##### 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 June 30, 2007
 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
    
    Not Applicable(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)120 Prosperous Place, Suite 201Lexington, Kentucky
    
    40509-1844(Address of principal executive offices)
    
    (Zip Code)
 Registrants telephone number, including area code: (859) 263-3948
  þ o
  o þ o
 o þ
  Title of Class
    
    Outstanding at August 3, 2007Common Stock
    
    21,798,981




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##### 



NGAS Resources, Inc.
  
 INDEX
 PagePart I. Financial InformationItem 1. Financial Statements:Condensed Consolidated Balance Sheets  June 30, 2007 (unaudited) and December 31, 2006
    
    1Condensed Consolidated Statement of Operations  Three months and six months ended June 30, 2007 and 2006
    
    2Condensed Consolidated Statement of Cash Flows  Three months and six months ended June 30, 2007 and 2006
    
    3Notes to Condensed Consolidated Financial Statements
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    12Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    21Item 4. Controls and Procedures
    
    21PART
II. OTHER INFORMATIONItem 4. Submission of Matters to a Vote of Security Holders
    
    22Item 6. Exhibits
    
    22EX-31.1EX-31.2EX-32.1EX-32.2
  
 Forward-Looking Statements
  
 Additional Information




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2007
    
    
    2006(Unaudited)ASSETSCurrent assets:Cash
    
    $
    2,872,020
    
    
    $
    14,431,977Accounts receivable
    
    
    7,964,917
    
    
    
    9,108,574Prepaid expenses and other current assets
    
    
    866,114
    
    
    
    1,108,734Loans to related parties
    
    
    7,466
    
    
    
    7,147Total current assets
    
    
    11,710,517
    
    
    
    24,656,432Bonds and deposits
    
    
    570,695
    
    
    
    533,695Oil and gas properties
    
    
    164,762,711
    
    
    
    144,217,532Property and equipment
    
    
    3,842,173
    
    
    
    3,342,571Loans to related parties
    
    
    253,401
    
    
    
    257,430Deferred financing costs
    
    
    1,985,437
    
    
    
    2,264,022Other non-current assets
    
    
    3,502,229
    
    
    
    2,634,271Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    186,940,340
    
    
    $
    178,219,130LIABILITIESCurrent liabilities:Accounts payable
    
    
    6,658,999
    
    
    
    9,286,849Accrued liabilities
    
    
    3,519,817
    
    
    
    3,998,978Customers drilling deposits
    
    
    4,868,133
    
    
    
    12,173,905Long term debt, current portion
    
    
    24,000
    
    
    
    24,000Total current liabilities
    
    
    15,070,949
    
    
    
    25,483,732Deferred income taxes
    
    
    8,482,850
    
    
    
    8,035,779Long term debt
    
    
    86,087,170
    
    
    
    66,922,744Deferred compensation
    
    
    1,711,380
    
    
    
    1,419,776Total liabilities
    
    
    111,352,349
    
    
    
    101,862,031SHAREHOLDERS EQUITYCapital stockAuthorized:5,000,000   Preferred shares100,000,000   Common sharesIssued:21,798,981   Common shares (2006  21,788,551)
    
    
    84,575,142
    
    
    
    84,531,83221,100   Common shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in capital  options and warrants
    
    
    3,451,983
    
    
    
    3,073,287Contributed surplus
    
    
    1,219,648
    
    
    
    1,396,074To be issued:9,185   Common shares (2006  9,185)
    
    
    45,925
    
    
    
    45,92589,269,068
    
    
    
    89,023,488Deficit
    
    
    (13,681,077
    )
    
    
    (12,666,389
    )Total shareholders equity
    
    
    75,587,991
    
    
    
    76,357,099Total liabilities and shareholders equity
    
    $
    186,940,340
    
    
    $
    178,219,130
 See accompanying notes.
 1




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006REVENUEContract drilling
    
    $
    7,459,704
    
    
    $
    11,029,274
    
    
    $
    16,704,923
    
    
    $
    31,440,774Oil and gas production
    
    
    6,730,947
    
    
    
    5,935,783
    
    
    
    13,483,179
    
    
    
    12,139,967Gas transmission and compression
    
    
    1,887,039
    
    
    
    1,374,585
    
    
    
    3,834,980
    
    
    
    2,078,156Total revenue
    
    
    16,077,690
    
    
    
    18,339,642
    
    
    
    34,023,082
    
    
    
    45,658,897DIRECT EXPENSESContract drilling
    
    
    5,919,020
    
    
    
    7,840,559
    
    
    
    13,099,737
    
    
    
    24,543,489Oil and gas production
    
    
    1,799,186
    
    
    
    1,529,940
    
    
    
    3,482,200
    
    
    
    2,983,408Gas transmission and compression
    
    
    779,843
    
    
    
    541,869
    
    
    
    1,879,436
    
    
    
    1,174,298Impairment of oil and gas assets
    
    
    964,000
    
    
    
    
    
    
    
    964,000
    
    
    
    Total direct expenses
    
    
    9,462,049
    
    
    
    9,912,368
    
    
    
    19,425,373
    
    
    
    28,701,195OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    3,042,364
    
    
    
    3,164,516
    
    
    
    7,064,246
    
    
    
    7,638,908Options, warrants and deferred compensation
    
    
    329,177
    
    
    
    419,787
    
    
    
    670,300
    
    
    
    848,534Depreciation, depletion and amortization
    
    
    2,361,176
    
    
    
    1,964,578
    
    
    
    4,667,646
    
    
    
    3,502,490Interest expense
    
    
    1,534,216
    
    
    
    1,089,070
    
    
    
    2,758,972
    
    
    
    1,689,453Interest income
    
    
    (49,689
    )
    
    
    (101,524
    )
    
    
    (133,743
    )
    
    
    (219,884
    )Other, net
    
    
    45,156
    
    
    
    86,440
    
    
    
    137,905
    
    
    
    127,388Total other expenses
    
    
    7,262,400
    
    
    
    6,622,867
    
    
    
    15,165,326
    
    
    
    13,586,889INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (646,759
    )
    
    
    1,804,407
    
    
    
    (567,617
    )
    
    
    3,370,813DEFERRED INCOME TAX EXPENSE
    
    
    113,665
    
    
    
    1,081,454
    
    
    
    447,071
    
    
    
    2,022,123NET INCOME (LOSS)
    
    $
    (760,424
    )
    
    $
    722,953
    
    
    $
    (1,014,688
    )
    
    $
    1,348,690NET INCOME (LOSS) PER SHAREBasic
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    0.06Diluted
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    0.06WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    21,798,607
    
    
    
    21,456,828
    
    
    
    21,794,843
    
    
    
    21,417,395Diluted
    
    
    21,798,607
    
    
    
    22,919,707
    
    
    
    21,794,843
    
    
    
    23,072,192
 See accompanying notes.
 2




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006OPERATING ACTIVITIESNet income (loss)
    
    $
    (760,424
    )
    
    $
    722,953
    
    
    $
    (1,014,688
    )
    
    $
    1,348,690Adjustments to reconcile net income to
net cash used in operating activities:Incentive bonus paid in common shares
    
    
    3,010
    
    
    
    
    
    
    
    3,010
    
    
    
    291,032Compensation from options and warrants
    
    
    329,177
    
    
    
    419,787
    
    
    
    670,300
    
    
    
    848,534Depreciation, depletion and amortization
    
    
    2,361,176
    
    
    
    1,964,578
    
    
    
    4,667,646
    
    
    
    3,502,490Impairment of oil and gas assets
    
    
    964,000
    
    
    
    
    
    
    
    964,000
    
    
    
    Gain on sale of assets
    
    
    84,061
    
    
    
    4,015
    
    
    
    78,141
    
    
    
    22,973Deferred income taxes
    
    
    113,665
    
    
    
    1,081,454
    
    
    
    447,071
    
    
    
    2,022,123Changes in assets and liabilitiesAccounts receivable
    
    
    (1,488,709
    )
    
    
    (2,897,966
    )
    
    
    1,143,657
    
    
    
    (3,095,607
    )Prepaid expenses and other current assets
    
    
    209,907
    
    
    
    653,388
    
    
    
    242,620
    
    
    
    2,262,169Other non-current assets
    
    
    (340,696
    )
    
    
    62,124
    
    
    
    (867,958
    )
    
    
    (761,820
    )Accounts payable
    
    
    427,672
    
    
    
    1,118,653
    
    
    
    (2,627,850
    )
    
    
    2,652,633Accrued liabilities
    
    
    183,012
    
    
    
    (1,953,700
    )
    
    
    (479,161
    )
    
    
    851,056Customers drilling deposits
    
    
    (1,072,504
    )
    
    
    (4,901,949
    )
    
    
    (7,305,772
    )
    
    
    (20,730,549
    )Net cash
provided by (used in) operating activities
    
    
    1,013,347
    
    
    
    (3,726,663
    )
    
    
    (4,078,984
    )
    
    
    (10,786,276
    )INVESTING ACTIVITIESProceeds from sale of assets
    
    
    7,500
    
    
    
    4,443
    
    
    
    34,700
    
    
    
    4,443Purchase of property and equipment
    
    
    (476,103
    )
    
    
    (164,950
    )
    
    
    (986,504
    )
    
    
    (489,692
    )Increase in bonds and deposits
    
    
    (12,000
    )
    
    
    (10,000
    )
    
    
    (37,000
    )
    
    
    (11,000
    )Additions to oil and gas properties, net
    
    
    (14,708,038
    )
    
    
    (9,523,333
    )
    
    
    (25,524,179
    )
    
    
    (35,044,644
    )Net cash used in investing activities
    
    
    (15,188,641
    )
    
    
    (9,693,840
    )
    
    
    (26,512,983
    )
    
    
    (35,540,893
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    1,867
    
    
    
    1,775
    
    
    
    3,710
    
    
    
    22,416Proceeds from issuance of common shares
    
    
    
    
    
    
    119,570
    
    
    
    40,300
    
    
    
    287,626Payments of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (75,000
    )Proceeds from issuance of long term debt
    
    
    15,000,000
    
    
    
    11,021,067
    
    
    
    19,000,000
    
    
    
    29,000,000Payments of long term debt
    
    
    (6,000
    )
    
    
    (6,000
    )
    
    
    (12,000
    )
    
    
    (12,000
    )Net cash provided by financing activities
    
    
    14,995,867
    
    
    
    11,136,412
    
    
    
    19,032,010
    
    
    
    29,223,042Change in cash
    
    
    820,573
    
    
    
    (2,284,091
    )
    
    
    (11,559,957
    )
    
    
    (17,104,127
    )Cash, beginning of period
    
    
    2,051,447
    
    
    
    9,124,216
    
    
    
    14,431,977
    
    
    
    23,944,252Cash, end of period
    
    $
    2,872,020
    
    
    $
    6,840,125
    
    
    $
    2,872,020
    
    
    $
    6,840,125SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    1,526,408
    
    
    $
    1,126,537
    
    
    $
    2,757,452
    
    
    $
    1,793,203Income 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
 Capitalized Costs and DD&A DD&A
 June 30,
    
    
    December 31,2007
    
    
    2006Proved oil and gas properties
    
    $
    130,278,138
    
    
    $
    110,169,303Unproved oil and gas properties
    
    
    3,512,312
    
    
    
    3,000,465Gathering facilities and well equipment
    
    
    50,309,355
    
    
    
    46,369,858184,099,805
    
    
    
    159,539,626Accumulated DD&A
    
    
    (19,337,094
    )
    
    
    (15,322,094
    )Net oil and gas properties and equipment
    
    $
    164,762,711
    
    
    $
    144,217,532
 Suspended Well Costs Accounting for Suspended Well
Costs
 4




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##### Table of Contents



Note 3. Property and Equipment
  June 30,
    
    
    December 31,2007
    
    
    2006Land
    
    $
    12,908
    
    
    $
    12,908Building improvements
    
    
    58,051
    
    
    
    48,350Machinery and equipment
    
    
    3,368,209
    
    
    
    2,680,174Office furniture and fixtures
    
    
    163,725
    
    
    
    129,031Computer and office equipment
    
    
    562,328
    
    
    
    569,877Vehicles
    
    
    1,506,080
    
    
    
    1,607,5545,671,301
    
    
    
    5,047,894Accumulated depreciation
    
    
    (1,829,128
    )
    
    
    (1,705,323
    )Net other property and equipment
    
    $
    3,842,173
    
    
    $
    3,342,571
 Note 4. Deferred Financing Costs
  Note 5. Goodwill
 Goodwill and Other Intangible Assets
 Note 6. Customer Drilling Deposits
  5




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##### Table of Contents



Note 7. Long Term Debt
 Convertible Notes
  Credit Facility
 Acquisition Debt
 Total Long Term Debt and Maturities
 Principal Amount OutstandingJune 30,
    
    
    December 31,2007
    
    
    2006Total long term debt (including current portion)(1)
    
    $
    86,111,170
    
    
    $
    66,946,744Less current portion
    
    
    24,000
    
    
    
    24,000Total long term debt(1)
    
    $
    86,087,170
    
    
    $
    66,922,744
 
 (1)
    
    Reflects allocations of $1,219,648 at June 30, 2007 and $1,396,074 at December 31, 2006
from our 6% convertible notes in the principal amount of $37,000,000 based on equity
components of their conversion features and related warrants. 6




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##### Table of Contents



Maturities of Debt
 Remainder of 2007
    
    $
    12,0002008
    
    
    24,0002009
    
    
    24,0002010
    
    
    35,804,3522011 and thereafter
    
    
    50,246,818
 Note 8. Capital Stock
 Preferred Shares
 Common Shares
 Number ofShares
    
    
    AmountCommon Shares IssuedBalance, December 31, 2005
    
    
    21,357,628
    
    
    $
    82,371,189Issued to employees as incentive bonus
    
    
    65,945
    
    
    
    468,612Issued upon exercise of stock options and warrants
    
    
    336,106
    
    
    
    1,472,026Issued for contract settlement
    
    
    28,872
    
    
    
    220,005Balance, December 31, 2006
    
    
    21,788,551
    
    
    
    84,531,832Issued to employees as incentive bonus
    
    
    430
    
    
    
    3,010Issued upon exercise of stock options and warrants
    
    
    10,000
    
    
    
    40,300Balance, June 30, 2007
    
    
    21,798,981
    
    
    $
    84,575,142Paid In Capital  Options and WarrantsBalance, December 31, 2005
    
    
    
    
    
    $
    2,743,806Recognized
    
    
    
    
    
    
    975,468Expired
    
    
    
    
    
    
    (565,946
    )Accreted(1)
    
    
    
    
    
    
    (80,041
    )Balance, December 31, 2006
    
    
    
    
    
    
    3,073,287Recognized
    
    
    
    
    
    
    378,696Balance, June 30, 2007
    
    
    
    
    
    $
    3,451,983Contributed SurplusBalance, December 31, 2005
    
    
    
    
    
    $
    1,748,926Accreted(1)
    
    
    
    
    
    
    (352,852
    )Balance, December 31, 2006
    
    
    
    
    
    
    1,396,074Accreted(1)
    
    
    
    
    
    
    (176,426
    )Balance, June 30, 2007
    
    
    
    
    
    
    1,219,648Common Shares to be IssuedBalance, June 30, 2007 and December 31, 2006
    
    
    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
 7




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##### Table of Contents



Weighted AverageIssued
    
    
    Exercisable
    
    
    Exercise PriceBalance, December 31, 2005
    
    
    2,985,000
    
    
    
    571,250
    
    
    $
    4.67Vested
    
    
    
    
    
    
    509,583
    
    
    
    4.26Exercised
    
    
    (135,000
    )
    
    
    (135,000
    )
    
    
    4.05Forfeited
    
    
    (35,000
    )
    
    
    
    
    
    
    6.02Balance, December 31, 2006
    
    
    2,815,000
    
    
    
    945,833
    
    
    
    4.68Vested
    
    
    
    
    
    
    292,500
    
    
    
    4.03Balance, June 30, 2007
    
    
    2,815,000
    
    
    
    1,238,333
    
    
    
    4.68
  Options Issued and Outstanding
    
    
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    
    
    AveragePrice
    
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    
    
    Exerciseor Range
    
    
    Number
    
    
    Life (years)
    
    
    Price
    
    
    
    
    Number
    
    
    Price$
    1.02
    
    
    
    145,000
    
    
    
    0.51
    
    
    $
    1.02
    
    
    
    
    
    145,000
    
    
    $
    1.024.03     4.09
    
    
    
    1,845,000
    
    
    
    2.25
    
    
    
    4.05
    
    
    
    
    
    1,045,000
    
    
    
    4.066.02     7.04
    
    
    
    825,000
    
    
    
    3.06
    
    
    
    6.74
    
    
    
    
    
    48,333
    
    
    
    6.022,815,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,238,333
 Share-Based Payment
 Common Stock Purchase Warrants
 Note 9. Income (Loss) Per Share
 EPS
 8




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Diluted EPS
    
    2007
    
    
    2006
    
    
    2007
    
    
    2006Numerator:Net income (loss) as reported for basic EPS
    
    $
    (760,424
    )
    
    $
    722,953
    
    
    $
    (1,014,688
    )
    
    $
    1,348,690Adjustments to income for diluted EPS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) for diluted EPS
    
    $
    (760,424
    )
    
    $
    722,953
    
    
    $
    (1,014,688
    )
    
    $
    1,348,690Denominator:Weighted average shares for basic EPS
    
    
    21,798,607
    
    
    
    21,456,828
    
    
    
    21,794,843
    
    
    
    21,417,395Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,277,449
    
    
    
    
    
    
    
    1,444,601Warrants
    
    
    
    
    
    
    185,430
    
    
    
    
    
    
    
    210,196Adjusted weighted average shares and
assumed conversions for diluted EPS
    
    
    21,798,607
    
    
    
    22,919,707
    
    
    
    21,794,843
    
    
    
    23,072,192Basic EPS
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    0.06Diluted EPS
    
    $
    (0.03
    )
    
    $
    0.03
    
    
    $
    (0.05
    )
    
    $
    0.06
 Note 10. Segment Information
  Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2007
    
    
    2006
    
    
    2007
    
    
    2006Revenue:Oil and gas development
    
    $
    16,077,690
    
    
    $
    18,339,642
    
    
    $
    34,023,082
    
    
    $
    45,658,897Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    16,077,690
    
    
    
    18,339,642
    
    
    
    34,023,082
    
    
    
    45,658,897DD&A:Oil and gas development
    
    
    2,194,706
    
    
    
    1,810,080
    
    
    
    4,337,131
    
    
    
    3,196,825Corporate
    
    
    166,470
    
    
    
    154,498
    
    
    
    330,515
    
    
    
    305,665Total
    
    
    2,361,176
    
    
    
    1,964,578
    
    
    
    4,667,646
    
    
    
    3,502,490Interest expense:Oil and gas development
    
    
    979,216
    
    
    
    534,070
    
    
    
    1,648,972
    
    
    
    579,453Corporate
    
    
    555,000
    
    
    
    555,000
    
    
    
    1,110,000
    
    
    
    1,110,000Total
    
    
    1,534,216
    
    
    
    1,089,070
    
    
    
    2,758,972
    
    
    
    1,689,453Net income (loss):Oil and gas development
    
    
    121,866
    
    
    
    1,561,882
    
    
    
    643,347
    
    
    
    3,032,535Corporate
    
    
    (882,290
    )
    
    
    (838,929
    )
    
    
    (1,658,035
    )
    
    
    (1,683,845
    )Total
    
    
    (760,424
    )
    
    
    722,953
    
    
    
    (1,014,688
    )
    
    
    1,348,690Capital expenditures:Oil and gas development
    
    
    15,065,115
    
    
    
    9,647,046
    
    
    
    26,264,057
    
    
    
    35,411,913Corporate
    
    
    119,026
    
    
    
    41,237
    
    
    
    246,626
    
    
    
    122,423Total
    
    $
    15,184,141
    
    
    $
    9,688,283
    
    
    $
    26,510,683
    
    
    $
    35,534,336
 June 30,
    
    
    December 31,2007
    
    
    2006Identifiable assets:Oil and gas development
    
    $
    183,776,214
    
    
    $
    174,750,803Corporate
    
    
    3,164,125
    
    
    
    3,468,327Total
    
    $
    186,940,340
    
    
    $
    178,219,130
 9




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##### Table of Contents



Note 11. Commitments
  Commercial CommitmentsOperating
    
    
    OtherYear
    
    Leases
    
    
    Commitments
    
    
    TotalRemainder of 2007
    
    $
    1,018,533
    
    
    $
    240,000
    (1)
    
    $
    1,258,5332008
    
    
    1,920,596
    
    
    
    100,000
    (2)
    
    
    2,020,5962009
    
    
    1,776,054
    
    
    
    2,045,000
    (2)
    
    
    3,821,0542010
    
    
    1,706,974
    
    
    
    
    
    
    
    1,706,9742011 and thereafter
    
    
    1,847,021
    
    
    
    
    
    
    
    1,847,021Total
    
    $
    8,269,178
    
    
    $
    2,385,000
    
    
    $
    10,654,178
 
 (1)
    
    Reflects obligations under a guaranty secured by a certificate of deposit provided for bank
debt of Galax Energy Concepts, LLC, a limited liability company in which DPI previously held a
minority interest.(2)
    
    Reflects commitments under a purchase contract for an airplane. Note 12. Recent Accounting Standards
 EITF 6-11 FASB EITF Accounting for
Income Tax Benefits of Dividends on Share-Based Payment Awards
 EITF 6-10 Accounting for the Deferred Compensation and Post Retirement Benefit Aspects of
Collateral Assignment Split-Dollar Life Insurance Arrangements
 SFAS No. 159 The Fair Value Option
for Financial Assets and Financial Liabilities
 SAB No. 108 SAB Considering the Effects of Prior Year Misstatements
when Quantifying Misstatements in Current Year Financial Statements
 SFAS No. 158 Employers Accounting
for Defined Benefit Pension and Other Postretirement Plans
 10




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##### Table of Contents



SFAS No. 157 Fair Value
Measurements
 FSP AUG AIR1 Accounting for
Planned Major Maintenance Activities
 FIN No. 48 FIN Accounting for Uncertainty in Income Taxes  Interpretation of FASB No. 109
 11




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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
  NGAS we our us Dth Mcf Bcf Mcfe Bcfe
 Strategy
  
    
    Organic Growth through Drilling. Development drilling is our mainstay for
production and reserve growth. As of June 30, 2007, we had interests in a total of 1,116
wells, concentrated in our core operated properties in the Appalachian basin. We believe
our long and successful operating history in Appalachia and proven ability to drill a large
number of wells year after year have positioned us as a leading player in this region. We
participated in 226 gross (65.4577 net) wells during 2006 and an additional 106 gross
(45.4965 net) wells in the first six months of 2007. The increase in our net well position
this year reflects our strategy for accelerating organic growth by retaining larger working
interests in new wells drilled on our core operated properties and reducing our reliance on
sponsored drilling programs for participation in these initiatives. A
majority of our Appalachian acreage is undeveloped, providing us with a multi-year inventory
of drilling locations for future development.
    
    Investment in Midstream Assets. We own and operate a strategically located
open-access gas gathering system spanning 116 miles in southeastern Kentucky and
southwestern Virginia. We acquired these midstream assets in March 2006 through our NGAS
Gathering subsidiary for $18 million. We operated this system since October 2004 and
augmented it after the acquisition through two high-pressure lateral upgrades. Ownership
of these facilities compliments our field-wide Appalachian gathering systems, expanding our
total gathering position to 559 miles as of June 30, 2007. We currently move production
from our Leatherwood, Straight Creek and SME fields for delivery through the NGAS Gathering
system, which has daily gross throughput of over 19,000 Dth, including third-party
deliveries. In addition to generating gas transmission and compression revenues from
third-party throughput and cost savings for our own Appalachian production, ownership of
these assets gives us control over gas flow from our connected fields and enhances our
competitive position in the region.
    
    Extension of Infrastructure. We construct and operate field-wide gas gathering
and compression facilities for our Appalachian properties, which we continually upgrade to
keep pace with our expanding production base. Because we control third-party
 12




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##### Table of Contents



access to these facilities, they provide us with
competitive advantages in acquiring and developing nearby acreage. Our field-wide systems
spanned 443 miles at June 30, 2007, including 103 miles of production lines installed in
2006 and 29 miles in the first two quarters this year. Recent additions to our
infrastructure include facilities that have enabled us to bring a backlog of unconnected
wells in our Leatherwood field on line sequentially for compression into the NGAS Gathering
system. We have upgraded the main suction line for this field to enhance flow
rates from new Leatherwood wells. We are also extending our infrastructure to provide
deliverability from our Fonde field through a 14-mile, six-inch steel line to our midstream
system. Production in Fonde has historically been limited by pipeline
capacity constraints. When completed, our new system will enable us to begin
connecting over
60 wells drilled in Fonde and open nearly 50,000 acres for future development in this field.
    
    Acquisition of Additional Drilling Prospects. We follow a disciplined capital
allocation process in selecting opportunities to build our substantial inventory of
drilling prospects that meet our criteria for predictable, long-lived reserves. During
2006, we expanded our position in several of our major Appalachian fields. We also
implemented initiatives to leverage our core expertise with evolving technologies in
horizontal and directional drilling, which may provide advantages in extracting tight gas
from unconventional formations. The initial projects are being conducted in the Arkoma
basin for coalbed methane (CBM) recovery, in the Illinois basin on acreage we acquired in
western Kentucky to test the New Albany shale formation and in West Virginia on acreage
controlled by a joint venture partner. We plan to continue capitalizing on opportunities
to assemble or acquire interests in large tracts with significant development potential.
Our goal is to consolidate our position in the Appalachian basin, while also diversifying
our prospect inventory with similar unconventional plays.
    
    Purchase of Producing Properties. The purchase of third-party production
offers a means in addition to drilling for accelerating our growth, while continuing to
capitalize on our operating experience. Our acquisition criteria for producing properties
include reserve life, profit enhancement potential, existing infrastructure, geographic
concentration and working interest levels permitting operation of acquired properties.
Based on our current evaluations, we believe some of our drilling programs present
attractive acquisition candidates, providing opportunities to increase our interest in
producing properties meeting all of these criteria. We plan to
implement a strategy to begin acquiring the assets of targeted programs based on independent reserve valuations that will
give effect to our working interests and reversionary interests in these programs. In
addition to increasing our reserves and cash flows, the consolidation of these assets
should generate administrative efficiencies, while also simplifying our capital structure.
 Regional Advantages
 Geographic
 Geological
 13




---



##### Table of Contents



Drilling Operations
 Drilling Results
 Development Wells
    
    
    Exploratory WellsProductive
    
    
    Dry
    
    
    Productive
    
    
    DryGross
    
    
    Net
    
    
    Gross
    
    
    Gross
    
    
    Net
    
    
    GrossYear ended December 31, 2006
    
    
    193
    
    
    
    56.3007
    
    
    
    
    
    
    
    4
    
    
    
    3.1250
    
    
    
    29Six months ended
June 30, 2007
    
    
    100
    
    
    
    39.4965
    
    
    
    
    
    
    
    6
    
    
    
    6.000
    
    
    
    
 Production Volumes and Sales Prices
 Six Months Ended
    
    
    Year EndedJune 30,
    
    
    December 31,2007
    
    
    2006
    
    
    2006Production volumes:Natural gas (Mcf)
    
    
    1,359,650
    
    
    
    1,282,496
    
    
    
    2,622,474Oil (Bbl)
    
    
    31,341
    
    
    
    18,463
    
    
    
    40,938Equivalents (Mcfe)
    
    
    1,547,698
    
    
    
    1,393,273
    
    
    
    2,868,102Average sales prices:Natural gas (per Mcf)
    
    $
    8.58
    
    
    $
    8.56
    
    
    $
    8.23Oil (per Bbl)
    
    
    53.95
    
    
    
    58.05
    
    
    
    59.60
 Participation Rights
 Drilling Programs
 Drilling Program Structure
 14




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##### Table of Contents



Drilling Program Investments
 Results of Operations  Three Months Ended June 30, 2007 and 2006
 Revenues
 Three Months Ended June 30,% of
    
    
    
    
    
    
    %2007
    
    
    Revenue
    
    
    2006
    
    
    ChangeRevenue:Contract drilling
    
    $
    7,459,704
    
    
    
    46
    %
    
    $
    11,029,274
    
    
    
    (32
    )%Oil and gas production
    
    
    6,730,947
    
    
    
    42
    
    
    
    5,935,783
    
    
    
    13Gas transmission and compression
    
    
    1,887,039
    
    
    
    12
    
    
    
    1,374,585
    
    
    
    37Total
    
    $
    16,077,690
    
    
    
    100
    %
    
    $
    18,339,642
    
    
    
    (12
    )
     Expenses
 15




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##### Table of Contents



Three Months Ended June 30,2007
    
    
    Margin
    
    
    2006
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    5,919,020
    
    
    
    21
    %
    
    $
    7,840,559
    
    
    
    29
    %Oil and gas production
    
    
    1,799,186
    
    
    
    73
    
    
    
    1,529,940
    
    
    
    74Gas transmission and compression
    
    
    779,843
    
    
    
    59
    
    
    
    541,869
    
    
    
    61Impairment of oil and gas assets
    
    
    964,000
    
    
    
    N/A
    
    
    
    
    
    
    
    N/ATotal direct expenses
    
    
    9,462,049
    
    
    
    41
    
    
    
    9,912,368
    
    
    
    46
 % Revenue
    
    
    
    
    
    
    % RevenueOther Expenses:Selling, general and administrative
    
    
    3,042,364
    
    
    
    19
    %
    
    
    3,164,516
    
    
    
    17
    %Options, warrants and deferred compensation
    
    
    329,177
    
    
    
    2
    
    
    
    419,787
    
    
    
    2Depreciation, depletion and amortization
    
    
    2,361,176
    
    
    
    15
    
    
    
    1,964,578
    
    
    
    11Interest expense, net of interest income
    
    
    1,484,527
    
    
    
    9
    
    
    
    987,546
    
    
    
    5Other, net
    
    
    45,156
    
    
    
    
    
    
    
    86,440
    
    
    
    Total other expenses
    
    $
    7,262,400
    
    
    
    
    
    
    $
    6,622,867
     SG&A
  DD&A
 16




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##### Table of Contents



Net Income and EPS EPS
 Results of Operations  Six Months Ended June 30, 2007 and 2006
 Revenues
 Six Months Ended June 30,% of
    
    
    
    
    
    
    %2007
    
    
    Revenue
    
    
    2006
    
    
    ChangeRevenue:Contract drilling
    
    $
    16,704,923
    
    
    
    49
    %
    
    $
    31,440,774
    
    
    
    (47
    )%Oil and gas production
    
    
    13,483,179
    
    
    
    40
    
    
    
    12,139,967
    
    
    
    11Gas transmission and compression
    
    
    3,834,980
    
    
    
    11
    
    
    
    2,078,156
    
    
    
    85Total
    
    $
    34,023,082
    
    
    
    100
    %
    
    $
    45,658,897
    
    
    
    (25
    )
    Expenses
 17




---



##### Table of Contents



Six Months Ended June 30,2007
    
    
    Margin
    
    
    2006
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    13,099,737
    
    
    
    22
    %
    
    $
    24,543,489
    
    
    
    22
    %Oil and gas production
    
    
    3,482,200
    
    
    
    74
    
    
    
    2,983,408
    
    
    
    75Gas transmission and compression
    
    
    1,879,436
    
    
    
    51
    
    
    
    1,174,298
    
    
    
    43Impairment of oil and gas assets
    
    
    964,000
    
    
    
    N/A
    
    
    
    
    
    
    
    N/ATotal direct expenses
    
    
    19,425,373
    
    
    
    
    
    
    
    28,701,195
    
    
    
    37
 % Revenue
    
    
    
    
    
    
    % RevenueOther Expenses:Selling, general and administrative
    
    
    7,064,246
    
    
    
    21
    %
    
    
    7,638,908
    
    
    
    17
    %Options, warrants and deferred compensation
    
    
    670,300
    
    
    
    2
    
    
    
    848,534
    
    
    
    2Depreciation, depletion and amortization
    
    
    4,667,646
    
    
    
    14
    
    
    
    3,502,490
    
    
    
    8Interest expense, net of interest income
    
    
    2,625,229
    
    
    
    8
    
    
    
    1,469,569
    
    
    
    3Other, net
    
    
    137,905
    
    
    
    
    
    
    
    127,388
    
    
    
    Total other expenses
    
    $
    15,165,326
    
    
    
    
    
    
    $
    13,586,889
        18




---



##### Table of Contents



Net Income and EPS
  Liquidity and Capital Resources
 Liquidity
  Capital Resources
   19




---



##### Table of Contents



Contractual Obligations and Commercial Commitments
  Operating Leases
    
    
    Other
    
    
    Long TermYear
    
    Equipment
    
    
    Premises
    
    
    Total
    
    
    Commitments
    
    
    DebtRemainder of 2007
    
    $
    892,484
    
    
    $
    126,049
    
    
    $
    1,018,533
    
    
    $
    240,000
    (1)
    
    $
    12,0002008
    
    
    1,899,588
    
    
    
    21,008
    
    
    
    1,920,596
    
    
    
    100,000
    (2)
    
    
    24,0002009
    
    
    1,776,054
    
    
    
    
    
    
    
    1,776,054
    
    
    
    2,045,000
    (2)
    
    
    24,0002010
    
    
    1,706,974
    
    
    
    
    
    
    
    1,706,974
    
    
    
    
    
    
    
    35,804,352
    (3)2011 and thereafter
    
    
    1,847,021
    
    
    
    
    
    
    
    1,847,021
    
    
    
    
    
    
    
    50,246,818Total
    
    $
    8,122,121
    
    
    $
    147,057
    
    
    $
    8,269,178
    
    
    $
    2,385,000
    
    
    $
    86,111,17
 
 (1)
    
    Reflects obligations under a guaranty secured by a certificate of deposit provided for bank
debt of Galax Energy Concepts, LLC, a limited liability company in which DPI previously held a
minority interest.(2)
    
    Reflects commitments under a purchase contract for an airplane.(3)
    
    Excludes an allocation of $1,219,648 from our 6% convertible notes in the principal amount of
$37,000,000 based on equity components of their conversion features. Critical Accounting Policies and Estimates
 General
 20




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##### Table of Contents



Allowance for Doubtful Accounts .
 Impairment of Long-Lived Assets .
 Forward Looking Statements and Risk Factors
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   21




---



##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 4. Submission of Matters to a Vote of Security Holders
  VotesNominee
    
    Votes For
    
    WithheldWilliam S. Daugherty
    
    
    17,907,787
    
    
    
    132,531Charles L. Cotterell
    
    
    17,852,028
    
    
    
    188,290James K. Klyman
    
    
    17,771,808
    
    
    
    268,510Thomas F. Miller
    
    
    17,890,072
    
    
    
    150,246
  Votes
    
    BrokerProposal
    
    Votes For
    
    Against
    
    NonvotesFixing the size of the board of
directors at four members
    
    
    17,613,523
    
    
    
    378,626
    
    
    
    48,167Ratification of the appointment of
independent public accountants
    
    
    17,944,380
    
    
    
    
    
    
    
    95,938
 
 Item 6. Exhibits
 ExhibitNumber
    
    Description of Exhibit3.1
    
    Notice of Articles, certified on June 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 June 29, 2004).3.2
    
    Alteration to Notice of Articles, certified on June 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 June 29, 2004).3.3
    
    Articles dated June 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 June 29, 2004).10.1
    
    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 March 31, 2004).10.4
    
    Asset Purchase and Sale Agreement dated as of January 17, 2006 among Duke Energy Gas
Services,
 22




---



##### Table of Contents



ExhibitNumber
    
    Description of ExhibitLLC, NGAS Gathering, LLC and Daugherty Resources, Inc. (incorporated by reference to
Exhibit 10.1 to current report on Form 8-K [File No. 0-12185] dated January 19, 2006).10.5
    
    Securities Purchase Agreement dated as of December 13, 2005 among NGAS Resources, Inc. and
the investors named therein (incorporated by reference to Exhibit 10.1 to current report on
Form 8-K [File No. 0-12185] dated December 14, 2005).10.6
    
    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).10.7
    
    Credit Agreement dated as of September 8, 2006 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]
dated September 8, 2006).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 March 31, 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
March 31, 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 March 31, 2004).11.1
    
    Computation of Earnings Per Share (included in Note 9 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 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    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.
 23




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##### Table of Contents



SIGNATURES
  NGAS Resources, Inc.Date: August 7, 2007
    By:
    /s/  William S. DaughertyWilliam S. DaughertyChief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer) 24