##### 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, 2005
 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 þ
  Title of Class
Common Stock
    
    Outstanding at August 5, 2005
17,549,846




---



NGAS Resources, Inc.
 INDEX
 PagePART I. FINANCIAL INFORMATIONItem 1. Financial Statements:Review
Engagement Report
    
    
    1Condensed Consolidated Balance Sheets  June 30, 2005 (unaudited) and December 31, 2004
    
    
    2Condensed Consolidated Statement of Operations and Deficit  Three months and six months ended
June 30, 2005 and 2004 (unaudited)
    
    
    3Condensed Consolidated Statement of Cash Flows  Three months and six months ended
June 30, 2005 and 2004 (unaudited)
    
    
    4Notes to Condensed Consolidated Financial Statements
    
    
    5Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    16Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II. OTHER INFORMATIONItem 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    25Item 4. Submission of Matters to a Vote of Security Holders
    
    
    26Item 6. Exhibits
    
    
    26EX-11.1 Computation of Earnings Per ShareEX-31.1 CertificationEX-31.2 CertificationEX-32.1 CertificationEX-32.2 Certification




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##### Table of Contents



PART I. FINANCIAL INFORMATION
 
 Item 1. Financial Statements
  
 REVIEW ENGAGEMENT REPORT
 NGAS RESOURCES, INC.
  NGAS RESOURCES, INC.
     KRAFT, BERGER, GRILL, SCHWARTZ, COHEN & MARCH LLP
Chartered Accountants
 
 1




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##### Table of Contents



NGAS Resources, Inc.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (U.S. funds)
 June 30,
    
    
    December 31,2005
    
    
    2004(Unaudited)ASSETSCurrent assets:Cash
    
    $
    15,446,431
    
    
    $
    11,849,372Accounts receivable
    
    
    4,477,097
    
    
    
    2,281,715Prepaid expenses and other current assets
    
    
    3,087,087
    
    
    
    2,152,174Loans to related parties (Note 4)
    
    
    119,920
    
    
    
    142,718Total current assets
    
    
    23,130,535
    
    
    
    16,425,979Bonds and deposits
    
    
    371,695
    
    
    
    124,650Oil and gas properties (Note 2)
    
    
    80,379,629
    
    
    
    68,156,790Property and equipment (Note 3)
    
    
    2,925,210
    
    
    
    2,668,908Loans to related parties (Note 4)
    
    
    256,170
    
    
    
    357,175Investments (Note 5)
    
    
    
    
    
    
    55,454Deferred financing costs (Note 6)
    
    
    1,256,566
    
    
    
    1,024,810Goodwill (Note 7)
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    108,632,982
    
    
    $
    89,126,943LIABILITIESCurrent liabilities:Accounts payable
    
    
    4,363,208
    
    
    
    3,381,726Accrued liabilities
    
    
    5,766,697
    
    
    
    3,537,576Customers drilling deposits (Note 8)
    
    
    19,934,725
    
    
    
    12,652,001Long term debt, current portion (Note 9)
    
    
    33,579
    
    
    
    121,247Total current liabilities
    
    
    30,098,209
    
    
    
    19,692,550Future income taxes
    
    
    2,661,302
    
    
    
    2,053,432Long term debt (Note 9)
    
    
    31,342,195
    
    
    
    25,870,498Deferred compensation
    
    
    587,011
    
    
    
    368,935Total liabilities
    
    
    64,688,717
    
    
    
    47,985,415SHAREHOLDERS EQUITYCapital stock (Note 10)Authorized:5,000,000      Preferred shares, non-cumulative, convertible100,000,000      Common sharesIssued:16,314,913      Common shares (December 31, 2004  15,605,208)
    
    
    57,394,421
    
    
    
    54,929,88721,100      Common shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in capital  options and warrants
    
    
    1,937,718
    
    
    
    1,796,504To be issued:9,185      Common shares (December 31, 2004  10,070)
    
    
    45,925
    
    
    
    50,35059,354,434
    
    
    
    56,753,111Deficit
    
    
    (15,410,169
    )
    
    
    (15,611,583
    )Total shareholders equity
    
    
    43,944,265
    
    
    
    41,141,528Total liabilities and shareholders equity
    
    $
    108,632,982
    
    
    $
    89,126,943
  2




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##### Table of Contents



NGAS Resources, Inc.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS AND DEFICIT
 (U.S. funds) (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004REVENUEContract drilling
    
    $
    7,639,000
    
    
    $
    7,040,250
    
    
    $
    24,316,000
    
    
    $
    21,366,375Oil and gas production
    
    
    3,507,703
    
    
    
    986,724
    
    
    
    6,383,491
    
    
    
    1,778,013Gas transmission and compression
    
    
    289,016
    
    
    
    300,195
    
    
    
    746,474
    
    
    
    748,663Total revenue
    
    
    11,435,719
    
    
    
    8,327,169
    
    
    
    31,445,965
    
    
    
    23,893,051DIRECT EXPENSESContract drilling
    
    
    6,618,260
    
    
    
    5,236,941
    
    
    
    18,988,065
    
    
    
    15,341,589Oil and gas production
    
    
    890,694
    
    
    
    392,379
    
    
    
    1,649,515
    
    
    
    670,087Gas transmission and compression
    
    
    235,084
    
    
    
    114,326
    
    
    
    627,868
    
    
    
    514,192Total direct expenses
    
    
    7,744,038
    
    
    
    5,743,646
    
    
    
    21,265,448
    
    
    
    16,525,868OTHER INCOME (EXPENSES)Selling, general and administrative
    
    
    (2,511,910
    )
    
    
    (1,744,546
    )
    
    
    (6,018,735
    )
    
    
    (4,930,064
    )Options, warrants and deferred compensation
    
    
    (239,090
    )
    
    
    (202,972
    )
    
    
    (491,698
    )
    
    
    (233,046
    )Depreciation, depletion and amortization
    
    
    (1,001,533
    )
    
    
    (255,475
    )
    
    
    (2,048,088
    )
    
    
    (508,604
    )Interest expense
    
    
    (555,001
    )
    
    
    (107,535
    )
    
    
    (1,063,754
    )
    
    
    (196,703
    )Interest income
    
    
    48,386
    
    
    
    81,344
    
    
    
    86,126
    
    
    
    168,206Other, net
    
    
    21,184
    
    
    
    104,483
    
    
    
    164,916
    
    
    
    112,229Total other income (expenses)
    
    
    (4,237,964
    )
    
    
    (2,124,701
    )
    
    
    (9,371,233
    )
    
    
    (5,587,982
    )INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (546,283
    )
    
    
    458,822
    
    
    
    809,284
    
    
    
    1,779,201INCOME TAX EXPENSE (BENEFIT)Current
    
    
    
    
    
    
    38,743
    
    
    
    
    
    
    
    149,159Future
    
    
    (10,631
    )
    
    
    211,696
    
    
    
    607,870
    
    
    
    654,418(10,631
    )
    
    
    250,439
    
    
    
    607,870
    
    
    
    803,577NET INCOME (LOSS)
    
    
    (535,652
    )
    
    
    208,383
    
    
    
    201,414
    
    
    
    975,624DEFICIT, beginning of period
    
    
    (14,874,517
    )
    
    
    (16,456,043
    )
    
    
    (15,611,583
    )
    
    
    (17,223,284
    )DEFICIT, end of period
    
    $
    (15,410,169
    )
    
    $
    (16,247,660
    )
    
    $
    (15,410,169
    )
    
    $
    (16,247,660
    )NET INCOME (LOSS) PER SHAREBasic
    
    $
    (0.03
    )
    
    $
    0.02
    
    
    $
    0.01
    
    
    $
    0.08Diluted
    
    $
    (0.03
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.06WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    16,005,158
    
    
    
    13,877,212
    
    
    
    15,848,386
    
    
    
    12,964,698Diluted
    
    
    16,005,158
    
    
    
    16,706,462
    
    
    
    16,749,736
    
    
    
    16,005,368
  3




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (U.S. funds) (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004OPERATING ACTIVITIESNet income (loss)
    
    $
    (535,652
    )
    
    $
    208,383
    
    
    $
    201,414
    
    
    $
    975,624Adjustments to reconcile net income to net cash
provided by (used in) operating activities:Incentive bonus paid in common shares
    
    
    
    
    
    
    
    
    
    
    217,026
    
    
    
    Options, warrants and deferred compensation
    
    
    239,090
    
    
    
    202,972
    
    
    
    491,698
    
    
    
    233,046Contract settlement paid in common shares
    
    
    (4,425
    )
    
    
    
    
    
    
    (4,425
    )
    
    
    Depreciation, depletion and amortization
    
    
    1,001,533
    
    
    
    255,475
    
    
    
    2,048,088
    
    
    
    508,604Write-down of investment
    
    
    55,454
    
    
    
    
    
    
    
    55,454
    
    
    
    Notes issued in kind for interest on long term debt
    
    
    
    
    
    
    18,157
    
    
    
    
    
    
    
    55,359Gain on sale of assets
    
    
    
    
    
    
    (348
    )
    
    
    (12,568
    )
    
    
    (4,948
    )Future income taxes (benefit)
    
    
    (10,631
    )
    
    
    (45,951
    )
    
    
    607,870
    
    
    
    396,771Changes in assets and liabilitiesAccounts receivable
    
    
    (1,670,147
    )
    
    
    (176,398
    )
    
    
    (2,195,382
    )
    
    
    (432,269
    )Prepaid expenses and other current assets
    
    
    (937,893
    )
    
    
    (183,389
    )
    
    
    (934,913
    )
    
    
    (222,676
    )Accounts payable
    
    
    (276,962
    )
    
    
    368,697
    
    
    
    981,482
    
    
    
    1,180,369Accrued liabilities
    
    
    (138,397
    )
    
    
    (766,269
    )
    
    
    2,229,121
    
    
    
    45,282Income taxes payable
    
    
    
    
    
    
    3,890
    
    
    
    
    
    
    
    44,306Customers drilling deposits
    
    
    8,257,125
    
    
    
    3,165,000
    
    
    
    7,282,724
    
    
    
    (4,010,000
    )Net cash provided by (used in) operating activities
    
    
    5,979,095
    
    
    
    3,050,219
    
    
    
    10,967,589
    
    
    
    (1,230,532
    )INVESTING ACTIVITIESProceeds from sale of assets
    
    
    
    
    
    
    186,000
    
    
    
    273,600
    
    
    $
    190,600Purchase of property and equipment
    
    
    (684,001
    )
    
    
    (107,084
    )
    
    
    (729,103
    )
    
    
    (222,230
    )Increase in bonds and deposits
    
    
    (161,650
    )
    
    
    (25,400
    )
    
    
    (247,045
    )
    
    
    (25,400
    )Additions to oil and gas properties, net
    
    
    (6,651,534
    )
    
    
    (2,452,882
    )
    
    
    (13,903,954
    )
    
    
    (8,719,016
    )Net cash used in investing activities
    
    
    (7,497,185
    )
    
    
    (2,399,366
    )
    
    
    (14,606,502
    )
    
    
    (8,776,046
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    29,980
    
    
    
    41,455
    
    
    
    123,803
    
    
    
    76,654Proceeds from issuance of common shares
    
    
    245,860
    
    
    
    6,456,732
    
    
    
    1,494,636
    
    
    
    9,895,049Payments of deferred financing costs
    
    
    
    
    
    
    
    
    
    
    (451,496
    )
    
    
    Proceeds from issuance of long term debt
    
    
    
    
    
    
    
    
    
    
    6,168,696
    
    
    
    Payments of long term debt
    
    
    (14,338
    )
    
    
    (23,167
    )
    
    
    (99,667
    )
    
    
    (46,037
    )Net cash provided by financing activities
    
    
    261,502
    
    
    
    6,475,020
    
    
    
    7,235,972
    
    
    
    9,925,666Change in cash
    
    
    (1,256,588
    )
    
    
    7,125,873
    
    
    
    3,597,059
    
    
    
    (80,912
    )Cash, beginning of period
    
    
    16,703,019
    
    
    
    15,388,208
    
    
    
    11,849,372
    
    
    
    22,594,993Cash, end of period
    
    $
    15,446,431
    
    
    $
    22,514,081
    
    
    $
    15,446,431
    
    
    $
    22,514,081SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    582,097
    
    
    $
    98,030
    
    
    $
    1,107,061
    
    
    $
    141,344Income taxes paid
    
    
    130,000
    
    
    
    34,853
    
    
    
    130,000
    
    
    
    104,853SUPPLEMENTAL SCHEDULE OF NONCASH
INVESTING AND FINANCING ACTIVITIESCommon shares issued for accounts payable
    
    
    
    
    
    
    146,596
    
    
    
    
    
    
    
    Common shares issued upon conversion of notes
    
    
    535,464
    
    
    
    156,250
    
    
    
    620,464
    
    
    
    1,613,890
  4




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##### Table of Contents



NGAS Resources, Inc.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 June 30, 2005 (Unaudited)
 Note 1. Summary of Significant Accounting Policies
 General
 Basis of Consolidation
 Estimates
 Change in Accounting Policy
 Reclassifications and Adjustments
 5




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##### Table of Contents



Three Months
    
    
    Six MonthsEnded June 30,
    
    
    Ended June 30,2004
    
    
    2004Gross profit, as reported
    
    $
    2,583,523
    
    
    $
    7,367,183Less DD&A, as a component of direct expenses
    
    
    (255,475
    )
    
    
    (508,604
    )Gross profit, as restated
    
    $
    2,328,048
    
    
    $
    6,858,579
 Note 2. Oil and Gas Properties
  June 30, 2005
    
    
    December 31,Accumulated
    
    
    
    
    
    
    2004Cost
    
    
    DD&A
    
    
    Net
    
    
    NetProved oil and gas properties
    
    $
    71,428,177
    
    
    $
    (5,278,211
    )
    
    $
    66,149,966
    
    
    $
    59,387,998Unproved oil and gas properties
    
    
    1,986,758
    
    
    
    
    
    
    
    1,986,758
    
    
    
    1,838,038Gathering lines and well equipment
    
    
    12,825,136
    
    
    
    (582,231
    )
    
    
    12,242,905
    
    
    
    6,930,754Total oil and gas properties
    
    $
    86,240,071
    
    
    $
    (5,860,442
    )
    
    $
    80,379,629
    
    
    $
    68,156,790
 Note 3. Property and Equipment
  June 30, 2005
    
    
    December 31,Accumulated
    
    
    
    
    
    
    2004Cost
    
    
    Depreciation
    
    
    Net
    
    
    NetLand
    
    $
    12,908
    
    
    $
    
    
    
    $
    12,908
    
    
    $
    12,908Building improvements
    
    
    36,134
    
    
    
    (5,151
    )
    
    
    30,983
    
    
    
    16,234Machinery and equipment
    
    
    2,358,063
    
    
    
    (467,851
    )
    
    
    1,890,212
    
    
    
    1,706,238Office furniture and fixtures
    
    
    83,570
    
    
    
    (28,488
    )
    
    
    55,082
    
    
    
    59,308Computer and office equipment
    
    
    421,270
    
    
    
    (174,723
    )
    
    
    246,547
    
    
    
    257,977Vehicles
    
    
    991,383
    
    
    
    (301,905
    )
    
    
    689,478
    
    
    
    616,243Total property and equipment
    
    $
    3,903,328
    
    
    $
    (978,118
    )
    
    $
    2,925,210
    
    
    $
    2,668,908
 Note 4. Loans to Related Parties
  6




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##### Table of Contents



Note 5. Investments
  Note 6. Deferred Financing Costs
  Note 7. Goodwill
  Note 8. Customer Drilling Deposits
  Note 9. Long Term Debt
 Credit Facility
 Convertible Notes
 7




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##### Table of Contents



Shares Issuable atPrincipal Amount Outstanding at
    
    
    
    
    
    
    June 30, 2005June 30,
    
    
    December 31,
    
    
    Conversion
    
    
    uponTitle of Notes
    
    2005
    
    
    2004
    
    
    Price
    
    
    Conversion10% Convertible Notes
due May 1, 2007(1)
    
    $
    515,500
    
    
    $
    560,500
    
    
    $
    1.50
    
    
    
    343,6668% Convertible Notes
due April 10, 2008
    
    
    705,925
    
    
    
    745,925
    
    
    
    1.90
    
    
    
    371,5398% Convertible Notes
due May 1, 2008
    
    
    188,750
    
    
    
    188,750
    
    
    
    2.25
    
    
    
    83,8887% Convertible Notes
due September 5, 2008
    
    
    1,077,202
    
    
    
    1,077,202
    
    
    
    4.50
    
    
    
    239,3787% Convertible Notes
due October 4, 2009(2)
    
    
    5,500,000
    
    
    
    6,100,000
    
    
    
    6.00
    
    
    
    916,6667% Convertible Notes
due March 31, 2010
    
    
    8,000,000
    
    
    
    1,831,304
    
    
    
    6.00
    
    
    
    1,333,333Total
    
    $
    15,987,377
    
    
    $
    10,503,681
    
    
    
    
    
    
    
    3,288,470
 
 (1)
    
    After June 30, 2005, the Company issued a notice of redemption for these notes. See Note
16  Subsequent Events.(2)
    
    Does not reflect the conversion of $4,200,000 principal amount of these notes after June
30, 2005. See Note 16  Subsequent Events. Acquisition Debt
 Miscellaneous Debt
 Principal Amount Outstanding atJune 30,
    
    
    December 31,Terms of Debt
    
    2005
    
    
    2004Notes issued to finance equipment and vehicles,
payable monthly in various amounts through 2005,
with interest ranging from 8.68% to 9.5% per annum,
collateralized by the acquired equipment and vehicles
    
    $
    
    
    
    $
    4,451Loan payable to unaffiliated company, bearing interest
at 10% per annum payable quarterly, collateralized
by assets of subsidiary guarantor
    
    
    
    
    
    
    64,779Note payable to unaffiliated individual, payable in
60 installments of $1,370, together with interest at 8%
per annum, through 2005
    
    
    
    
    
    
    4,964Loans payable to various banks, payable monthly in
various amounts, together with interest at rates ranging
from 4% to 9.75% per annum, through 2005,
collateralized by receivables and various vehicles
    
    
    9,579
    
    
    
    23,052Total
    
    $
    9,579
    
    
    $
    97,246
 Maturities of Long Term Debt
 8




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##### Table of Contents



Principal Amount Outstanding atJune 30,
    
    
    December 31,2005
    
    
    2004Total long term debt (including current portion)
    
    $
    31,375,774
    
    
    $
    25,991,745Less current portion
    
    
    33,579
    
    
    
    121,247Total long term debt
    
    $
    31,342,195
    
    
    $
    25,870,498
 Maturities of DebtBalance of 2005
    
    $
    21,5792006
    
    
    15,024,000
    (1)2007
    
    
    539,500
    (2)2008
    
    
    1,995,877
    (3)2009
    
    
    5,524,000
    (4)2010 and thereafter
    
    
    8,270,818
    (3)
 
 (1)
    
    Primarily reflects long term debt under the Companys revolving credit facility.(2)
    
    After June 30, 2005, the Company issued a notice of redemption for these notes. See Note
16  Subsequent Events.(3)
    
    Primarily reflects long term debt under the Companys convertible notes outstanding at June
30, 2005.(4)
    
    Does not reflect the conversion of $4,200,000 principal amount of these notes after June
30, 2005. See Note 16  Subsequent Events. Note 10. Capital Stock
 Preferred and Common Shares
 Number ofCommon Shares Issued
    
    Shares
    
    
    AmountBalance, December 31, 2003
    
    
    10,676,030
    
    
    $
    36,244,623Issued for cash
    
    
    2,557,665
    
    
    
    12,200,886Issued to employees as incentive bonus
    
    
    157,250
    
    
    
    674,905Issued upon exercise of stock options and warrants
    
    
    1,520,936
    
    
    
    3,507,493Issued upon conversion of convertible notes
    
    
    560,601
    
    
    
    1,688,590Issued for settlement of accounts payable
    
    
    46,352
    
    
    
    181,520Issued for contract settlement
    
    
    86,374
    
    
    
    431,870Balance, December 31, 2004
    
    
    15,605,208
    
    
    
    54,929,887Issued to employees as incentive bonus
    
    
    51,920
    
    
    
    217,026Issued upon exercise of stock options and warrants
    
    
    506,733
    
    
    
    1,627,044Issued upon conversion of convertible notes
    
    
    151,052
    
    
    
    620,464Balance, June 30, 2005
    
    
    16,314,913
    
    
    $
    57,394,421
 Paid In Capital  Options and Warrants
    
    AmountBalance, December 31, 2003
    
    $
    1,140,321Issued
    
    
    676,433Exercised
    
    
    (20,250
    )Balance, December 31, 2004
    
    
    1,796,504Issued
    
    
    273,622Exercised
    
    
    (132,408
    )Balance, June 30, 2005
    
    $
    1,937,718
 9




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##### Table of Contents



Number ofCommon Shares to be Issued
    
    Shares
    
    
    AmountBalance, December 31, 2003
    
    
    1,403,335
    
    
    $
    5,917,958Issued in contract settlement(1)
    
    
    (86,374
    )
    
    
    (431,870
    )Contract settlement in cash in lieu of common shares
    
    
    (3,556
    )
    
    
    (17,780
    )Issued in financing transaction(2)
    
    
    (1,303,335
    )
    
    
    (5,417,958
    )Balance, December 31, 2004
    
    
    10,070
    
    
    
    50,350Contract settlement in cash in lieu of common shares
    
    
    (885
    )
    
    
    (4,425
    )Balance at June 30, 2005
    
    
    9,185
    
    
    $
    45,925
 
 (1)
    
    Reflects shares issuable in a contract settlement, of which 3,335 shares were settled in
cash during 2004 and 10,070 shares remained unissued at June 30, 2005 and December
31, 2004.(2)
    
    Reflects shares subscribed at the end of 2003 in an institutional private placement, part
of the proceeds from which were received in January 2004, resulting in the classification of
all the shares subscribed in the financing as common shares to be issued at December 31,
2003. Stock Options and Awards
  Weighted AverageStock Options
    
    Issued
    
    
    Exercisable
    
    
    Exercise PriceBalance, December 31, 2003
    
    
    1,119,331
    
    
    
    1,119,331
    
    
    
    1.10Issued(1)
    
    
    2,015,000
    
    
    
    
    
    
    
    4.05Exercised
    
    
    (311,480
    )
    
    
    
    
    
    
    1.00Expired
    
    
    (437,851
    )
    
    
    
    
    
    
    1.23Balance, December 31, 2004
    
    
    2,385,000
    
    
    
    370,000
    
    
    
    3.58Exercised
    
    
    (225,000
    )
    
    
    
    
    
    
    1.02Balance, June 30, 2005
    
    
    2,160,000
    
    
    
    291,250
    
    
    $
    3.85
 
 (1)
    
    Granted to employees and directors under stock option plans at exercise prices ranging
from $4.03 to $4.09 per share and vesting in increments from February 25, 2005 through
February 25, 2009. 10




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##### Table of Contents



Common Stock Purchase Warrants
 Weighted AverageCommon Stock Purchase Warrants
    
    Issued
    
    
    Exercisable
    
    
    Exercise PriceBalance, December 31, 2003
    
    
    3,333,523
    
    
    
    3,333,523
    
    
    $
    3.43Issued in financing transactions(1)
    
    
    966,460
    
    
    
    
    
    
    
    6.09Issued for consulting services(2)
    
    
    20,000
    
    
    
    
    
    
    
    4.03Exercised
    
    
    (1,209,456
    )
    
    
    
    
    
    
    2.63Expired
    
    
    (689,062
    )
    
    
    
    
    
    
    3.06Balance,
December 31, 2004
    
    
    2,421,465
    
    
    
    2,421,465
    
    
    
    4.96Exercised
    
    
    (281,733
    )
    
    
    
    
    
    
    4.49Balance, June 30, 2005
    
    
    2,139,732
    
    
    
    2,139,732
    
    
    $
    5.03
 
 (1)
    
    Expiring from September 13, 2006 through December 31, 2008(2)
    
    Expiring from April 3, 2004 through April 2, 2008. Note 11. Income (Loss) Per Share
  11




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,Diluted EPS
    
    2005
    
    
    2004
    
    
    2005
    
    
    2004Numerator:Net income (loss) as reported for basic EPS
    
    $
    (535,652
    )
    
    $
    208,383
    
    
    $
    201,414
    
    
    $
    975,624Adjustments to income for diluted EPS
    
    
    
    
    
    
    18,496
    
    
    
    
    
    
    
    46,943Net income (loss) for diluted EPS
    
    $
    (535,652
    )
    
    $
    226,879
    
    
    $
    201,414
    
    
    $
    1,022,567Denominator:Weighted average shares for basic EPS
    
    
    16,005,158
    
    
    
    13,877,212
    
    
    
    15,848,386
    
    
    
    12,964,698Effect of dilutive securities:Stock options
    
    
    
    
    
    
    1,107,069
    
    
    
    633,686
    
    
    
    1,096,844Warrants
    
    
    
    
    
    
    940,813
    
    
    
    267,664
    
    
    
    982,953Convertible notes
    
    
    
    
    
    
    781,368
    
    
    
    
    
    
    
    960,873Adjusted weighted average shares and
assumed conversions for dilutive EPS
    
    
    16,005,158
    
    
    
    16,706,462
    
    
    
    16,749,736
    
    
    
    16,005,368Diluted EPS
    
    $
    (0.03
    )
    
    $
    0.01
    
    
    $
    0.01
    
    
    $
    0.06
 Note 12. Related Party Transactions
 General
 Drilling Programs
 Reporting Period
    
    Drilling Contract RevenueThree months ended June 30, 2005
    
    
    $  7,639,000Three months ended June 30, 2004
    
    
    7,040,250Six months ended June 30, 2005
    
    
    24,316,000Six months ended June 30, 2004
    
    
    21,366,375
 Note 13. Segment Information
  12




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##### Table of Contents



Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue, net:Oil and gas development
    
    $
    11,435,719
    
    
    $
    8,327,169
    
    
    $
    31,445,965
    
    
    $
    23,893,051Corporate
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    11,435,719
    
    
    
    8,327,169
    
    
    
    31,445,965
    
    
    
    23,893,051DD&A:Oil and gas development
    
    
    902,232
    
    
    
    227,150
    
    
    
    1,865,542
    
    
    
    446,150Corporate
    
    
    99,301
    
    
    
    28,325
    
    
    
    182,546
    
    
    
    62,454Total
    
    
    1,001,533
    
    
    
    255,475
    
    
    
    2,048,088
    
    
    
    508,604Interest expense:Oil and gas development
    
    
    259,191
    
    
    
    54,513
    
    
    
    525,290
    
    
    
    67,803Corporate
    
    
    295,810
    
    
    
    53,022
    
    
    
    538,464
    
    
    
    128,900Total
    
    
    555,001
    
    
    
    107,535
    
    
    
    1,063,754
    
    
    
    196,703Net income (loss):Oil and gas development
    
    
    6,591
    
    
    
    485,099
    
    
    
    1,155,926
    
    
    
    1,477,295Corporate
    
    
    (542,243
    )
    
    
    (276,716
    )
    
    
    (954,512
    )
    
    
    (501,671
    )Total
    
    
    (535,652
    )
    
    
    208,383
    
    
    
    201,414
    
    
    
    975,624Capital expenditures:Oil and gas development
    
    
    7,164,534
    
    
    
    2,524,271
    
    
    
    14,450,781
    
    
    
    8,867,169Corporate
    
    
    171,001
    
    
    
    35,695
    
    
    
    182,276
    
    
    
    74,077Total
    
    $
    7,335,535
    
    
    $
    2,559,966
    
    
    $
    14,633,057
    
    
    
    8,941,246
 June 30,
    
    
    December 31,2005
    
    
    2004Identifiable assets:Oil and gas development
    
    $
    105,427,567
    
    
    $
    82,380,938Corporate
    
    
    3,205,415
    
    
    
    6,746,005Total
    
    $
    108,632,982
    
    
    $
    89,126,943
 Note 14. United States and Canadian Accounting Principles
 Differences Reflected in Condensed Consolidated Financial Statements
 Recent Accounting Pronouncements  Canadian GAAP
 Financial Instruments
 13




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##### Table of Contents



Comprehensive Income
 Equity
 Recent Accounting Pronouncements  U.S. GAAP
 SFAS No. 123R
 SFAS No. 19 and FAS No. 19-1
 SFAS No. 154
 14




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##### Table of Contents



Note 15. Commitments
  Commercial CommitmentsOperating
    
    
    OtherYear
    
    Leases
    
    
    Commitments
    
    
    TotalBalance of 2005
    
    $
    275,432
    
    
    $
    240,000
    (1)
    
    $
    515,4322006
    
    
    547,048
    
    
    
    
    
    
    
    547,0482007
    
    
    547,732
    
    
    
    
    
    
    
    547,7322008
    
    
    287,809
    
    
    
    100,000
    (2)
    
    
    387,8092009
    
    
    195,000
    
    
    
    2,045,000
    (2)
    
    
    2,240,0002010 and thereafter
    
    
    97,500
    
    
    
    
    
    
    
    97,500Total
    
    $
    1,950,521
    
    
    $
    2,385,000
    
    
    $
    4,335,521
 
 (1)
    
    Reflects obligations under a guaranty secured by a certificate of deposit provided for
bank debt of Galax Energy Concepts, LLC, a North Carolina limited liability company in which
DPI previously held a minority interest.(2)
    
    Reflects commitments under a purchase contract for an airplane. Note 16. Subsequent Events
 Conversion of 10% Convertible Notes due May 1, 2007
 Conversion of 7% Convertible Notes due October 4, 2009
 15




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##### Table of Contents



NGAS Resources, Inc.
 
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
   Strategy
  
    
    Acceleration of Drilling Operations. Development drilling is our mainstay for
production and reserve growth, heavily concentrated on geographic areas of the Appalachian
Basin where we have established expertise and recognition. To help finance our drilling
initiatives, we sponsor and manage Drilling Programs for private investors, contributing
between 25% to 66.67% of total program capital and maintaining a proportionate working
interest in program wells. Since 2000, we drilled 401 gross (120.7688 net) gas wells
through our Drilling Programs. This includes 84 gross (23.9210 net) wells in the first six
months of 2005 and 155 gross (49.7149 net) wells during 2004. We are sponsoring Drilling
Programs for up to 170 new wells in 2005 and maintaining initial working interest in
program wells ranging from 30.7% to 40.9%.
    
    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 experience as a regional operator. 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. During the second half of 2004, we completed three separate
acquisitions of oil and gas interests covering a total of 89,737 acres in the Appalachian
Basin, adding over 29.7 Bcf of gas equivalents to our estimated proved reserves at an
acquisition price averaging $1.17 per Mcfe. We plan to continue pursuing acquisition
opportunities for our own account and may begin sponsoring production programs with private
investors to acquire producing oil and gas wells, primarily in the Appalachian Basin.
    
    Acquisition of Additional Drilling Prospects. We focus on expanding our
substantial inventory of drilling prospects that meet our criteria for building
predictable, long-lived reserves. Over the last several years, we acquired oil and gas
drilling rights covering approximately 100,000 acres on the southwestern edge of the
 16




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##### Table of Contents



Big Sandy Gas Field in eastern Kentucky (the Leatherwood Field), as well as leases for
26,500 acres on the north side of the Pine Mountain Fault System near the Leatherwood Field
(the Straight Creek Field). Our property acquisitions in 2004 also included substantial
additional development prospects, primarily on acreage positions we acquired from Stone
Mountain Energy Company (SME) during October 2004 in the Martins Fork and Amvest Fields,
which span portions of Harlan County, Kentucky and Lee County, Virginia. We plan to
continue capitalizing on opportunities to acquire large tracts with significant unproved gas
development potential as well as established infrastructure, further expanding our inventory
of drilling prospects and our stake in Appalachian Basin gas reserves and production.
    
    Disciplined Approach to Drilling. As of June 30, 2005, we had interests in a
total of 692 wells, primarily in the Appalachian Basin. Most of our wells are drilled to
relatively shallow total depths up to 5,000 feet, usually encountering five distinct and
predictable natural gas pay zones. This disciplined approach helps reduce drilling risks,
as reflected in our success rate. Historically, over 99% of our wells have been completed
as producers. We complete and produce our wells from multiple pay zones whenever possible,
eliminating the costs and complexities of deferred completions with behind-pipe gas. While
our wells typically produce at modest initial volumes and pressures, they also demonstrate
low annual decline rates and are expected to produce for 25 years or more.
    
    Extension of Gas Gathering Systems. We construct and operate gas gathering
facilities to connect our wells to interstate pipelines with access to major natural gas
markets. As of June 30, 2005, our gas gathering facilities aggregated approximately 247
miles. In addition to generating gas transmission and compression revenues, our 100%
ownership of these systems gives us control over third-party access, providing competitive
advantages in acquiring and developing nearby acreage. During the first six months of
2005, we extended our gathering systems by 76 miles, including part of a 23-mile,
eight-inch steel gathering line for connecting our wells in the Leatherwood Field. As of
the date of this report, we have installed all of the eight-inch line for the Leatherwood
system and have started to set compressors and lateral lines for 80 wells awaiting
connection in the Leatherwood Field. During the balance of the year, we expect to bring
most of these wells on line as our Leatherwood system is put in service.
    
    Operation of Third-Party Gathering System. Gas production from the properties
we acquired from SME in October 2004 is delivered through a 150-mile gathering system owned
by Duke Energy and previously operated by SME in southeastern Kentucky, southwestern
Virginia and northeastern Tennessee. The Stone Mountain system interconnects with Duke
Energys East Tennessee natural gas pipeline at Rogersville, Tennessee, connecting major
natural gas supply basins to growing markets in the eastern United States. Following the
SME acquisition, we expanded our arrangements with Duke Energy to operate and maintain the
Stone Mountain gas gathering system and to dedicate our SME production and part of our
Straight Creek production for delivery through the system. Gas production from our
Leatherwood Field can also move through the Stone Mountain system when our 8-inch gathering
system is completed for that area. By integrating operations on the acquired acreage with
our existing field activities in the region, we expect to expand our throughput to major
natural gas markets serviced through Dukes system and strengthen our competitive position
in the region.
 Drilling Operations
 Drilling Program Structure
  17




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##### Table of Contents



Drilling Program Benefits
 
    
    Based on outside capital of 70% to 75% invested in our development Drilling Programs, we
control a drilling budget up to four times greater than we could support on our own. This
helps us compete for attractive properties by increasing our drilling commitments. It also
increases our buying power for drilling services and materials, contributing to lower
overall development costs.
    
    Aggregating our capital with private investors in our Drilling Programs enables
us to maintain a larger and more capable staff than we could otherwise support if we were
operating solely for our own account.
    
    Accelerating the pace of development activities through our Drilling Programs
expands the production capacity we can make available to gas purchasers, contributing to
higher and more stable sales prices for our production.
    
    By conducting drilling operations on our undeveloped prospects through smaller,
specialized Drilling Programs and retaining ownership interests ranging from 40% to 67%, we
expand our inventory of developmental locations with lower risk profiles for larger,
subsequent Drilling Programs, while adding to our proved reserves, both developed and
undeveloped.
    
    Our Drilling Program strategy substantially increases the number of wells we
could drill solely for our own account, diversifying the risks inherent in drilling
operations.
 Drilling Program Financings
 Drilling Results
 Development Wells
    
    
    Exploratory WellsProductive
    
    
    Dry
    
    
    Productive
    
    
    DryGross
    
    
    Net
    
    
    Gross
    
    
    Gross
    
    
    Net
    
    
    GrossYear ended December 31, 2004
    
    
    140
    
    
    
    39.7149
    
    
    
    
    
    
    
    15
    
    
    
    10.0000
    
    
    
    Six months ended June 30, 2005
    
    
    84
    
    
    
    23.9210
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 18




---



##### Table of Contents



Well Characteristics
 Results of Operations  Three Months Ended June 30, 2005 and 2004
 Revenues
    Expenses
  19




---



##### Table of Contents



Net Income (Loss)
 Results of Operations  Six Months Ended June 30, 2005 and 2004
 Revenues
 20




---



##### Table of Contents



Expenses
      21




---



##### Table of Contents



Net Income
  Liquidity and Capital Resources
 Liquidity
  Capital Resources
  22




---



##### Table of Contents



Per ShareNumber of
    
    SubscriptionClosing Date
    
    Shares Issued
    
    Price
    
    ProceedsApril 28, 2004
    
    
    975,000
    
    
    $
    5.98
    
    
    $
    5,832,450November 2, 2004
    
    
    279,330
    
    
    
    5.37
    
    
    
    1,500,000Total
    
    
    1,254,330
    
    
    
    
    
    
    $
    7,332,450
       23




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##### Table of Contents



Forward Looking Statements
  Related Party Transactions
  Contractual Obligations and Commercial Commitments
  Operating
    
    
    Long Term
    
    
    OtherYear
    
    Leases
    
    
    Debt
    
    
    Commitments
    
    
    TotalBalance of 2005
    
    $
    275,432
    
    
    $
    21,579
    
    
    $
    240,000
    (1)
    
    $
    539,0112006
    
    
    547,048
    
    
    
    15,024,000
    
    
    
    
    
    
    
    15,571,0482007
    
    
    547,732
    
    
    
    539,500
    (2)
    
    
    
    
    
    
    1,087,2322008
    
    
    287,809
    
    
    
    1,995,877
    
    
    
    100,000
    (3)
    
    
    2,383,6862009
    
    
    195,000
    
    
    
    5,524,000
    (4)
    
    
    2,045,000
    (3)
    
    
    7,764,0002010 and thereafter
    
    
    97,500
    
    
    
    8,270,818
    
    
    
    
    
    
    
    8,368,319Total
    
    $
    1,950,521
    
    
    $
    31,375,774
    
    
    $
    2,385,000
    
    
    $
    35,711,295
 
 (1)
    
    Reflects obligations under a guaranty secured by a certificate of deposit provided for
bank debt of Galax Energy Concepts, LLC, a North Carolina limited liability company in which
DPI previously held a minority interest.(2)
    
    Includes $515,500 principal amount of the Companys 10% convertible notes due May 1, 2007,
all of which were converted after June 30, 2005. See Capital Resources above.(3)
    
    Reflects commitments under a purchase contract for an airplane.(4)
    
    Does not reflect the conversion during July and the first half of August 2005 of $4,200,000
principal amount of the Companys 7% convertible notes due October 4, 2009. Critical Accounting Policies and Estimates
 General
 24




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##### Table of Contents



Allowance for Doubtful Accounts .
 Impairment of Long-Lived Assets .
 
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
  
 Item 4. Controls and Procedures
   
 PART II. OTHER INFORMATION
 
 Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
  25




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##### Table of Contents



Item 4. Submission of Matters to a Vote of Security Holders
  VotesNominee
    
    Votes For
    
    
    WithheldWilliam S. Daugherty
    
    
    13,642,621
    
    
    
    255,883James K. Klyman
    
    
    13,643,108
    
    
    
    255,396Charles L. Cotterell
    
    
    13,643,108
    
    
    
    255,396Thomas F. Miller
    
    
    13,643,108
    
    
    
    255,396
  Votes
    
    
    VotesProposal
    
    Votes For
    
    
    Against
    
    
    WithheldFixing the size of the board of
directors at four members
    
    
    13,490,187
    
    
    
    452,379
    
    
    
    255,396Ratification of the appointment of
independent public accountants
    
    
    13,694,591
    
    
    
    
    
    
    
    203,311
 
 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).4.1
    
    Form of 7% Convertible Promissory Note due September 5, 2008 (incorporated by reference
to Exhibit 10.2 to Current Report on Form 8-K [File No. 0-12185] dated September 10, 2003).4.1
    
    7% Convertible Promissory Note in the principal amount of $6,100,000 due October 4, 2009
(incorporated by reference to Exhibit 10.2 to Current Report on Form 8-K [File No. 0-12185]
dated October 4, 2004).4.3
    
    Note Purchase Agreement for 7% Convertible Promissory Notes in the principal amount of
$8,000,000 due March 31, 2010 (incorporated by reference to Exhibit 10.13 to Registration
Statement on Form S-3 (File No. 333-125053) filed May 19, 2005).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).
 26




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.2
    
    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
    
    Form of Common Stock Purchase Warrant dated September 10, 2003 (incorporated by reference
to Exhibit 10.3 to Current Report on Form 8-K [File No. 0-12185] dated September 10, 2003).10.5
    
    Form of Common Stock Purchase Warrant dated December 31, 2003 (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K [File No. 0-12185] dated January 2, 2003).10.6
    
    Form of Common Stock Purchase Warrant dated April 29, 2004 (incorporated by reference to
Exhibit 10.4 to Current Report on Form 8-K [File No. 0-12185] dated September 29, 2003).10.7
    
    Form of Common Stock Purchase Warrant dated October 4, 2004 (incorporated by reference to
Exhibit 10.3 to Current Report on Form 8-K [File No. 0-12185] dated October 4, 2004).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 Share21.1
    
    Subsidiaries (incorporated by reference to Exhibit 21.1 to Annual Report on Form 10-KSB
[File No. 0-12185] for the year ended December 31, 2004).31.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.31.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(a) under the Securities
Exchange Act of 1934, as amended.32.1
    
    Certification of Chief Executive Officer pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, as amended.32.2
    
    Certification of Chief Financial Officer pursuant to Rule 13a-14(b) under the Securities
Exchange Act of 1934, as amended.
 27




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##### Table of Contents



SIGNATURES
  NGAS RESOURCES, INC.Date: August 15, 2005
    By:
    /s/  William S. DaughertyWilliam S. DaughertyChief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer) 28