##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 AMENDMENT NO. 1 TO
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended March 31, 2009
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
 Commission File No. 0-12185
 NGAS Resources, Inc.
 (Exact name of registrant as specified in its charter)
 Province of British Columbia
    
    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
 þ o
  Large accelerated filer o   
    Accelerated filer þ
    Non-accelerated filer o
    Smaller reporting company o(Do not check if a smaller reporting company)
 o þ
  Title of Class
    
    Outstanding at May 5, 2009Common Stock
    
    26,968,646




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##### 



NGAS Resources, Inc.
 INDEX TO FORM 10-Q/A
  
 Part I. Financial Information
 PageItem 1. Financial Statements:Condensed Consolidated Balance Sheets  March 31, 2009 (unaudited) and December 31, 2008
    
    
    1Condensed Consolidated Statement of Operations  Three months ended
March 31, 2009 (restated) and 2008
    
    
    2Condensed Consolidated Statement of Cash Flows  Three months ended
March 31, 2009 (restated) and 2008
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20EX-31.1EX-31.2EX-32.1EX-32.2
  
 Additional Information
 SEC NGAS company we our us Dth Mcf Mcfe Mmcf Bcf EUR
 Explanatory Note
 10-Q/A 10-Q
 
    
    Condensed Consolidated Financial Statements The condensed consolidated financial statements
have been restated to account for the embedded conversion feature of our 6% convertible notes
as a derivative liability under ASC 815-40-15 (formerly EITF 07-5), which became effective as
of January 1, 2009. The impact of the change in accounting principles is set forth in Note 2
 Restatement Adjustments.
    
    MD&A The recognition of non-cash interest expense for accretion of the debt discount and
related adjustments from the change in accounting principles are reflected under the caption
Results of Operations.
    
    Certifications The certifications in the exhibits to the 10-Q have been updated as the date
of this 10-Q/A.




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##### Table of Contents



NGAS Resources, Inc.   
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash
    
    $
    1,248,066
    
    
    $
    981,899Accounts receivable
    
    
    5,758,219
    
    
    
    10,450,173Prepaid expenses and other current assets
    
    
    609,850
    
    
    
    540,253Loans to related parties
    
    
    77,474
    
    
    
    79,188Total current assets
    
    
    7,693,609
    
    
    
    12,051,513Bonds and deposits
    
    
    837,898
    
    
    
    623,898Oil and gas properties
    
    
    232,001,956
    
    
    
    229,218,344Property and equipment
    
    
    3,099,554
    
    
    
    3,285,925Loans to related parties
    
    
    171,429
    
    
    
    171,429Deferred financing costs
    
    
    1,501,959
    
    
    
    1,689,580Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    245,619,582
    
    
    $
    247,353,866LIABILITIESCurrent liabilities:Accounts payable
    
    $
    5,265,843
    
    
    $
    12,362,092Accrued liabilities
    
    
    641,762
    
    
    
    675,141Deferred compensation
    
    
    2,209,700
    
    
    
    2,246,439Customer drilling deposits
    
    
    1,594,248
    
    
    
    2,262,955Long-term debt, current portion
    
    
    24,000
    
    
    
    24,000Total current liabilities
    
    
    9,735,553
    
    
    
    17,570,627Deferred compensation
    
    
    190,376
    
    
    
    Deferred income taxes
    
    
    13,116,638
    
    
    
    12,949,476Long-term debt
    
    
    107,192,740
    
    
    
    109,270,818Fair value of derivative financial instruments
    
    
    518
    
    
    
    Other long-term liabilities
    
    
    3,845,906
    
    
    
    3,685,849Total liabilities
    
    
    134,081,731
    
    
    
    143,476,770SHAREHOLDERS EQUITYCapital stockAuthorized:5,000,000 Preferred shares100,000,000 Common sharesIssued:26,968,646 Common shares (2008  26,543,646)
    
    
    110,988,162
    
    
    
    110,626,91221,100 Common shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in capital  options and warrants
    
    
    4,039,236
    
    
    
    3,774,600To be issued:9,185 Common shares (2008  9,185)
    
    
    45,925
    
    
    
    45,925115,049,693
    
    
    
    114,423,807Deficit
    
    
    (3,511,842
    )
    
    
    (10,546,711
    )Total shareholders equity
    
    
    111,537,851
    
    
    
    103,877,096Total liabilities and shareholders equity
    
    $
    245,619,582
    
    
    $
    247,353,866
 See accompanying notes.
 1




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NGAS Resources, Inc.   
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008REVENUEContract drilling
    
    $
    7,323,752
    
    
    $
    6,602,118Oil and gas production
    
    
    7,067,219
    
    
    
    8,489,434Gas transmission, compression and processing
    
    
    2,804,982
    
    
    
    2,558,092Total revenue
    
    
    17,195,953
    
    
    
    17,649,644DIRECT EXPENSESContract drilling
    
    
    5,541,426
    
    
    
    5,119,849Oil and gas production
    
    
    2,324,965
    
    
    
    2,764,955Gas transmission, compression and processing
    
    
    968,917
    
    
    
    1,090,246Total direct expenses
    
    
    8,835,308
    
    
    
    8,975,050OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    3,250,265
    
    
    
    3,288,483Options, warrants and deferred compensation
    
    
    418,273
    
    
    
    137,679Depreciation, depletion and amortization
    
    
    3,618,870
    
    
    
    2,871,760Bad debt expense
    
    
    
    
    
    
    347,840Interest expense
    
    
    2,281,008
    
    
    
    1,325,970Interest income
    
    
    (8,816
    )
    
    
    (69,710
    )Fair value gain on derivative financial instruments
    
    
    (14,319
    )
    
    
    Other, net
    
    
    79,541
    
    
    
    (6,277
    )Total other expenses
    
    
    9,624,822
    
    
    
    7,895,745INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (1,264,177
    )
    
    
    778,849INCOME TAX EXPENSE
    
    
    167,162
    
    
    
    615,660NET INCOME (LOSS)
    
    $
    (1,431,339
    )
    
    $
    163,189NET INCOME (LOSS) PER SHAREBasic
    
    $
    (0.05
    )
    
    $
    0.01Diluted
    
    $
    (0.05
    )
    
    $
    0.01WEIGHTED AVERAGE COMMON
SHARES OUTSTANDINGBasic
    
    
    26,671,146
    
    
    
    26,235,811Diluted
    
    
    26,671,146
    
    
    
    26,731,037
 See accompanying notes.
 2




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NGAS Resources, Inc.   
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months EndedMarch 31,2009
    
    
    2008OPERATING ACTIVITIESNet income (loss)
    
    $
    (1,431,339
    )
    
    $
    163,189Adjustments to reconcile net income (loss) to
net cash provided by operating activities:Incentive bonus paid in common shares
    
    
    361,250
    
    
    
    31,570Options, warrants and deferred compensation
    
    
    418,273
    
    
    
    137,679Depreciation, depletion and amortization
    
    
    3,618,870
    
    
    
    2,871,760Bad debt expense
    
    
    
    
    
    
    347,840Gain on sale of assets
    
    
    (9,285
    )
    
    
    (1,336
    )Fair value gain on derivative financial instruments
    
    
    (14,319
    )
    
    
    Accretion of debt discount
    
    
    908,967
    
    
    
    Deferred income taxes
    
    
    167,162
    
    
    
    615,660Changes in assets and liabilities:Accounts receivable
    
    
    4,691,954
    
    
    
    (1,156,106
    )Prepaid expenses and other current assets
    
    
    (69,597
    )
    
    
    (456,734
    )Other non-current assets
    
    
    
    
    
    
    3,242,790Accounts payable
    
    
    (7,096,249
    )
    
    
    2,337,766Accrued liabilities
    
    
    (33,379
    )
    
    
    128,804Customers drilling deposits
    
    
    (668,707
    )
    
    
    169,285Other long-term liabilities
    
    
    160,057
    
    
    
    Net cash provided by operating activities
    
    
    1,003,658
    
    
    
    8,432,167INVESTING ACTIVITIESProceeds from sale of assets
    
    
    19,696
    
    
    
    12,200Purchase of property and equipment
    
    
    (29,256
    )
    
    
    (155,287
    )Increase in bonds and deposits
    
    
    (214,000
    )
    
    
    (75,000
    )Additions to oil and gas properties, net
    
    
    (6,008,612
    )
    
    
    (13,096,966
    )Net cash used in investing activities
    
    
    (6,232,172
    )
    
    
    (13,315,053
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    1,714
    
    
    
    1,938Proceeds from issuance of common shares
    
    
    
    
    
    
    102,000Payments of deferred financing costs
    
    
    (1,033
    )
    
    
    (114,293
    )Proceeds from issuance of long term debt
    
    
    5,500,000
    
    
    
    5,740,000Payments of long term debt
    
    
    (6,000
    )
    
    
    (2,020,175
    )Net cash provided by financing activities
    
    
    5,494,681
    
    
    
    3,709,470Change in cash
    
    
    266,167
    
    
    
    (1,173,416
    )Cash, beginning of period
    
    
    981,899
    
    
    
    2,816,678Cash, end of period
    
    $
    1,248,066
    
    
    $
    1,643,262SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    1,371,480
    
    
    $
    1,327,683Income 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 ASC Contracts in
Entitys Own Equity
 Estimates .
 Note 2. Restatement Adjustments
 Change in Accounting Principle Derivatives and Hedging  Embedded Derivatives
 Cumulative Effect Adjustments
 4




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Retained DeficitCumulative Effect Adjustment:As previously reported, December, 31, 2008
    
    $
    (10,546,711
    )Cumulative effect adjustment
    
    
    8,466,208As adjusted, January 1, 2009
    
    $
    (2,080,503
    )
 Impact on Interim Financial Statements
 Three Months Ended March 31, 2009As Previously
    
    
    Restatement
    
    
    AsReported
    
    
    Adjustments
    
    
    RestatedStatements of Operations:Total revenue
    
    $
    17,195,953
    
    
    $
    
    
    
    $
    17,195,953Total direct expenses
    
    
    8,835,308
    
    
    
    
    
    
    
    8,835,308Other expenses (income)Selling, general and administrative
    
    
    3,250,265
    
    
    
    
    
    
    
    3,250,265Options, warrants and deferred compensation
    
    
    418,273
    
    
    
    
    
    
    
    418,273Depreciation, depletion and amortization
    
    
    3,618,870
    
    
    
    
    
    
    
    3,618,870Interest expense
    
    
    1,372,041
    
    
    
    908,967
    
    
    
    2,281,008Interest income
    
    
    (8,816
    )
    
    
    
    
    
    
    (8,816
    )Fair value gain on derivative financial instruments
    
    
    
    
    
    
    (14,319
    )
    
    
    (14,319
    )Other, net
    
    
    79,541
    
    
    
    
    
    
    
    79,541Total other expenses
    
    
    8,730,174
    
    
    
    894,648
    
    
    
    9,624,822Loss before income taxes
    
    
    (369,529
    )
    
    
    (894,648
    )
    
    
    (1,264,177
    )Income tax expense
    
    
    167,162
    
    
    
    
    
    
    
    167,162Net loss
    
    $
    (536,691
    )
    
    $
    (894,648
    )
    
    $
    (1,431,339
    )EPS  basic and diluted
    
    $
    (0.02
    )
    
    $
    (0.03
    )
    
    $
    (0.05
    )
 Note 3. Oil and Gas Properties
 Capitalized Costs and DD&A DD&A
 March 31,
    
    
    December 31,2009
    
    
    2008Proved oil and gas properties
    
    $
    197,600,820
    
    
    $
    192,186,676Unproved oil and gas properties
    
    
    4,840,080
    
    
    
    5,065,835Gathering facilities and well equipment
    
    
    68,146,668
    
    
    
    67,326,445270,587,568
    
    
    
    264,578,956Accumulated DD&A
    
    
    (38,585,612
    )
    
    
    (35,360,612
    )Net oil and gas properties and equipment
    
    $
    232,001,956
    
    
    $
    229,218,344
 Suspended Well Costs Accounting for Suspended Well Costs
 5




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##### Table of Contents



Note 4. Property and Equipment
  March 31,
    
    
    December 31,2009
    
    
    2008Land
    
    $
    12,908
    
    
    $
    12,908Building improvements
    
    
    64,265
    
    
    
    64,265Machinery and equipment
    
    
    3,360,793
    
    
    
    3,333,981Office furniture and fixtures
    
    
    175,862
    
    
    
    175,862Computer and office equipment
    
    
    665,115
    
    
    
    670,349Vehicles
    
    
    1,892,449
    
    
    
    1,951,2796,171,392
    
    
    
    6,208,644Accumulated depreciation
    
    
    (3,071,838
    )
    
    
    (2,922,719
    )Net other property and equipment
    
    $
    3,099,554
    
    
    $
    3,285,925
 Note 5. Deferred Financing Costs
  Note 6 . Goodwill
 SFAS Goodwill and Other Intangible Assets
 Note 7. Customer Drilling Deposits
  Note 8. Long Term Debt
 Convertible Notes
 Credit Facility
 6




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##### Table of Contents



Acquisition Debt
 Total Long Term Debt and Maturities
 RestatedMarch 31,
    
    
    December 31,2009
    
    
    2008Principal Amount OutstandingTotal long term debt (including current portion)(1)
    
    $
    107,216,740
    
    
    $
    109,294,818Less current portion
    
    
    24,000
    
    
    
    24,000Total long term debt(1)
    
    $
    107,192,740
    
    
    $
    109,270,818Maturities of DebtRemainder of 2009
    
    $
    18,0002010
    
    
    29,451,922
    (1)2011
    
    
    77,524,0002012
    
    
    24,0002013 and thereafter
    
    
    198,818
 
 (1)
    
    Reflects the carrying amount of our 6% convertible notes in the principal amount of
$37,000,000, net of the unamortized debt discount of $7,572,078 at March 31, 2009 attributable
to their embedded conversion feature. See Note 2  Restatement Adjustments. Note 9. Capital Stock
 Preferred Shares
 Common Shares
 Number ofShares
    
    
    AmountCommon Shares IssuedBalance, December 31, 2007
    
    
    26,136,064
    
    
    $
    108,842,526Issued to employees as incentive bonus
    
    
    50,000
    
    
    
    259,690Issued upon exercise of stock options
    
    
    357,582
    
    
    
    1,524,696Balance, December 31, 2008
    
    
    26,543,646
    
    
    
    110,626,912Issued as stock awards under incentive plan
    
    
    425,000
    
    
    
    361,250Balance, March 31, 2009
    
    
    26,968,646
    
    
    $
    110,988,162Paid In
Capital  Options and WarrantsBalance, December 31, 2007
    
    
    
    
    
    
    3,484,148Recognized
    
    
    
    
    
    
    625,142Exercised
    
    
    
    
    
    
    (334,690
    )Balance, December 31, 2008
    
    
    
    
    
    
    3,774,600Recognized
    
    
    
    
    
    
    264,636Balance, March 31, 2009
    
    
    
    
    
    $
    4,039,236
 Number ofShares
    
    
    AmountCommon Shares to be IssuedBalance, March 31, 2009 and December 31, 2008
    
    
    9,185
    
    
    $
    45,925
 7




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##### Table of Contents



Stock Options and Awards
 Weighted AverageIssued
    
    Exercisable
    
    Exercise PriceBalance, December 31, 2007
    
    
    2,681,250
    
    
    
    1,739,583
    
    
    $
    4.75Granted
    
    
    2,300,000
    
    
    
    
    
    
    
    2.93Vested
    
    
    
    
    
    
    41,667
    
    
    
    6.02Exercised
    
    
    (357,582
    )
    
    
    (357,582
    )
    
    
    3.33Forfeited
    
    
    (10,000
    )
    
    
    (10,000
    )
    
    
    7.04Balance, December 31, 2008
    
    
    4,613,668
    
    
    
    1,413,668
    
    
    
    3.95Vested
    
    
    
    
    
    
    900,000
    
    
    
    4.03Forfeited
    
    
    (310,000
    )
    
    
    (310,000
    )
    
    
    4.03Balance, March 31, 2009
    
    
    4,303,668
    
    
    
    2,003,668
    
    
    
    3.94
  Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AveragePrice
    
    
    
    
    
    
    
    Remaining
    
    Exercise
    
    
    
    
    
    Exerciseor Range
    
    
    
    Number
    
    Life (years)
    
    Price
    
    Number
    
    Price$
    1.51
    
    
    
    
    
    1,650,000
    
    
    
    6.11
    
    
    $
    1.51
    
    
    
    
    
    
    $
    4.03        4.09
    
    
    
    
    
    1,230,000
    
    
    
    0.74
    
    
    
    4.05
    
    
    
    1,330,000
    
    
    
    4.096.02        7.64
    
    
    
    
    
    1,423,668
    
    
    
    2.11
    
    
    
    6.66
    
    
    
    673,668
    
    
    
    6.884,303,668
    
    
    
    
    
    
    
    
    
    
    
    2,003,668
 Share-Based Payment
 Note 10. Income (Loss) Per Share
 EPS
 8




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##### Table of Contents



Three Months EndedMarch 31,2009
    
    
    2008RestatedNumerator:Net income (loss) as reported for basic EPS
    
    $
    (1,431,339
    )
    
    $
    163,189Adjustments to income (loss) for diluted EPS
    
    
    
    
    
    
    Net income (loss) for diluted EPS
    
    $
    (1,431,339
    )
    
    $
    163,189Denominator:Weighted average shares for basic EPS
    
    
    26,671,146
    
    
    
    26,235,811Effect of dilutive securities:Stock options
    
    
    
    
    
    
    495,226Adjusted weighted average shares for dilutive EPS
    
    
    26,671,146
    
    
    
    26,731,037Basic EPS
    
    $
    (0.05
    )
    
    $
    0.01Diluted EPS
    
    $
    (0.05
    )
    
    $
    0.01
 Note 11. Segment Information
 Disclosure about
Segments of an Enterprise and Related Information
 Note 12. Commitments
  Operating
    
    
    OtherLeases
    
    
    Commitments(1)
    
    
    TotalYearRemainder of 2009
    
    $
    1,752,219
    
    
    $
    2,343,000
    
    
    $
    4,095,2192010
    
    
    2,267,973
    
    
    
    
    
    
    
    2,267,9732011
    
    
    2,047,086
    
    
    
    
    
    
    
    2,047,0862012
    
    
    847,442
    
    
    
    
    
    
    
    847,4422013 and thereafter
    
    
    73,284
    
    
    
    
    
    
    
    73,284Total
    
    $
    6,988,004
    
    
    $
    2,343,000
    
    
    $
    9,331,004
 
 (1)
    
    Reflects commitments under a purchase contract for an airplane. Note 13. Recent Accounting Standards
 Oil and Gas Reporting Requirements
 SFAS No. 162 The Hierarchy of Generally
Accepted Accounting Principles
 SFAS No. 161 Disclosures About
Derivative Instruments and Hedging Activities
 9




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##### Table of Contents



FSP No. 157-2 Effective Date of
FASB Statement No. 157,
 Note 14. Subsequent Events
 Pending Sale of Interest in Gathering System APA Seminole Seminole Energy
  Expansion of Devonian Shale Play
 10




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##### Table of Contents



NGAS Resources, Inc.
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Recent Developments
 Pending Sale of Interest in Gathering System DPI NGAS Gathering APA Seminole Seminole
Energy
 Expansion of Devonian Shale Play
 Business Strategy
  
    
    Organic Growth through Drilling with Reduced Capital Spending. Development
drilling is the mainstay of our business model. During 2008, we drilled 75 gross
(64.94 net) wells on our operated properties in the Appalachian and Illinois Basins, along
with 118 gross (18.45 net) non-operated wells. We have an average working interest of 87%
in wells drilled on operated properties during 2008, compared to 56% in the prior year.
This reflects the evolution of our business model for accelerating organic growth by
retaining more of our available working interest in wells drilled on our operated
properties, which we implemented late in 2007. While we are committed to this long-term
strategy, we have addressed the challenging conditions in our industry by reducing our
2009 capital spending budget, currently set at $15 million and allocated 80%
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##### Table of Contents



to drilling and the balance to infrastructure and lease acquisition projects. This is in
line with our anticipated cash flow from operations and may be adjusted during the year in
response to market developments. To meet our 2009 drilling commitments and objectives, we
are returning to our established partnership structure and sales network, which raised over
$34 million for a non-operated program last year. We expect to maintain a 20% interest in
this years program, which will increase to 35% after program payout.
    
    Horizontal Drilling Initiatives. Recent advances in horizontal drilling and
completion technology have enhanced the value proposition for our operated properties by
substantially increasing our recovery volumes and rates at dramatically lower finding
costs. Horizontal drilling also gives us access to areas where natural gas development
would otherwise be delayed or constrained by coal mining activity or challenging terrain.
We focused these initiatives during 2008 in our Leatherwood field, where we completed
20 horizontal wells last year. Each well has a single lateral leg up to 3,500 feet
through the Devonian shale formation, which is present throughout our Appalachian
operating areas. Initial 30-day flow rates for our Leatherwood horizontals averaged
309Mcf per day. We achieved comparable results for our first two New Albany shale
horizontals drilled late in 2008 on our Illinois Basin acreage and our initial Devonian
shale horizontals completed during the first quarter of 2009 in each of our Straight
Creek, Fonde and Martins Fork fields. We plan to continue this transition throughout our
operated properties, with up to 53 horizontals planned for our 2009 drilling partnership.
    
    Advantages from Restructured Infrastructure Position. The gas gathering
facilities covered by our APA with Seminole span approximately 485 miles through parts of
southeastern Kentucky, eastern Tennessee and western Virginia, providing deliverability
from 90% of our Appalachian properties directly from the wellhead to the interstate
pipeline network serving major east coast natural gas markets. The facilities include an
open-access system we purchased in March 2006 from Duke Energy Gas Services, LLC. This
midstream system spans 116 miles, with a connection to Duke Energys East Tennessee
pipeline. We upgraded our midstream system during 2007 with a liquids extraction plant
co-owned and operated by an affiliate of Seminole. The system has a current daily gross
throughput of approximately 20,000 Dth, including third-party deliveries. Although our
pending sale of a half interest in our Appalachian system will eliminate the closed-access
status of our field-wide infrastructure, our capacity rights following the sale will have
an evergreen term and will ensure continued deliverability from our operated Appalachian
properties serviced by these facilities. Our capacity rights should also preserve our
competitive advantages from control of regional gas flow, enhancing our opportunities to
acquire undeveloped acreage near our core producing fields upon completion of coal mining
activities.
    
    Development of Additional Drilling Prospects. We follow a disciplined capital
allocation process in selecting opportunities to expand our substantial inventory of
drilling prospects that meet our criteria for predictable, long-lived reserves. Our goal
is to consolidate our position in the Appalachian Basin, while diversifying our asset base
with similar unconventional plays outside the basin. As part of this strategy, in
addition to the recent expansion of our Devonian shale play through our Chesapeake
farmout, we are developing our New Albany shale play within the southcentral portion of
the Illinois Basin in western Kentucky. We began producing this project to sales in
September 2008, with a total of 30 wells on line at March 31, 2009. Based on encouraging
results from our New Albany shale horizontals, we have expanded our lease position and
plan to drill up to five horizontal wells on this acreage during 2009. See Recent
Developments.
 Drilling Operations
 General
 Geological Factors
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##### Table of Contents



EUR
 Horizontal Drilling
 Air Drilling Technology
 Staged Completion Technology
 Drilling Results
 Development Wells
    
    Exploratory WellsProductive
    
    Dry
    
    Productive
    
    DryGross
    
    Net
    
    Gross
    
    Gross
    
    Net
    
    GrossYear Ended December 31, 2008Vertical
    
    
    137
    
    
    
    58.8522
    
    
    
    
    
    
    
    9
    
    
    
    8.8125
    
    
    
    Horizontal
    
    
    47
    
    
    
    15.7254
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    184
    
    
    
    74.5776
    
    
    
    
    
    
    
    9
    
    
    
    8.8125
    
    
    
    Quarter Ended March 31, 2009Vertical
    
    
    4
    
    
    
    0.7972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Horizontal
    
    
    8
    
    
    
    4.1588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    12
    
    
    
    4.9560
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
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##### Table of Contents



Producing Activities
 Regional Advantages
 Liquids Extraction
 Oil and Gas Production
 Three Months Ended
    
    Year EndedMarch 31,
    
    December 31,2009
    
    2008
    
    2008Production volumes:Natural gas (Mcf)
    
    
    868,548
    
    
    
    743,998
    
    
    
    3,087,596Oil (Bbl)
    
    
    17,277
    
    
    
    13,488
    
    
    
    57,291Natural gas liquids (gallons)
    
    
    1,201,181
    
    
    
    634,135
    
    
    
    3,895,649Equivalents (Mcfe)
    
    
    1,038,297
    
    
    
    880,414
    
    
    
    3,745,124Average sales prices and costs:Natural gas (per Mcf)
    
    $
    6.74
    
    
    $
    8.51
    
    
    $
    8.89Oil (per Bbl)
    
    
    33.09
    
    
    
    90.48
    
    
    
    95.07Natural gas liquids (per gallon)
    
    
    0.64
    
    
    
    1.48
    
    
    
    1.41
 Future Gas Sales Contracts
 Fixed-Price Contracts for Natural Gas Production
 2009Q2
    
    Q3
    
    Q4Average price per Dth
    
    $
    8.47
    
    
    $
    8.20
    
    
    $
    8.00Average price per Mcf
    
    
    9.35
    
    
    
    9.04
    
    
    
    8.83Percent of DPI gas contracted
    
    
    46
    %
    
    
    33
    %
    
    
    28
    %
 Results
of Operations  Three Months Ended March 31, 2009 and 2008
 Revenues
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Three Months Ended March 31,% of
    
    
    
    
    
    
    %2009
    
    
    Revenue
    
    
    2008
    
    
    ChangeRevenue:Contract drilling
    
    $
    7,323,752
    
    
    
    43
    %
    
    $
    6,602,118
    
    
    
    11
    %Oil and gas production
    
    
    7,067,219
    
    
    
    41
    
    
    
    8,489,434
    
    
    
    (17
    )Gas transmission, compression and processing
    
    
    2,804,982
    
    
    
    16
    
    
    
    2,558,092
    
    
    
    10Total
    
    $
    17,195,953
    
    
    
    100
    %
    
    $
    17,649,644
    
    
    
    (3
    )
     Expenses
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##### Table of Contents



Three Months Ended March 31,2009
    
    
    Margin
    
    
    2008
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    5,541,426
    
    
    
    24
    %
    
    $
    5,119,849
    
    
    
    22
    %Oil and gas production
    
    
    2,324,965
    
    
    
    67
    
    
    
    2,764,955
    
    
    
    67Gas transmission, compression and processing
    
    
    968,917
    
    
    
    65
    
    
    
    1,090,246
    
    
    
    57Total direct expenses
    
    
    8,835,308
    
    
    
    49
    
    
    
    8,975,050
    
    
    
    49(Restated)
    
    
    % Revenue
    
    
    
    
    
    
    % RevenueOther Expenses:Selling, general and administrative
    
    
    3,250,265
    
    
    
    19
    %
    
    
    3,288,483
    
    
    
    19
    %Options, warrants and deferred compensation
    
    
    418,273
    
    
    
    2
    
    
    
    137,679
    
    
    
    1Depreciation, depletion and amortization
    
    
    3,618,870
    
    
    
    21
    
    
    
    2,871,760
    
    
    
    16Bad debt expense
    
    
    
    
    
    
    N/A
    
    
    
    347,840
    
    
    
    2Interest expense, net of interest income
    
    
    2,272,192
    
    
    
    13
    
    
    
    1,256,260
    
    
    
    7Fair value gain on derivative financial instrument
    
    
    (14,319
    )
    
    
    N/A
    
    
    
    
    
    
    
    N/AOther, net
    
    
    79,541
    
    
    
    
    
    
    
    (6,277
    )
    
    
    N/ATotal other expenses
    
    $
    9,624,822
    
    
    
    
    
    
    $
    7,895,745
    SG&A
  DD&A
  16




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##### Table of Contents



Net Income and EPS EPS
  Liquidity and Capital Resources
 Liquidity
  Capital Resources
   17




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##### Table of Contents



Forward Looking Statements
  
    
    uncertainty about estimates of future natural gas production and required capital
expenditures;
    
    commodity price volatility;
    
    increases in the cost of drilling, completion, gas gathering and processing or
other costs of developing and producing our reserves;
    
    unavailability of drilling rigs and services;
    
    drilling, operational and environmental risks;
    
    regulatory changes and litigation risks; and
    
    uncertainties in estimating proved oil and gas reserves, projecting future rates of
production and timing of development and remedial expenditures.
  Contractual Obligations and Commercial Commitments
  Operating Leases
    
    
    Other
    
    
    Long-TermEquipment
    
    
    Premises
    
    
    Total
    
    
    Commitments
    
    
    DebtYearRemainder of 2009
    
    $
    1,566,929
    
    
    $
    185,290
    
    
    $
    1,752,219
    
    
    $
    2,343,000
    (1)
    
    $
    18,0002010
    
    
    2,020,158
    
    
    
    247,815
    
    
    
    2,267,973
    
    
    
    
    
    
    
    29,451,922
    (2)2011
    
    
    1,794,697
    
    
    
    252,389
    
    
    
    2,047,086
    
    
    
    
    
    
    
    77,524,0002012
    
    
    591,469
    
    
    
    255,973
    
    
    
    847,442
    
    
    
    
    
    
    
    24,0002013 and thereafter
    
    
    51,929
    
    
    
    21,355
    
    
    
    73,284
    
    
    
    
    
    
    
    198,818Total
    
    $
    6,025,182
    
    
    $
    962,822
    
    
    $
    6,988,004
    
    
    $
    2,343,000
    
    
    $
    107,216,740
    (2)
 
 (1)
    
    Reflects commitments under a purchase contract for an airplane.(2)
    
    Excludes the unamortized debt discount of $7,572,078 at March 31, 2009 attributable to the
embedded conversion feature of our 6% convertible notes in the principal amount of
$37,000,000. Related Party Transactions
  Critical Accounting Policies and Estimates
 General
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##### Table of Contents



Estimates of Proved Reserves and Future Net Cash Flows
 Impairment of Long-Lived Assets .
 Allowance for Doubtful Accounts .
 
 Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
 Commodity Price Risk
  Financial Market Risks
 Interest Rate Risk
 Foreign Market Risk
 
 Item 4.
    
    Controls and Procedures
 Managements Responsibility for Financial Statements
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##### Table of Contents



Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework
 Changes in Internal Control over Financial Reporting
  Part II  Item 6
 ExhibitNumber
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.32.2
    
    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.
 
 SIGNATURES
  NGAS Resources, Inc.Date: December 31, 2009
    
    By:
    
    /s/ William S. DaughertyWilliam S. DaughertyChief Executive Officer(Duly Authorized Officer)(Principal Executive Officer)
 21