704
    
    
    $
    27,8072010
    
    
    2,102,680
    
    
    
    247,815
    
    
    
    2,350,495
    
    
    
    36,663,866
    (1)2011
    
    
    1,842,835
    
    
    
    252,389
    
    
    
    2,095,224
    
    
    
    35,093,5572012
    
    
    591,469
    
    
    
    255,973
    
    
    
    847,442
    
    
    
    2,157,4612013 and thereafter
    
    
    51,929
    
    
    
    21,355
    
    
    
    73,284
    
    
    
    192,818Total
    
    $
    5,131,853
    
    
    $
    839,296
    
    
    $
    5,971,149
    
    
    $
    74,135,509
 
 (1)
    
    Excludes an allocation of $425,731 from our 6% convertible notes in the principal amount of
$37,000,000 based on equity components of their conversion features. 19




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##### Table of Contents



Gas Gathering and Sales Commitments
 
    
    Base monthly gathering fees of $850,000, with annual escalations at the rate of
1.5%;
    
    Base monthly operating fees of $175,000, 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 Gathering System by Seminole and Seminole Energy.
 Critical Accounting Policies and Estimates
 General
 Estimates of Proved Reserves and Future Net Cash Flows
 Impairment of Long-Lived Assets .
 Allowance for Doubtful Accounts .
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Commodity Price Risk
  20




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##### Table of Contents



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 6. Exhibits
 ExhibitNumber
    
    Description of Exhibit3.1
    
    Notice of Articles, certified on September 3, 2004 by the Registrar of Corporations under
the British Columbia Business Corporations Act (incorporated by reference to Exhibit 3.1 to
Current Report on Form 8-K [File No. 0-12185], filed September 29, 2004).3.2
    
    Alteration to Notice of Articles, certified on September 25, 2004 by the Registrar of
Corporations under the British Columbia Business Corporations Act (incorporated by reference
to Exhibit 3.2 to Current Report on Form 8-K [File No. 0-12185], filed September 29, 2004).3.3
    
    Articles dated September 25, 2004, as amended and restated for corporate transition under
the British Columbia Business Corporations Act (incorporated by reference to Exhibit 3.3 to
Current Report on Form 8-K [File No. 0-12185], filed September 29, 2004).
 21




---



##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.1
    
    1997 Stock Option Plan (incorporated by reference to Exhibit 10[a] to Annual Report on Form
10-KSB [File No. 0-12185] for the year ended December 31, 2002).10.2
    
    2001 Stock Option Plan (incorporated by reference to Exhibit 10[b] to Annual Report on Form
10-KSB [File No. 0-12185] for the year ended December 31, 2002).10.3
    
    2003 Incentive Stock and Stock Option Plan (incorporated by reference to Exhibit 10.3 to
Quarterly Report on Form 10-QSB [File No. 0-12185] for the quarter ended September 30, 2004).10.4
    
    Form of 6% convertible notes issued pursuant to the Securities Purchase Agreement dated as
of December 13, 2005 among NGAS Resources, Inc. and the investors named therein (incorporated
by reference to Exhibit 10.2 to current report on Form 8-K [File No. 0-12185] dated December
14, 2005).10.5
    
    Amended and Restated Credit Agreement dated as of May 30, 2008 among NGAS Resources, Inc.,
Daugherty Petroleum, Inc. and KeyBank National Association, as agent for the lenders named
therein (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q [File No.
0-12185] for the quarter ended June 30, 2008).10.6
    
    Third Amendment dated as of June 2, 2009 to Amended and Restated Credit Agreement dated as
of May 30, 2008 among NGAS Resources, Inc., Daugherty Petroleum, Inc. and KeyBank National
Association, as agent for the lenders named therein (incorporated by reference to Exhibit
10.1 to Current Report on Form 8-K [File No. 0-12185] filed June 5, 2009).10.7
    
    NAESB Gas Purchase Agreement dated as of July 15, 2009 between Daugherty Petroleum, Inc.
and Seminole Energy Services, LLC (incorporated by reference to Exhibit 10.5 to current
report on Form 8-K [File No. 0-12185] dated July 17, 2009).10.8
    
    Form of Change of Control Agreement dated as of February 25, 2004 (incorporated by
reference to Exhibit 10.9 to quarterly report on Form 10-QSB [File No. 0-12185] for the
quarter ended June 30, 2004).10.9
    
    Form of Indemnification Agreement dated as of February 25, 2004 (incorporated by reference
to Exhibit 10.10 to quarterly report on Form 10-QSB [File No. 0-12185] for the quarter ended
June 30, 2004).10.10
    
    Form of Long-Term Incentive Agreement dated as of February 25, 2004 (incorporated by
reference to Exhibit 10.11 to quarterly report on Form 10-QSB [File No. 0-12185] for the
quarter ended June 30, 2004).10.11
    
    Form of Long-Term Incentive Agreement dated as of December 9, 2008 (incorporated by
reference to Exhibit 10.11 to annual report on Form 10-K [File No. 0-12185] for the year
ended December 31, 2008).10.12
    
    Form of general partnership agreement with sponsored drilling programs (incorporated by
reference to Exhibit 10.11 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).10.13
    
    Form of limited partnership agreement with sponsored investment partnerships (incorporated
by reference to Exhibit 10.12 to amended annual report on Form 10-K/A [File No. 0-12185] for
the year ended December 31, 2006).10.14
    
    Form of assignment of drilling rights with sponsored drilling programs (incorporated by
reference to Exhibit 10.13 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).10.15
    
    Form of drilling and operating agreement with sponsored drilling programs (incorporated by
reference to Exhibit 10.14 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).11.1
    
    Computation of Earnings Per Share (included in Note 10 to the accompanying consolidated
financial statements)21.0
    
    Subsidiaries (incorporated by reference to Exhibit 21.1 to annual report on Form 10-K [File
No. 0-12185] for the year ended December 31, 2006).31.1
    
    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.
 22




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit32.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002
(included in Exhibit 32.1).
 SIGNATURES
  NGAS Resources, Inc.Date: November 3, 2009
    By:
    /s/William S. DaughertyWilliam S. DaughertyChief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer) 23