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  **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, 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. Employer****incorporation or organization)** **Identification No.)**   **120 Prosperous Place, Suite 201**  **Lexington, Kentucky** **40509-1844****(Address of principal executive offices)** **(Zip Code)****Registrant’s telephone number, including area code: (859) 263-3948**(Former name or former address, if changed since the last report)     Indicate by check mark if the registrant (1) filed all reports required to be filed bySection 13 or 15(d) of the Act during the past 12 months and (2) has been subject to those filingrequirements for the past 90 days. Yes þ No o     Indicate by check mark if the registrant has submitted electronically and posted on itscorporate website every indicative data file required to be submitted and posted pursuant toRule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that theregistrant was required to submit and post such files). Yes o No o     Indicate by check mark whether the registrant is a large accelerated filer, an acceleratedfiler, a non-accelerated filer, or a smaller reporting company. See the definitions of “largeaccelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):            Large accelerated filer o Accelerated filer þ Non-accelerated filer o Smaller reporting company o    (Do not check if a smaller reporting company)       Indicate by check mark if the registrant is a shell company (as defined in Rule 12b-2).Yes o No þNumber of shares outstanding of each of the registrant’s classes of common stock as of the latestpracticable date.     **Title of Class** **Outstanding at May 5, 2009** **Common Stock**  **26,968,646**   
 

 
**NGAS Resources, Inc.****INDEX TO FORM 10-Q**       **Page****Part I.****Financial Information**         ***Item 1. Financial Statements*****:**         Condensed Consolidated Balance Sheets — March 31, 2009 (unaudited) and December 31, 2008   1      Condensed Consolidated Statement of Operations — Three months ended March 31, 2009 and 2008   2      Condensed Consolidated Statement of Cash Flows — Three months ended March 31, 2009 and 2008   3      Notes to Condensed Consolidated Financial Statements   4      ***Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations***  10      ***Item 3. Quantitative and Qualitative Disclosures about Market Risk***  19      ***Item 4. Controls and Procedures***  20      **Part II.****Other Information**         ***Item 6. Exhibits***  20  EX-10.16 EX-31.1 EX-31.2 EX-32.1 EX-32.2 **Additional Information**          We file annual, quarterly and other reports and information with the Securities ExchangeCommission. Promptly after their filing, we provide access to these reports without charge on ourwebsite at www.ngas.com. Our principal and administrative offices are located in Lexington,Kentucky. Our common stock is traded on the Nasdaq Global Select Market under the symbol *NGAS*.Unless otherwise indicated, references in this report to the *company*or to *we*, *our*or *us*includeNGAS Resources, Inc., our direct and indirect wholly owned subsidiaries and our interests insponsored drilling partnerships. As used in this report, *Dth*means decatherm, *Mcf*means thousandcubic feet, *Mcfe*means thousand cubic feet of natural gas equivalents, *Mmcf*means million cubicfeet, *Bcf*means billion cubic feet and *EUR*means estimated ultimately recoverable volumes ofnatural gas or oil.. 
 

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**NGAS Resources, Inc.****CONDENSED CONSOLIDATED BALANCE SHEETS**           **March 31,**  **December 31,**   **2009**  **2008**   **(Unaudited)**     ASSETS        Current assets:        Cash  $1,248,066  $981,899 Accounts receivable   5,758,219   10,450,173 Prepaid expenses and other current assets   609,850   540,253 Loans to related parties   77,474   79,188        Total current assets   7,693,609   12,051,513 Bonds and deposits   837,898   623,898 Oil and gas properties   232,001,956   229,218,344 Property and equipment   3,099,554   3,285,925 Loans to related parties   171,429   171,429 Deferred financing costs   1,501,959   1,689,580 Goodwill   313,177   313,177        Total assets $245,619,582  $247,353,866        LIABILITIES        Current liabilities:        Accounts payable  $5,265,843  $12,362,092 Accrued liabilities   641,762   675,141 Deferred compensation   2,209,700   2,246,439 Customer drilling deposits   1,594,248   2,262,955 Long-term debt, current portion   24,000   24,000        Total current liabilities   9,735,553   17,570,627 Deferred compensation   190,376   — Deferred income taxes   13,116,638   12,949,476 Long-term debt   114,162,661   108,580,448 Other long-term liabilities   3,845,906   3,685,849        Total liabilities   141,051,134   142,786,400        SHAREHOLDERS’ EQUITY        Capital stock        *Authorized*:        5,000,000 Preferred shares        100,000,000 Common shares        *Issued*:        26,968,646 Common shares (2008 — 26,543,646)   110,988,162   110,626,912 21,100 Common shares held in treasury, at cost   (23,630)  (23,630)Paid-in capital — options and warrants   4,039,236   3,774,600 *Contributed surplus*  602,157   690,370 *To be issued*:        9,185 Common shares (2008 — 9,185)   45,925   45,925           115,651,850   115,114,177 Deficit   (11,083,402)  (10,546,711)       Total shareholders’ equity   104,568,448   104,567,466        Total liabilities and shareholders’ equity $245,619,582  $247,353,866        *See accompanying notes.*
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**NGAS Resources, Inc.****CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**           **Three Months Ended**   **March 31,**   **2009**  **2008** REVENUE        Contract drilling  $7,323,752  $6,602,118 Oil and gas production   7,067,219   8,489,434 Gas transmission, compression and processing   2,804,982   2,558,092        Total revenue   17,195,953   17,649,644        DIRECT EXPENSES        Contract drilling   5,541,426   5,119,849 Oil and gas production   2,324,965   2,764,955 Gas transmission, compression and processing   968,917   1,090,246        Total direct expenses   8,835,308   8,975,050        OTHER EXPENSES (INCOME)        Selling, general and administrative   3,250,265   3,288,483 Options, warrants and deferred compensation   418,273   137,679 Depreciation, depletion and amortization   3,618,870   2,871,760 Bad debt expense   —   347,840 Interest expense   1,372,041   1,325,970 Interest income   (8,816)  (69,710)Other, net   79,541   (6,277)       Total other expenses   8,730,174   7,895,745        INCOME (LOSS) BEFORE INCOME TAXES   (369,529)  778,849 INCOME TAX EXPENSE   167,162   615,660        NET INCOME (LOSS)  $(536,691) $163,189        NET INCOME (LOSS) PER SHARE        Basic  $(0.02) $0.01        Diluted  $(0.02) $0.01        WEIGHTED AVERAGE COMMONSHARES OUTSTANDING        Basic   26,671,146   26,235,811        Diluted   26,671,146   26,731,037        *See accompanying notes.*
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**NGAS Resources, Inc.****CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)**           **Three Months Ended**   **March 31,**   **2009**  **2008** OPERATING ACTIVITIES        Net income (loss)  $(536,691) $163,189 Adjustments to reconcile net income (loss) to netcash provided by operating activities:        Incentive bonus paid in common shares   361,250   31,570 Options, warrants and deferred compensation   418,273   137,679 Depreciation, depletion and amortization   3,618,870   2,871,760 Bad debt expense   —   347,840 Gain on sale of assets   (9,285)  (1,336)Deferred income taxes   167,162   615,660 Changes 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   —   3,242,790 Accounts payable   (7,096,249)  2,337,766 Accrued liabilities   (33,379)  128,804 Customers’ drilling deposits   (668,707)  169,285 Other long-term liabilities   160,057   —        Net cash provided by operating activities   1,003,658   8,432,167        INVESTING ACTIVITIES        Proceeds from sale of assets   19,696   12,200 Purchase 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 ACTIVITIES        Decrease in loans to related parties   1,714   1,938 Proceeds from issuance of common shares   —   102,000 Payments of deferred financing costs   (1,033)  (114,293)Proceeds from issuance of long term debt   5,500,000   5,740,000 Payments of long term debt   (6,000)  (2,020,175)       Net cash provided by financing activities   5,494,681   3,709,470        Change in cash   266,167   (1,173,416)Cash, beginning of period   981,899   2,816,678        Cash, end of period  $1,248,066  $1,643,262        SUPPLEMENTAL DISCLOSURE        Interest paid  $1,371,480  $1,327,683 Income taxes paid   —   — *See accompanying notes.*
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**NGAS Resources, Inc.****NOTESTO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS****(Unaudited)*****Note 1. Summary of Significant Accounting Policies***          (a) *General*. The accompanying condensed consolidated financial statements of NGASResources, Inc. (*NGAS*) have been prepared in accordance with accounting principles generallyaccepted in the United States of America (*U.S. GAAP*). Our accounting policies are described inNote 1 to the consolidated financial statements in our annual report on Form 10-K for the yearended December 31, 2008. Our accounting policies and their method of application in theaccompanying condensed consolidated financial statements are consistent with those described in theannual report.          (b) *Basis of Presentation*. The accompanying condensed consolidated financialstatements include the accounts of NGAS, our wholly owned subsidiary, Daugherty Petroleum, Inc.(*DPI*), and its wholly owned subsidiaries. The condensed consolidated financial statements alsoreflect DPI’s interests in a total of 38 drilling programs sponsored to participate in some of itsdrilling initiatives. We account for those interests using the proportionate consolidation method,with all material inter-company accounts and transactions eliminated on consolidation. Referencesto the *company*, *we*, *our*or *us*include DPI, its subsidiaries and interests in sponsored drillingprograms. These interim consolidated financial statements are unaudited but reflect all normalrecurring adjustments that, in the opinion of our management, are necessary to fairly present ourfinancial position at March 31, 2009 and results of operations and cash flows for the three monthsended March 31, 2009 and 2008.          (c) *Estimates**.*The preparation of financial statements in conformity with U.S. GAAPrequires us to make estimates and assumptions that affect the reported amounts of assets andliabilities and the disclosure of contingent assets and liabilities as of the date of theconsolidated financial statements and the reported amounts of revenues and expenses during thereporting periods. The most significant estimates pertain to proved oil and gas reserves andrelated cash flow estimates used in impairment tests of goodwill and other long-lived assets,estimates of future development, dismantlement and abandonment costs and estimates relating tofuture oil and gas revenues and expenses. We also make estimates and assumptions in maintainingallowances for doubtful accounts when deemed appropriate to reflect losses that could result fromfailures by customers or other parties to make payments on our trade receivables. The evaluationsrequired for all of these estimates involve significant uncertainties, and actual results coulddiffer from the estimates.***Note 2. Oil and Gas Properties***          (a) *Capitalized Costs and DD&A*. All of our oil and gas development and producingactivities are conducted within the continental United States. Capitalized costs and accumulateddepreciation, depletion and amortization (*DD&A*) for our oil and gas properties, gatheringfacilities and well equipment as of March 31, 2009 and December 31, 2008 are summarized below.           **March 31,**  **December 31,**   **2009**  **2008** Proved oil and gas properties $197,600,820  $192,186,676 Unproved oil and gas properties   4,840,080   5,065,835 Gathering facilities and well equipment   68,146,668   67,326,445           270,587,568   264,578,956 Accumulated DD&A   (38,585,612)  (35,360,612)       Net oil and gas properties and equipment $232,001,956  $229,218,344                  (b) *Suspended Well Costs*. We had no suspended exploratory wells costs that wererequired to be expensed during 2008 or the first three months of 2009 based on the criteria of FSPNo. 19-1, *Accounting for Suspended Well Costs*. As of March 31, 2009, we had no wells for whichexploratory wells costs had been capitalized for a period of greater than one year after completionof drilling.
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***Note 3. Property and Equipment***          The following table presents the capitalized costs and accumulated depreciation for our otherproperty and equipment as of March 31, 2009 and December 31, 2008.           **March 31,**  **December 31,**   **2009**  **2008** Land  $12,908  $12,908 Building improvements   64,265   64,265 Machinery and equipment   3,360,793   3,333,981 Office furniture and fixtures   175,862   175,862 Computer and office equipment   665,115   670,349 Vehicles   1,892,449   1,951,279           6,171,392   6,208,644 Accumulated depreciation   (3,071,838)  (2,922,719)                Net other property and equipment  $3,099,554  $3,285,925        ***Note 4. Deferred Financing Costs***          Financing costs for our convertible notes and secured credit facility are initiallycapitalized and amortized at rates based on the terms of the underlying debt instruments. SeeNote 7 — Long Term Debt. Upon conversion of convertible notes, the principal amount converted isadded to equity, net of a proportionate amount of the original financing costs. Unamortizeddeferred financing costs for our outstanding notes and credit facility aggregated $1,501,959 atMarch 31, 2009 and $1,689,580 at December 31, 2008.***Note 5. Goodwill***          Goodwill of $1,789,564 was recorded in connection with our acquisition of DPI in 1993 and wasamortized over ten years on a straight-line basis until 2002, when we adopted the Canadianequivalent of Financial Accounting Standards (*SFAS*) No. 142, *Goodwill and Other Intangible Assets*.Under the adopted standard, goodwill is no longer amortized but is instead tested for impairment atleast annually. Our annual analyses indicated that no impairment charges were required.Accordingly, accumulated amortization of goodwill remained at $1,476,387 as of March 31, 2009 andDecember 31, 2008, with unamortized goodwill of $313,177.***Note 6. Customer Drilling Deposits***          Net proceeds received under drilling contracts with sponsored programs are recorded ascustomer drilling deposits at the time of receipt. We recognize revenues from drilling operationson the completed contract method as the wells are drilled, rather than when funds are received. Wehad customer drilling deposits of $1,594,248 at March 31, 2009 and $2,262,955 at December 31, 2008,representing unapplied drilling contract payments for wells that were not yet drilled as of thebalance sheet date.***Note 7. Long Term Debt***          (a) *Convertible Notes*. We have an outstanding series of 6% convertible notes dueDecember 15, 2010 in the aggregate principal amount of $37 million. The notes are convertible intoour common shares at a conversion price of $12.94. We will be entitled to redeem the notes at 100%of their principal amount plus accrued and unpaid interest if the prevailing market price of ourcommon stock exceeds 160% of the note conversion price for specified periods. Upon any event ofdefault under the notes or any change of control, we may be required to redeem the notes at adefault rate equal to 125% of their principal amount or at a change of control rate equal to thegreater of 110% of their principal amount or the consideration that would be received by theholders for the underlying shares in the change of control transaction. Any notes that are neitherredeemed nor converted prior to maturity will be repayable in cash or in common shares, valued forthat purpose at 92.5% of their prevailing market price.          (b) *Credit Facility*. We have a senior secured revolving credit facility maintained byDPI with KeyBank National Association, as agent and primary lender. The facility provides forrevolving term loans and letters of credit in an aggregate amount up to $125 million, with aborrowing base of $80 million at December 31, 2008 and March 31, 2009. Outstanding borrowingsunder the facility bear interest at fluctuating rates up to 1.0% above the agent’s prime rate,depending on the amount of borrowing base utilization. Alternatively, we may elect Eurodollarbased pricing up to 3.0% above quoted Libor rates. As of March 31, 2009, outstanding borrowingsunder the facility aggregated $77.5 million. The facility is secured by liens on our proved oiland gas properties and open-access
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gathering facilities. Obligations under the facility have a scheduled maturity in September2011 and are guaranteed by NGAS.          (c) *Acquisition Debt*. We issued a note for $854,818 to finance our 1986 acquisitionof mineral property on Unga Island, Alaska. The debt is repayable without interest in monthlyinstallments of $2,000 and is secured by liens on the acquired property, buildings and equipment.Although the acquisition agreement provides for royalties at 4% of production revenues, theproperty has remained inactive. The outstanding acquisition debt was $288,818 at March 31, 2009.          (d) *Total Long Term Debt and Maturities*. The following tables summarize our totallong term debt at March 31, 2009 and December 31, 2008 and the principal payments due each yearthrough 2013 and thereafter.           **March 31,**  **December 31,**   **2009**  **2008** **Principal Amount Outstanding**          Total long term debt (including current portion)(1) $114,186,661  $108,604,448 Less current portion  24,000   24,000        Total long term debt(1) $114,162,661  $108,580,448        **Maturities of Debt**                 Remainder of 2009  $18,000     2010   36,421,843(1)    2011   77,524,000     2012   24,000     2013 and thereafter   198,818      (1) Reflects allocations of $602,157 at March 31, 2009 and $690,370 at December 31, 2008 from our6% convertible notes in the principal amount of $37,000,000 based on equity components oftheir conversion features and related warrants.***Note 8. Capital Stock***          (a) *Preferred Shares*. We have 5,000,000 authorized shares of preferred stock, none ofwhich were outstanding at March 31, 2009 and December 31, 2008.          (b) *Common Shares*. The following table reflects transactions involving our commonstock during the reported periods.           **Number of**      **Shares**  **Amount** **Common Shares Issued**                 Balance, December 31, 2007  26,136,064  $108,842,526 Issued to employees as incentive bonus   50,000   259,690 Issued upon exercise of stock options   357,582   1,524,696        Balance, December 31, 2008   26,543,646   110,626,912 Issued as stock awards under incentive plan   425,000   361,250        Balance, March 31, 2009  26,968,646  $110,988,162        **Paid In Capital — Options and Warrants**                 Balance, December 31, 2007       3,484,148 Recognized       625,142 Exercised       (334,690)        Balance, December 31, 2008       3,774,600 Recognized       264,636         Balance, March 31, 2009      $4,039,236         
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           **Number of**      **Shares**  **Amount** **Contributed Surplus**                 Balance, December 31, 2007      $1,043,222 Accreted(1)      (352,852)        Balance, December 31, 2008       690,370 Accreted(1)      (88,213)        Balance, March 31, 2009      $602,157         **Common Shares to be Issued**                 Balance, March 31, 2009 and December 31, 2008   9,185  $45,925         (1) Reflects accretion of the equity components allocated to our 6% convertible notes and relatedwarrants issued in 2005.          (c) *Stock Options and Awards*. We maintain three stock plans for the benefit of ourdirectors, officers, employees and certain consultants or advisors. The plans provide for thegrant of options to purchase up to 3,600,000 common shares and, in the case of our most recentplan, either stock awards or options for an aggregate of up to 4,000,000 common shares. Optiongrants under all the plans must be at prevailing market prices and may be subject to vestingrequirements over a period of up to ten years from the date of grant. Stock awards under the thirdplan may be subject to vesting conditions and trading restrictions specified at the time of grant.Stock awards and option grants were made under these plans for a total of 425,000 shares during thefirst quarter of 2009 and 2,350,000 shares during 2008. The following table shows transactions instock options during the reported periods.                       **Weighted Average**   **Issued**  **Exercisable**  **Exercise Price** Balance, December 31, 2007   2,681,250   1,739,583  $4.75            Granted   2,300,000   —   2.93 Vested   —   41,667   6.02 Exercised   (357,582)  (357,582)  3.33 Forfeited   (10,000)  (10,000)  7.04            Balance, December 31, 2008   4,613,668   1,413,668   3.95 Vested   —   900,000   4.03 Forfeited   (310,000)  (310,000)  4.03             Balance, March 31, 2009   4,303,668   2,003,668   3.94                      At March 31, 2009, the exercise prices of options outstanding under our equity plans rangedfrom $1.51 to $7.64 per share, and their weighted average remaining contractual life was3.25 years. The following table provides additional information on the terms of stock optionsoutstanding at March 31, 2009.                         **Options Outstanding**  **Options Exercisable**           **Weighted**  **Weighted**      **Weighted** **Exercise**      **Average**  **Average**      **Average** **Price**      **Remaining**  **Exercise**      **Exercise** **or 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   4.09 6.02  7.64   1,423,668   2.11   6.66   673,668   6.88                                                        4,303,668           2,003,668                                      In accounting for stock options, we apply the fair value recognition provisions of SFASNo. 123(R), *Share-Based Payment*. We use the Black-Scholes pricing model to determine the fairvalue of each stock option at the grant date, and we recognize the compensation cost ratably overthe vesting period. For the periods presented in the interim consolidated financial statements,the fair value estimates for each option grant assumed a risk free interest rate ranging from 0.03%to 6%, no dividend yield, a theoretical volatility ranging from 0.30 to 0.85 and an expected
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life ranging from six months to six years based on the vesting provisions of the options.This resulted in non-cash charges for options and warrants of $625,142 in 2008 and $264,636 in thefirst quarter of 2009.***Note 9. Income (Loss) Per Share***          The following table shows the computation of basic and diluted earnings (loss) per share (*EPS*)for the reporting periods.           **Three Months Ended**   **March 31,**   **2009**  **2008** **Numerator:**                 Net income (loss) as reported for basic EPS  $(536,691) $163,189 Adjustments to income (loss) for diluted EPS   —   —        Net income (loss) for diluted EPS  $(536,691) $163,189                 **Denominator:**                 Weighted average shares for basic EPS   26,671,146   26,235,811 Effect of dilutive securities:        Stock options   —   495,226        Adjusted weighted average shares for dilutive EPS   26,671,146   26,731,037        Basic EPS  $(0.02) $0.01        Diluted EPS  $(0.02) $0.01        ***Note 10. Segment Information***          We have a single reportable operating segment for our oil and gas business based on theintegrated way we are organized by management in making operating decisions and assessingperformance. Although our financial reporting reflects our separate revenue streams from drilling,production and transmission activities and the direct expenses for each component, we do notconsider the components as discreet operating segments under SFAS No. 131, *Disclosure aboutSegments of an Enterprise and Related Information*.***Note 11. Commitments***          We incurred operating lease expenses of $2,317,526 in 2008 and $675,797 in the first threemonths of 2009. As of March 31, 2009, we had future obligations under operating leases and othercommercial commitments in the amounts listed below.               **Operating**  **Other**    **Year** **Leases**  **Commitments****(1)**  **Total** Remainder of 2009  $1,752,219  $2,343,000  $4,095,219 2010   2,267,973   —   2,267,973 2011   2,047,086   —   2,047,086 2012   847,442   —   847,442 2013 and thereafter   73,284   —   73,284           Total  $6,988,004  $2,343,000  $9,331,004            (1) Reflects commitments under a purchase contract for an airplane.***Note 12. Recent Accounting Standards***          *Oil and Gas Reporting Requirements*. In December 2008, the SEC amended its oil and gasreporting rules under the Exchange Act and Industry Guides. The revisions are intended to provideinvestors with a more meaningful and comprehensive understanding of oil and gas reserves byaligning the oil and gas disclosure requirements with current industry practices and technology.The amendments will be effective for fiscal years ending on or after December 31, 2009 and willsignificantly impact reserve and resource reporting for all E&P companies.
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          *SFAS No. 162*. In May 2008, the FASB issued SFAS No. 162, *The Hierarchy of GenerallyAccepted Accounting Principles*. SFAS 162 identifies the sources of accounting principles and theframework for selecting principles to be used in the preparation and presentation of financialstatements in accordance with U.S. GAAP. The adoption of SFAS 162 had no effect on ourconsolidated financial statements.          *SFAS No. 161*. In March 2008, the FASB issued SFAS No. 161, *Disclosures AboutDerivative Instruments and Hedging Activities*, which expands the quarterly disclosure requirementsin SFAS No. 133 for derivative instruments and hedging activities, effective for fiscal yearsbeginning after November 15, 2008. Our adoption of SFAS No. 161 had no effect our consolidatedfinancial position and results of operations.          *FSP No. 157-2*. In February 2008, the FASB issued FSP No. 157-2, *Effective Date ofFASB Statement No. 157,*which defers the effective date of SFAS 157 for certain nonfinancial assetsand nonfinancial liabilities, except those recognized or disclosed at fair value in the financialstatements on a recurring basis. The deferred provisions of SFAS 157 affect assets measured atfair value in goodwill impairment testing, nonfinancial long-lived assets measured at fair valuefor impairment assessment and asset retirement obligations initially measured at fair value. Ouradoption of these deferred provision on January 1, 2009 had no material impact on our consolidatedfinancial position or results of operations.***Note 13. Subsequent Events***          *PendingSale of Interest in Gathering System*. On May 11, 2009, DPI and NGASGathering, LLC entered into an asset purchase agreement (*APA*) with Seminole Gas Company (*Seminole*)for the sale of a 50% undivided interest in our Appalachian gas gathering and midstream facilitiesat a purchase price of $28 million. The APA also provides for us to enter into various gasmarketing and gas sales arrangements with Seminole Energy Services, L.L.C., the parent company ofSeminole (*Seminole Energy*), upon the closing of the sale. Under these arrangements, we will retainfirm capacity rights for daily delivery of 30,000 Mcf of controlled gas through the system. Wewill also provide Seminole Energy with a six-month option to buy our retained 50% interest in thesegathering facilities for an additional $22 million. The purchase price for both components issubject to certain adjustments and will be payable for our retained 50% interest $7.5 million incash upon exercise of the purchase option and the balance over 30 months under a promissory notebearing interest at 8% per annum. DPI will have the right to require Seminole Energy to exercisethe purchase option if we complete of an equity offering for at least $5 million within thesix-month option period following the closing under the APA.          Both components of the pending sale are subject to customary closing conditions. We will alsobe required to obtain an amendment to our credit facility permitting our sale of the gatheringassets, which are currently part of the collateral securing the facility. To reflect the releaseof the collateral as well as the decrease in our 2008 reserve estimates from lower year-endcommodity prices and higher drilling costs, we anticipate an significant reduction in our current$80 million borrowing base at the semi-annual redetermination scheduled by the end of June 2009.An additional APA closing condition limits this reduction to not less than $55 million. At thatreduced level, our planned reduction of our currently outstanding debt of $77.5 million from APAsale proceeds would leave approximately $5 million of unused borrowing base commitments under thefacility. The APA closing conditions also require us to obtain a waiver of the current ratiofinancial covenant under our credit facility as of June 30, 2009 and adjustments to the otherfinancial covenants through December 31, 2010.          *Expansion of Devonian Shale Play*. We entered into a farmout agreement in May 2009with Chesapeake Appalachia, LLC for a tract of 56,000 gross (42,000 net undeveloped) acrescontiguous to the Amvest portion of our Stone Mountain field in Letcher and Harlan Counties,Kentucky. Chesapeake’s prior development of the tract includes approximately 100 producing wellsand a gathering system that connects to our gathering facilities. Chesapeake and Penn VirginiaOperating, LLC, a royalty interest owner, each have participation rights for up to 25% of theworking interests in our future wells on the acreage, and we have a minimum annual drillingcommitment of four wells under the farmout, with an additional commitment to drill six verticalDevonian shale wells by the beginning of June 2009. To meet our initial commitment, we enteredinto arrangements with a joint venture partner that provides us with a 15% carried working interestin these wells, which we began drilling at the time we obtained the farmout. We granted our jointventure partner participation rights for up to 50% of our available working interest in subsequentDevonian shale horizontal wells on the acquired acreage.
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**NGAS Resources, Inc.****Item 2.** **MANAGEMENT’S DISCUSSION AND ANALYSIS OF**