##### 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 March 31, 2008
 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
  Large accelerated filer
o
    
    Accelerated filer
þ
    
    Non-accelerated filer  
o
(Do not check if a smaller reporting company)
    
    Smaller reporting company
o
 o þ
  Title of Class
    
    Outstanding at May 2, 2008Common Stock
    
    26,263,064




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##### 



NGAS Resources, Inc.
 INDEX
 PagePart I. Financial InformationItem 1. Financial Statements:Condensed Consolidated Balance Sheets  March 31, 2008 (unaudited) and December 31, 2007
    
    
    1Condensed Consolidated Statement of Operations  Three months ended March 31, 2008 and 2007
    
    
    2Condensed Consolidated Statement of Cash Flows  Three months ended March 31, 2008 and 2007
    
    
    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
    
    
    19Item 4. Controls and Procedures
    
    
    19Part II. Other InformationItem 6. Exhibits
    
    
    20EX-31.1EX-31.2EX-32.1EX-32.2
  
 Forward-Looking Statements
  
 Additional Information
 www.ngas.com NGAS we our us Dth Mcf Bcf Mcfe Bcfe




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NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 March 31,
    
    
    December 31,2008
    
    
    2007(Unaudited)ASSETSCurrent assets:Cash
    
    $
    1,643,262
    
    
    $
    2,816,678Accounts receivable
    
    
    8,718,209
    
    
    
    7,909,943Prepaid expenses and other current assets
    
    
    962,512
    
    
    
    505,778Loans to related parties
    
    
    7,750
    
    
    
    7,654Total current assets
    
    
    11,331,733
    
    
    
    11,240,053Bonds and deposits
    
    
    610,445
    
    
    
    535,445Oil and gas properties
    
    
    194,398,168
    
    
    
    183,823,702Property and equipment
    
    
    3,624,092
    
    
    
    3,689,636Loans to related parties
    
    
    247,376
    
    
    
    249,410Deferred financing costs
    
    
    1,681,852
    
    
    
    1,706,852Other non-current assets
    
    
    
    
    
    
    3,242,790Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    212,206,843
    
    
    $
    204,801,065LIABILITIESCurrent liabilities:Accounts payable
    
    $
    8,987,575
    
    
    $
    6,649,809Accrued liabilities
    
    
    3,784,488
    
    
    
    3,655,684Customer drilling deposits
    
    
    3,027,091
    
    
    
    2,857,806Long term debt, current portion
    
    
    24,000
    
    
    
    388,856Total current liabilities
    
    
    15,823,154
    
    
    
    13,552,155Deferred income taxes
    
    
    9,834,430
    
    
    
    9,218,770Long term debt
    
    
    84,333,809
    
    
    
    80,160,915Deferred compensation
    
    
    2,062,858
    
    
    
    1,960,020Total liabilities
    
    
    112,054,251
    
    
    
    104,891,860SHAREHOLDERS EQUITYCapital stockAuthorized:5,000,000 Preferred shares100,000,000 Common sharesIssued:26,243,064 Common shares (2007  26,136,064)
    
    
    109,087,029
    
    
    
    108,842,52621,100 Common shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in capital  options and warrants
    
    
    3,408,056
    
    
    
    3,484,148Contributed surplus
    
    
    955,009
    
    
    
    1,043,222To be issued:9,185 Common shares
    
    
    45,925
    
    
    
    45,925113,472,389
    
    
    
    113,392,191Deficit
    
    
    (13,319,797
    )
    
    
    (13,482,986
    )Total shareholders equity
    
    
    100,152,592
    
    
    
    99,909,205Total liabilities and shareholders equity
    
    $
    212,206,843
    
    
    $
    204,801,065
 See accompanying notes.
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NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007REVENUEContract drilling
    
    $
    6,602,118
    
    
    $
    9,245,219Oil and gas production
    
    
    8,489,434
    
    
    
    6,752,232Gas transmission, compression and processing
    
    
    2,558,092
    
    
    
    1,947,941Total revenue
    
    
    17,649,644
    
    
    
    17,945,392DIRECT EXPENSESContract drilling
    
    
    5,119,849
    
    
    
    7,180,717Oil and gas production
    
    
    2,764,955
    
    
    
    1,683,014Gas transmission, compression and processing
    
    
    1,090,246
    
    
    
    1,099,593Total direct expenses
    
    
    8,975,050
    
    
    
    9,963,324OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    3,288,483
    
    
    
    4,021,882Options, warrants and deferred compensation
    
    
    137,679
    
    
    
    341,123Depreciation, depletion and amortization
    
    
    2,871,760
    
    
    
    2,306,470Bad debt expense
    
    
    347,840
    
    
    
    Interest expense
    
    
    1,325,970
    
    
    
    1,224,756Interest income
    
    
    (69,710
    )
    
    
    (84,054
    )Other, net
    
    
    (6,277
    )
    
    
    92,749Total other expenses
    
    
    7,895,745
    
    
    
    7,902,926INCOME BEFORE INCOME TAXES
    
    
    778,849
    
    
    
    79,142INCOME TAX EXPENSE
    
    
    615,660
    
    
    
    333,406NET INCOME (LOSS)
    
    $
    163,189
    
    
    $
    (254,264
    )NET INCOME (LOSS) PER SHAREBasic
    
    $
    0.01
    
    
    $
    (0.01
    )Diluted
    
    $
    0.01
    
    
    $
    (0.01
    )WEIGHTED AVERAGE COMMON
SHARES OUTSTANDINGBasic
    
    
    26,235,811
    
    
    
    21,791,107Diluted
    
    
    26,731,037
    
    
    
    21,791,107
 See accompanying notes.
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NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (Unaudited)
 Three Months EndedMarch 31,2008
    
    
    2007OPERATING ACTIVITIESNet income (loss)
    
    $
    163,189
    
    
    $
    (254,264
    )Adjustments to reconcile net income (loss) to
net cash used in operating activities:Incentive bonus paid in common shares
    
    
    31,570
    
    
    
    Options, warrants and deferred compensation
    
    
    137,679
    
    
    
    341,123Depreciation, depletion and amortization
    
    
    2,871,760
    
    
    
    2,306,470Bad debt expense
    
    
    347,840
    
    
    
    Loss on sale of assets
    
    
    (1,336
    )
    
    
    (5,920
    )Deferred income taxes
    
    
    615,660
    
    
    
    333,406Changes in assets and liabilities:Accounts receivable
    
    
    (1,156,106
    )
    
    
    2,632,366Prepaid expenses and other current assets
    
    
    (456,734
    )
    
    
    32,713Other non-current assets
    
    
    3,242,790
    
    
    
    (527,262
    )Accounts payable
    
    
    2,337,766
    
    
    
    (3,055,522
    )Accrued liabilities
    
    
    128,804
    
    
    
    (662,173
    )Customers drilling deposits
    
    
    169,285
    
    
    
    (6,233,268
    )Net cash provided by (used in) operating activities
    
    
    8,432,167
    
    
    
    (5,092,331
    )INVESTING ACTIVITIESProceeds from sale of assets
    
    
    12,200
    
    
    
    27,200Purchase of property and equipment
    
    
    (155,287
    )
    
    
    (510,401
    )Increase in bonds and deposits
    
    
    (75,000
    )
    
    
    (25,000
    )Additions to oil and gas properties, net
    
    
    (13,096,966
    )
    
    
    (10,816,141
    )Net cash used in investing activities
    
    
    (13,315,053
    )
    
    
    (11,324,342
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    1,938
    
    
    
    1,843Proceeds from issuance of common shares
    
    
    102,000
    
    
    
    40,300Payments of deferred financing costs
    
    
    (114,293
    )
    
    
    Proceeds from issuance of long term debt
    
    
    5,740,000
    
    
    
    4,000,000Payments of long term debt
    
    
    (2,020,175
    )
    
    
    (6,000
    )Net cash provided by financing activities
    
    
    3,709,470
    
    
    
    4,036,143Change in cash
    
    
    (1,173,416
    )
    
    
    (12,380,530
    )Cash, beginning of period
    
    
    2,816,678
    
    
    
    14,431,977Cash, end of period
    
    $
    1,643,262
    
    
    $
    2,051,447SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    1,327,683
    
    
    $
    1,231,044Income taxes paid
    
    
    
    
    
    
    
 See accompanying notes.
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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
 March 31,
    
    
    December 31,2008
    
    
    2007Proved oil and gas properties
    
    $
    158,104,748
    
    
    $
    148,981,923Unproved oil and gas properties
    
    
    4,202,536
    
    
    
    3,876,721Gathering facilities and well equipment
    
    
    59,019,321
    
    
    
    55,370,995221,326,605
    
    
    
    208,229,639Accumulated DD&A
    
    
    (26,928,437
    )
    
    
    (24,405,937
    )Net oil and gas properties and equipment
    
    $
    194,398,168
    
    
    $
    183,823,702
 Suspended Well Costs Accounting for Suspended Well
Costs
 4




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Note 3. Property and Equipment
  March 31,
    
    
    December 31,2008
    
    
    2007Land
    
    $
    12,908
    
    
    $
    12,908Building improvements
    
    
    58,051
    
    
    
    58,051Machinery and equipment
    
    
    3,211,013
    
    
    
    3,170,601Office furniture and fixtures
    
    
    170,782
    
    
    
    168,217Computer and office equipment
    
    
    598,965
    
    
    
    578,317Vehicles
    
    
    1,929,894
    
    
    
    1,869,5515,981,613
    
    
    
    5,857,645Accumulated depreciation
    
    
    (2,357,521
    )
    
    
    (2,168,009
    )Net other property and equipment
    
    $
    3,624,092
    
    
    $
    3,689,636
 Note 4. Deferred Financing Costs
  Note 5. Goodwill
 SFAS Goodwill and Other Intangible Assets
 Note 6. Customer Drilling Deposits
  Note 7. Long Term Debt
 Convertible Notes
 5




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Credit Facility
 Equipment Loan
 Acquisition Debt
 Total Long Term Debt and Maturities
 Principal Amount OutstandingMarch 31,
    
    
    December 31,2008
    
    
    2007Total long term debt (including current portion)(1)
    
    $
    84,357,809
    
    
    $
    80,549,771Less current portion
    
    
    24,000
    
    
    
    388,856Total long term debt(1)
    
    $
    84,333,809
    
    
    $
    80,160,915Maturities of DebtRemainder of 2008
    
    $
    18,0002009
    
    
    24,0002010
    
    
    36,068,991
    (1)2011
    
    
    48,024,0002012 and thereafter
    
    
    222,818
 
 (1)
    
    Reflects allocations of $955,009 at March 31, 2008 and $1,043,222 at December 31, 2007 from
our 6% convertible notes in the principal amount of $37,000,000 based on equity components of
their conversion features and related warrants, which expired unexercised in 2006. Note 8. Capital Stock
 Preferred Shares
 Common Shares
 6




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Number ofShares
    
    
    AmountCommon Shares IssuedBalance, December 31, 2006
    
    
    21,788,551
    
    
    $
    84,531,832Issued in registered direct placement
    
    
    4,200,000
    
    
    
    23,687,955Issued as stock awards under incentive plan
    
    
    10,430
    
    
    
    61,010Issued upon exercise of stock options and warrants
    
    
    137,083
    
    
    
    561,729Balance, December 31, 2007
    
    
    26,136,064
    
    
    
    108,842,526Issued to employees as incentive bonus
    
    
    7,000
    
    
    
    31,570Issued upon exercise of stock options
    
    
    100,000
    
    
    
    212,933Balance, March 31, 2008
    
    
    26,243,064
    
    
    $
    109,087,029Paid In Capital  Options and WarrantsBalance, December 31, 2006
    
    
    
    
    
    $
    3,073,287Recognized
    
    
    
    
    
    
    529,062Exercised
    
    
    
    
    
    
    (118,201
    )Balance, December 31, 2007
    
    
    
    
    
    
    3,484,148Recognized
    
    
    
    
    
    
    34,841Exercised
    
    
    
    
    
    
    (110,933
    )Balance, March 31, 2008
    
    
    
    
    
    $
    3,408,056Contributed SurplusBalance, December 31, 2006
    
    
    
    
    
    $
    1,396,074Accreted(1)
    
    
    
    
    
    
    (352,852
    )Balance, December 31, 2007
    
    
    
    
    
    
    1,043,222Accreted(1)
    
    
    
    
    
    
    (88,213
    )Balance, March 31, 2008
    
    
    
    
    
    $
    955,009Common Shares to be IssuedBalance, March 31, 2008 and December 31, 2007
    
    
    9,185
    
    
    $
    45,925
 
 (1)
    
    Reflects accretion of the equity components allocated to our 6% convertible notes and related
warrants issued in 2005. Stock Options and Awards
 Weighted AverageIssued
    
    Exercisable
    
    Exercise PriceBalance, December 31, 2006
    
    
    2,815,000
    
    
    
    945,833
    
    
    $
    4.68Vested
    
    
    
    
    
    
    920,833
    
    
    
    6.03Exercised
    
    
    (127,083
    )
    
    
    (127,083
    )
    
    
    3.17Forfeited
    
    
    (6,667
    )
    
    
    
    
    
    
    6.02Balance, December 31, 2007
    
    
    2,681,250
    
    
    
    1,739,583
    
    
    
    4.75Exercised
    
    
    (100,000
    )
    
    
    (100,000
    )
    
    
    1.02Balance, March 31, 2008
    
    
    2,581,250
    
    
    
    1,639,583
    
    
    
    4.89
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Options Outstanding
    
    Options ExercisableWeighted
    
    Weighted
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Average
    
    Average
    
    
    
    
    
    AveragePrice
    
    
    
    
    
    Remaining
    
    Exercise
    
    
    
    
    
    Exerciseor Range
    
    Number
    
    Life (years)
    
    Price
    
    Number
    
    Price$   4.03
    
    
    4.09
    
    
    
    1,776,250
    
    
    
    1.52
    
    
    
    4.05
    
    
    
    976,250
    
    
    
    4.066.02
    
    
    7.04
    
    
    
    805,000
    
    
    
    2.30
    
    
    
    6.75
    
    
    
    663,333
    
    
    
    6.912,581,250
    
    
    
    
    
    
    
    
    
    
    
    1,639,583
 Share-Based Payment
 Common Stock Purchase Warrants
 Note 9. Income (Loss) Per Share
 EPS
 Three Months EndedMarch 31,2008
    
    
    2007Numerator:Net income (loss) as reported for basic EPS
    
    $
    163,189
    
    
    $
    (254,264
    )Adjustments to income (loss) for diluted EPS
    
    
    
    
    
    
    Net income (loss) for diluted EPS
    
    $
    163,189
    
    
    $
    (254,264
    )Denominator:Weighted average shares for basic EPS
    
    
    26,235,811
    
    
    
    21,791,107Effect of dilutive securities:Stock options
    
    
    495,226
    
    
    
    Adjusted weighted average shares for dilutive EPS
    
    
    26,731,037
    
    
    
    21,791,107Basic EPS
    
    $
    0.01
    
    
    $
    (0.01
    )Diluted EPS
    
    $
    0.01
    
    
    $
    (0.01
    )
 Note 10. Segment Information
 Disclosure about
Segments of an Enterprise and Related Information
 Note 11. Commitments
  8




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Operating
    
    
    OtherYear
    
    Leases
    
    
    Commitments(1)
    
    
    TotalRemainder of 2008
    
    $
    1,652,084
    
    
    $
    340,000
    
    
    $
    1,992,0842009
    
    
    2,095,062
    
    
    
    2,045,000
    
    
    
    4,140,0622010
    
    
    2,026,933
    
    
    
    
    
    
    
    2,026,9332011
    
    
    1,820,255
    
    
    
    
    
    
    
    1,820,2552012 and thereafter
    
    
    713,014
    
    
    
    
    
    
    
    713,014Total
    
    $
    8,307,348
    
    
    $
    2,385,000
    
    
    $
    10,692,348
 
 (1)
    
    Reflects (i) obligations of $240,000 under a guaranty secured by a certificate of deposit
provided for bank debt of a limited liability company in which DPI previously held an interest
and (ii) commitments under a purchase contract for an airplane. Note 12. Recent Accounting Standards
 SFAS No. 161 Disclosures About
Derivative Instruments and Hedging Activities
 SFAS No. 160 Noncontrolling
Interests in Consolidated Financial Statements
 SFAS No. 141(R) Business
Combinations
 EITF 07-1 EITF Accounting for Collaborative Arrangements Reporting Revenue Gross as a Principal Versus Net as an Agent
 EITF 6-11 Accounting for Income Tax Benefits of Dividends on Share-Based Payment Awards
 FSP No. FIN 481 Definition of
Settlement in FASB Interpretation No. 48
 9




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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
 10




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NGAS Resources, Inc.
 
 Item 2. MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Strategy
  
    
    Organic Growth through Drilling. Development drilling is our mainstay for
production and reserve growth. We participated in 217 gross (82.2 net) wells during
2007 and an additional 60 gross (27.7 net) wells in the first quarter of 2008. This
reflects the evolution of our business model for accelerating organic growth by
retaining all of our available working interest in wells drilled on operated properties
in the Appalachian and Illinois Basins, which averaged 94% in the first quarter of
2008, compared to 56% during 2007. We implemented this shift in our development
strategy late in 2007, and most of our higher net interest wells were awaiting
connection at year end. We anticipate significant upside as we bring our backlog of
unconnected wells on line. Our growth strategy during 2008 is focused on that task, as
well as increasing our acreage position and taking advantage of horizontal drilling
opportunities on core properties. We have a drilling budget of $44 million for 2008,
including our horizontal drilling initiatives, plus $6 million in related
infrastructure build-outs. Both of these components of our capital expenditure program
may be adjusted based on various timing considerations, particularly in the view of the
added complexities in the permitting process for our horizontal wells.
    
    Horizontal Drilling Initiatives. The value proposition for many of our
Appalachian properties may be enhanced by the use of horizontal drilling, which has
been found to provide advantages in extracting natural gas in various environments,
including shale and other tight reservoirs that are challenging to produce efficiently.
While substantially more expensive, horizontal drilling may improve overall returns on
investment by increasing recovery volumes and rates, limiting the number of wells
necessary to develop an area through conventional drilling and reducing the costs and
surface disturbances of multiple vertical wells. We have focused these initiatives in
our Leatherwood field, where we drilled two horizontal wells in the first quarter of
2008 and an additional two wells through the date of this report. Each well has a
single lateral leg up to 3,500 feet through the lower Huron section of the Devonian
shale, which is present throughout most of our operating areas. For the first month in
production, the initial well had an average flow rate 367 Mcf per day. We are
encouraged by our preliminary results and plan to drill a total of twenty horizontal
wells by year end.
    
    Enhancement of Field-Wide Infrastructure. We construct and operate
field-wide gas gathering facilities to provide compression, connection and local
distribution capabilities for most of our Appalachian production. Because we control
third-party access to our field-wide systems, they
 11




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provide us with competitive advantages in acquiring and developing nearby acreage. We
continually upgrade these facilities to keep pace with our expanding production base.
Recent additions to our field-wide systems include 26 miles of gathering lines installed
during the first quarter of 2008, facilities for producing our New Albany shale project
in western Kentucky, known as Haleys Mill, and facilities to provide deliverability
from our Fonde field for compression into our midstream system. Production in Fonde has
historically been limited by pipeline capacity constraints, and our new system has
enabled us to begin connecting a backlog of wells drilled in Fonde over the last several
years and open nearly 50,000 acres for future development in this field.
    
    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 and augmented the system through two high-pressure lateral
upgrades for connections to our field-wide gathering facilities, plus a recently
completed processing plant for liquids extraction We currently deliver all our
production from the Leatherwood, Straight Creek and SME fields to the interstate
pipeline network through the NGAS Gathering system, and we recently began adding
production from our Fonde field through a 14-mile, six-inch steel line to the system.
As of March 31, 2008, the system had daily gross throughput of over 19,000 Dth,
including third-party deliveries. In addition to generating gas transmission and
processing revenues from third-party throughput and cost savings for our own
Appalachian production, ownership of these midstream assets gives us control over gas
flow from our connected fields and enhances our competitive position in the region.
    
    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, we are aggressively developing our New Albany shale play in the
Haleys Mill field, which is situated within the southcentral portion of the Illinois
Basin in western Kentucky. We have also acquired exclusive development rights and a
50% interest in currently constrained gathering infrastructure for a project spanning
approximately 63,000 acres across six counties in eastern Kentucky, known as the
Licking River prospect. We commenced drilling operations on the Licking River prospect
in second quarter this year and have drilled five wells through the date of this
report. We plan to continue capitalizing on opportunities to assemble or participate
in developing large tracts with significant reserve potential.
    
    Purchase of Producing Properties. The purchase of third-party production
offers a means in addition to drilling for capitalizing on our operating experience and
accelerating our growth. 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 our mature drilling programs present
attractive acquisition candidates, providing opportunities to increase our interest in
producing properties meeting all these criteria. We plan to begin purchasing the
assets of targeted programs based on independent reserve valuations that will give
effect to our working interests and reversionary interests in these programs. The
consolidation of these assets is expected to increase our reserves and cash flows,
while also generating administrative efficiencies and simplifying our capital
structure.
 Drilling Operations
 General
 12




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##### Table of Contents



Geological Factors
 Drilling Results
 Development Wells
    
    Exploratory WellsProductive
    
    Dry
    
    Productive
    
    DryGross
    
    Net
    
    Gross
    
    Gross
    
    Net
    
    GrossYear ended December 31, 2007
    
    
    211
    
    
    
    76.1508
    
    
    
    
    
    
    
    6
    
    
    
    6.0000
    
    
    
    Three months ended
March 31, 2008
    
    
    60
    
    
    
    27.6931
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
  Participation Rights
 Producing Activities
 Regional Advantages
 Oil and Gas Production
 13




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##### Table of Contents



Three Months Ended
    
    
    Year EndedMarch 31,
    
    
    December 31,2008
    
    
    2007
    
    
    2007Production volumes:Natural gas (Mcf)
    
    
    743,998
    
    
    
    684,649
    
    
    
    2,950,690Oil (Bbl)
    
    
    13,488
    
    
    
    15,611
    
    
    
    57,738Natural gas liquids (gallons)
    
    
    634,135
    
    
    
    41,333
    
    
    
    154,797Equivalents (Mcfe)
    
    
    880,414
    
    
    
    781,929
    
    
    
    3,310,665Average sales prices:Natural gas (per Mcf)
    
    $
    8.51
    
    
    $
    8.62
    
    
    $
    8.19Oil (per Bbl)
    
    
    90.48
    
    
    
    51.44
    
    
    
    64.97Natural gas liquids (per gallon)
    
    
    1.48
    
    
    
    1.08
    
    
    
    1.41
 Results of Operations  Three Months Ended March 31, 2008 and 2007
 Revenues
 Three Months Ended March 31,% of
    
    
    
    
    
    
    %2008
    
    
    Revenue
    
    
    2007
    
    
    ChangeRevenue:Contract drilling
    
    $
    6,602,118
    
    
    
    37
    %
    
    $
    9,245,219
    
    
    
    (29
    )%Oil and gas production
    
    
    8,489,434
    
    
    
    48
    
    
    
    6,752,232
    
    
    
    26Gas transmission, compression and processing
    
    
    2,558,092
    
    
    
    15
    
    
    
    1,947,941
    
    
    
    31Total
    
    $
    17,649,644
    
    
    
    100
    %
    
    $
    17,945,392
    
    
    
    (2
    )%
     14




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##### Table of Contents



Expenses
 Three Months Ended March 31,2008
    
    
    Margin
    
    
    2007
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    5,119,849
    
    
    
    22
    %
    
    $
    7,180,717
    
    
    
    22
    %Oil and gas production
    
    
    2,764,955
    
    
    
    67
    
    
    
    1,683,014
    
    
    
    75Gas transmission, compression and processing
    
    
    1,090,246
    
    
    
    57
    
    
    
    1,099,593
    
    
    
    44Total direct expenses
    
    
    8,975,050
    
    
    
    49
    
    
    
    9,963,324
    
    
    
    44
 % Revenue
    
    
    
    
    
    
    % RevenueOther Expenses:Selling, general and administrative
    
    
    3,288,483
    
    
    
    19
    %
    
    
    4,021,882
    
    
    
    22
    %Options, warrants and deferred compensation
    
    
    137,679
    
    
    
    1
    
    
    
    341,123
    
    
    
    2Depreciation, depletion and amortization
    
    
    2,871,760
    
    
    
    16
    
    
    
    2,306,470
    
    
    
    13Bad debt expense
    
    
    347,840
    
    
    
    2
    
    
    
    
    
    
    
    N/AInterest expense, net of interest income
    
    
    1,256,260
    
    
    
    7
    
    
    
    1,140,702
    
    
    
    6Other, net
    
    
    (6,277
    )
    
    
    N/A
    
    
    
    92,749
    
    
    
    1Total other expenses
    
    $
    7,895,745
    
    
    
    
    
    
    $
    7,902,926
    SG&A
  15




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##### Table of Contents



DD&A
    Net Income and EPS EPS
  Liquidity and Capital Resources
 Liquidity
  Capital Resources
 16




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##### Table of Contents



Forward Looking Statements
  Contractual Obligations and Commercial Commitments
  17




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##### Table of Contents



Operating Leases
    
    
    Other
    
    
    Long TermYear
    
    Equipment
    
    
    Premises
    
    
    Total
    
    
    Commitments(1)
    
    
    DebtRemainder of 2008
    
    $
    1,468,505
    
    
    $
    183,579
    
    
    $
    1,652,084
    
    
    $
    340,000
    
    
    $
    18,0002009
    
    
    1,848,198
    
    
    
    246,864
    
    
    
    2,095,062
    
    
    
    2,045,000
    
    
    
    24,0002010
    
    
    1,779,118
    
    
    
    247,815
    
    
    
    2,026,933
    
    
    
    
    
    
    
    36,068,991
    (2)2011
    
    
    1,567,866
    
    
    
    252,389
    
    
    
    1,820,255
    
    
    
    
    
    
    
    48,024,0002012 and thereafter
    
    
    435,685
    
    
    
    277,329
    
    
    
    713,014
    
    
    
    
    
    
    
    222,818Total
    
    $
    7,099,372
    
    
    $
    1,207,976
    
    
    $
    8,307,348
    
    
    $
    2,385,000
    
    
    $
    84,357,809
 
 (1)
    
    Reflects (i) obligations of $240,000 under a guaranty secured by a certificate of deposit
provided for bank debt of a limited liability company in which we previously held an interest
and (ii) commitments under a purchase contract for an airplane.(2)
    
    Excludes an allocation of $955,009 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
 Estimates of Proved Reserves and Future Net Cash Flows
 Impairment of Long-Lived Assets .
 Allowance for Doubtful Accounts .
 Forward Looking Statements and Risk Factors
  18




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##### Table of Contents



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
  Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
 Internal Control  Integrated Framework
 19




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##### Table of Contents



Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 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, LLC, 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
    
    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).10.6
    
    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).10.7
    
    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).10.8
    
    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).10.9
    
    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).10.10
    
    Form of general partnership agreement with sponsored drilling programs (incorporated by
reference to Exhibit 10.11 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).10.10
    
    Form of limited partnership agreement with sponsored investment partnerships (incorporated
by reference to Exhibit 10.12 to amended annual report on Form 10-K/A [File No. 0-12185] for
the year ended December 31, 2006).
 20




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.12
    
    Form of assignment of drilling rights with sponsored drilling programs (incorporated by
reference to Exhibit 10.13 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).10.13
    
    Form of drilling and operating agreement with sponsored drilling programs (incorporated by
reference to Exhibit 10.14 to amended annual report on Form 10-K/A [File No. 0-12185] for the
year ended December 31, 2006).11.1
    
    Computation of Earnings Per Share (included in Note 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.
 
 SIGNATURES
  NGAS Resources, Inc.Date: May 8, 2008
    By:
    /s/William S. DaughertyWilliam S. DaughertyChief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer) 21