##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION
 Washington, D.C. 20549
 FORM 10-Q
 þ
    
    QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 For the Quarter Ended June 30, 2009
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF EXCHANGE ACT
 Commission File No. 0-12185
 NGAS Resources, Inc.
  Province of British Columbia
(State or other jurisdiction of 
incorporation or organization)
    
    Not Applicable
(I.R.S. Employer
Identification No.)120 Prosperous Place, Suite 201
Lexington, Kentucky
(Address of principal executive offices)
    
    40509-1844
(Zip Code)
 Registrants telephone number, including area code: (859) 263-3948
  þ o
 o 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 August 4, 2009Common Stock
    
    27,004,361




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##### 



NGAS Resources, Inc.
 INDEX TO FORM 10-Q
 PagePart I. Financial InformationItem 1.
Financial Statements:Condensed Consolidated Balance Sheets  June 30, 2009 (unaudited) and December 31, 2008
    
    
    1Condensed Consolidated Statement of Operations  Three months and six months ended
June 30, 2009 and 2008
    
    
    2Condensed Consolidated Statement of Cash Flows  Three months and six months ended
June 30, 2009 and 2008
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    20Item 4. Controls and Procedures
    
    
    20Part II. Other InformationItem 4. Submission of Matters to a Vote of Security Holders
    
    
    21Item 6. Exhibits
    
    
    21EX-31.1EX-31.2EX-32.1EX-32.2
  
 Additional Information
 NGAS company we our us Dth MMBtu Mcf Mcfe Mmcf Bcf EUR




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##### Table of Contents



NGAS Resources, Inc.
 CONDENSED CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2009
    
    
    2008(Unaudited)ASSETSCurrent assets:Cash
    
    $
    7,642,019
    
    
    $
    981,899Accounts receivable
    
    
    5,684,160
    
    
    
    10,450,173Prepaid expenses and other current assets
    
    
    515,848
    
    
    
    540,253Loans to related parties
    
    
    76,914
    
    
    
    79,188Total current assets
    
    
    13,918,941
    
    
    
    12,051,513Bonds and deposits
    
    
    263,695
    
    
    
    623,898Oil and gas properties
    
    
    179,603,725
    
    
    
    229,218,344Assets held for sale
    
    
    47,216,714
    
    
    
    Property and equipment
    
    
    5,667,261
    
    
    
    3,285,925Loans to related parties
    
    
    171,429
    
    
    
    171,429Deferred financing costs
    
    
    1,645,985
    
    
    
    1,689,580Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    248,800,927
    
    
    $
    247,353,866LIABILITIESCurrent liabilities:Accounts payable
    
    $
    5,237,137
    
    
    $
    12,362,092Accrued liabilities
    
    
    665,157
    
    
    
    675,141Deferred compensation
    
    
    2,094,700
    
    
    
    2,246,439Customer drilling deposits
    
    
    698,400
    
    
    
    2,262,955Long-term debt, current portion
    
    
    87,703
    
    
    
    24,000Total current liabilities
    
    
    8,783,097
    
    
    
    17,570,627Deferred compensation
    
    
    344,013
    
    
    
    Deferred income taxes
    
    
    13,012,717
    
    
    
    12,949,476Long-term debt
    
    
    118,981,171
    
    
    
    108,580,448Other long-term liabilities
    
    
    4,008,675
    
    
    
    3,685,849Total liabilities
    
    
    145,129,673
    
    
    
    142,786,400SHAREHOLDERS 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
    
    
    4,204,791
    
    
    
    3,774,600Contributed surplus
    
    
    513,944
    
    
    
    690,370To be issued:9,185   Common shares (2008  9,185)
    
    
    45,925
    
    
    
    45,925115,729,192
    
    
    
    115,114,177Deficit
    
    
    (12,057,938
    )
    
    
    (10,546,711
    )Total shareholders equity
    
    
    103,671,254
    
    
    
    104,567,466Total liabilities and shareholders equity
    
    $
    248,800,927
    
    
    $
    247,353,866
 See accompanying notes.
 1




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##### Table of Contents



NGAS Resources, Inc.
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008REVENUEContract drilling
    
    $
    5,172,998
    
    
    $
    7,625,356
    
    
    $
    12,496,750
    
    
    $
    14,227,474Oil and gas production
    
    
    6,891,644
    
    
    
    11,179,620
    
    
    
    13,958,863
    
    
    
    19,669,054Gas transmission, compression
and processing
    
    
    2,599,229
    
    
    
    2,536,560
    
    
    
    5,404,211
    
    
    
    5,094,652Total revenue
    
    
    14,663,871
    
    
    
    21,341,536
    
    
    
    31,859,824
    
    
    
    38,991,180DIRECT EXPENSESContract drilling
    
    
    3,873,266
    
    
    
    5,756,997
    
    
    
    9,414,692
    
    
    
    10,876,846Oil and gas production
    
    
    2,614,094
    
    
    
    3,107,095
    
    
    
    4,939,059
    
    
    
    5,872,050Gas transmission, compression
and processing
    
    
    1,025,408
    
    
    
    957,548
    
    
    
    1,994,325
    
    
    
    2,047,794Total direct expenses
    
    
    7,512,768
    
    
    
    9,821,640
    
    
    
    16,348,076
    
    
    
    18,796,690OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    2,552,740
    
    
    
    3,442,094
    
    
    
    5,803,005
    
    
    
    6,730,577Options, warrants and deferred compensation
    
    
    319,192
    
    
    
    234,803
    
    
    
    737,465
    
    
    
    372,482Depreciation, depletion and amortization
    
    
    3,687,621
    
    
    
    3,261,192
    
    
    
    7,306,491
    
    
    
    6,132,952Bad debt expense
    
    
    
    
    
    
    59,000
    
    
    
    
    
    
    
    406,840Interest expense
    
    
    1,459,824
    
    
    
    1,355,643
    
    
    
    2,831,865
    
    
    
    2,681,613Interest income
    
    
    (6,194
    )
    
    
    (9,093
    )
    
    
    (15,010
    )
    
    
    (78,803
    )Other, net
    
    
    216,377
    
    
    
    34,632
    
    
    
    295,918
    
    
    
    28,355Total other expenses
    
    
    8,229,560
    
    
    
    8,378,271
    
    
    
    16,959,734
    
    
    
    16,274,016INCOME (LOSS) BEFORE INCOME TAXES
    
    
    (1,078,457
    )
    
    
    3,141,625
    
    
    
    (1,447,986
    )
    
    
    3,920,474INCOME TAX EXPENSE (BENEFIT)
    
    
    (103,921
    )
    
    
    1,620,363
    
    
    
    63,241
    
    
    
    2,236,023NET INCOME (LOSS)
    
    $
    (974,536
    )
    
    $
    1,521,262
    
    
    $
    (1,511,227
    )
    
    $
    1,684,451NET INCOME (LOSS) PER SHAREBasic
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    (0.06
    )
    
    $
    0.06Diluted
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    (0.06
    )
    
    $
    0.06WEIGHTED
AVERAGE COMMON SHARES OUTSTANDING:Basic
    
    
    26,968,646
    
    
    
    26,346,506
    
    
    
    26,820,718
    
    
    
    26,291,159Diluted
    
    
    26,968,646
    
    
    
    27,344,529
    
    
    
    26,820,718
    
    
    
    27,015,16
 See accompanying notes.
 2




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##### Table of Contents



NGAS
Resources, Inc.   CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008OPERATING ACTIVITIESNet income (loss)
    
    $
    (974,536
    )
    
    $
    1,521,262
    
    
    $
    (1,511,227
    )
    
    $
    1,684,451Adjustments to reconcile net income to
net cash provided by operating activities:Incentive bonus paid in common shares
    
    
    
    
    
    
    
    
    
    
    361,250
    
    
    
    31,570Options, warrants and deferred compensation
    
    
    319,192
    
    
    
    234,803
    
    
    
    737,465
    
    
    
    372,482Depreciation, depletion and amortization
    
    
    3,687,621
    
    
    
    3,261,192
    
    
    
    7,306,491
    
    
    
    6,132,952Bad debt expense
    
    
    
    
    
    
    59,000
    
    
    
    
    
    
    
    406,840Gain (loss) on sale of assets
    
    
    (3,620
    )
    
    
    981
    
    
    
    (12,905
    )
    
    
    (355
    )Deferred income taxes (benefit)
    
    
    (103,921
    )
    
    
    1,620,363
    
    
    
    63,241
    
    
    
    2,236,023Changes in assets and liabilitiesAccounts receivable
    
    
    74,059
    
    
    
    (2,987,214
    )
    
    
    4,766,013
    
    
    
    (4,143,320
    )Prepaid expenses and other current assets
    
    
    94,002
    
    
    
    574,348
    
    
    
    24,405
    
    
    
    117,614Other non-current assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,242,790Accounts payable
    
    
    (28,706
    )
    
    
    (1,633,082
    )
    
    
    (7,124,955
    )
    
    
    704,684Accrued liabilities
    
    
    23,395
    
    
    
    78,814
    
    
    
    (9,984
    )
    
    
    207,618Deferred compensation
    
    
    (115,000
    )
    
    
    
    
    
    
    (115,000
    )
    
    
    Customers drilling deposits
    
    
    (895,848
    )
    
    
    (1,396,787
    )
    
    
    (1,564,555
    )
    
    
    (1,227,502
    )Other long-term liabilities
    
    
    162,769
    
    
    
    
    
    
    
    322,826
    
    
    
    Net cash provided by operating activities
    
    
    2,239,407
    
    
    
    1,333,680
    
    
    
    3,243,065
    
    
    
    9,765,847INVESTING ACTIVITIESProceeds from sale of assets
    
    
    34,337
    
    
    
    26,500
    
    
    
    54,033
    
    
    
    38,700Purchase of property and equipment
    
    
    (2,458,544
    )
    
    
    (149,214
    )
    
    
    (2,487,800
    )
    
    
    (304,501
    )Change in bonds and deposits
    
    
    224,203
    
    
    
    39,500
    
    
    
    10,203
    
    
    
    (35,500
    )Additions to oil and gas properties, net
    
    
    1,931,517
    
    
    
    (13,228,191
    )
    
    
    (4,077,095
    )
    
    
    (26,325,157
    )Net cash used in investing activities
    
    
    (268,487
    )
    
    
    (13,311,405
    )
    
    
    (6,500,659
    )
    
    
    (26,626,458
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    560
    
    
    
    739
    
    
    
    2,274
    
    
    
    2,677Proceeds from issuance of common shares
    
    
    
    
    
    
    1,006,806
    
    
    
    
    
    
    
    1,108,806Payments of deferred financing costs
    
    
    (371,527
    )
    
    
    (29,250
    )
    
    
    (372,560
    )
    
    
    (143,543
    )Proceeds from issuance of long-term debt
    
    
    4,800,000
    
    
    
    11,000,000
    
    
    
    10,300,000
    
    
    
    16,740,000Payments of long-term debt
    
    
    (6,000
    )
    
    
    (6,000
    )
    
    
    (12,000
    )
    
    
    (2,026,175
    )Net cash provided by financing activities
    
    
    4,423,033
    
    
    
    11,972,295
    
    
    
    9,917,714
    
    
    
    15,681,765Change in cash
    
    
    6,393,953
    
    
    
    (5,430
    )
    
    
    6,660,120
    
    
    
    (1,178,846
    )Cash, beginning of period
    
    
    1,248,066
    
    
    
    1,643,262
    
    
    
    981,899
    
    
    
    2,816,678Cash, end of period
    
    $
    7,642,019
    
    
    $
    1,637,832
    
    
    $
    7,642,019
    
    
    $
    1,637,832SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    1,450,714
    
    
    $
    1,353,635
    
    
    $
    2,822,194
    
    
    $
    2,681,318Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 See accompanying notes.
 3




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##### Table of Contents



NGAS Resources, Inc.   NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
 Note 1. Summary of Significant Accounting Policies
 General NGAS U.S. GAAP
 Basis of Presentation DPI company we our us
 Estimates .
 Note 2. Oil and Gas Properties
 Sale of 50% Undivided Interest in Appalachian Gas Gathering Facilities NG II APA Seminole Gathering System Seminole Energy
 Capitalized Costs and DD&A DD&A
 4




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##### Table of Contents



June 30,
    
    
    December 31,2009(1)
    
    
    2008Proved oil and gas properties
    
    $
    194,933,880
    
    
    $
    192,186,676Unproved oil and gas properties
    
    
    5,031,686
    
    
    
    5,065,835Gathering facilities and well equipment
    
    
    16,162,264
    
    
    
    67,326,445216,127,830
    
    
    
    264,578,956Accumulated DD&A
    
    
    (36,524,105
    )
    
    
    (35,360,612
    )Net oil and gas properties and equipment
    
    $
    179,603,725
    
    
    $
    229,218,344
 
 (1)
    
    Excludes capitalized costs totaling $47,216,714 for Gathering System assets held for sale,
net of accumulated depreciation totaling $5,311,507. Suspended Well Costs Accounting for Suspended Well Costs
 Note 3. Property and Equipment
  June 30,
    
    
    December 31,2009
    
    
    2008Land
    
    $
    12,908
    
    
    $
    12,908Building improvements
    
    
    64,265
    
    
    
    64,265Machinery and equipment
    
    
    6,164,986
    
    
    
    3,333,981Office furniture and fixtures
    
    
    175,862
    
    
    
    175,862Computer and office equipment
    
    
    669,465
    
    
    
    670,349Vehicles
    
    
    1,790,323
    
    
    
    1,951,2798,877,809
    
    
    
    6,208,644Accumulated depreciation
    
    
    (3,210,548
    )
    
    
    (2,922,719
    )Net other property and equipment
    
    $
    5,667,261
    
    
    $
    3,285,925
 Note 4. Deferred Financing Costs
  Note 5. Goodwill
 SFAS Goodwill and Other Intangible Assets
 Note 6. Customer Drilling Deposits
  5




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##### Table of Contents



Note 7. Long-Term Debt
 Convertible Notes
 Credit Facility
 
    
    Redetermination of the borrowing base to $65 million, with an additional $10
million reduction upon release of our Gathering System assets from the collateral
package under the credit agreement;
    
    Change in the maximum interest rate for borrowings under the credit agreement to
2.25% above the administrative agents prime rate;
    
    Waiver of current ratio financial covenant under the credit agreement until
September 30, 2009, and
    
    Adjustments to our other financial covenants under the credit agreement through
December 31, 2010.
  Installment Loan
 Acquisition Debt
 Total Long-Term Debt and Maturities
 June 30,
    
    
    December 31,2009(1)
    
    
    2008Principal Amount OutstandingTotal
long-term debt (including current portion)(2)
    
    $
    119,068,874
    
    
    $
    108,604,448Less current portion
    
    
    87,703
    
    
    
    24,000Total long-term debt
    
    $
    118,981,171
    
    
    $
    108,580,448
 6




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##### Table of Contents



Maturities of DebtRemainder of 2009
    
    $
    43,3852010
    
    
    36,575,653
    (2)2011
    
    
    80,093,5572012
    
    
    2,157,4612013 and thereafter
    
    
    198,818
 
 (1)
    
    Does not reflect the $28 million reduction in our credit facility borrowings from proceeds
of the sale of a 50% interest in our Gathering System on July 15, 2009. See Note 2  Oil and
Gas Properties.(2)
    
    Reflects allocations of $513,944 at June 30, 2009 and $690,370 at December 31, 2008 from our
6% convertible notes in the principal amount of $37,000,000 based on equity components of
their conversion features and related warrants. Note 8. 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, June 30, 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
    
    
    
    
    
    
    430,191Balance, June 30, 2009
    
    
    
    
    
    $
    4,204,791Contributed SurplusBalance, December 31, 2007
    
    
    
    
    
    $
    1,043,222Accreted(1)
    
    
    
    
    
    
    (352,852
    )Balance, December 31, 2008
    
    
    
    
    
    
    690,370Accreted(1)
    
    
    
    
    
    
    (176,426
    )Balance, June 30, 2009
    
    
    
    
    
    $
    513,944Common Shares to be IssuedBalance, June 30, 2009 and December 31, 2008
    
    
    9,185
    
    
    $
    45,925
 
 (1)
    
    Reflects accretion of the equity components allocated to our 6% convertible notes and
related warrants issued in 2005. Stock Options and Awards
 7




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##### Table of Contents



Weighted AverageIssued
    
    Exercisable
    
    Exercise PriceBalance, December 31, 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
    
    
    
    
    
    
    1,220,000
    
    
    
    4.68Expired
    
    
    (310,000
    )
    
    
    (310,000
    )
    
    
    4.03Balance, June 30, 2009
    
    
    4,303,668
    
    
    
    2,323,668
    
    
    
    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
    
    
    
    5.86
    
    
    $
    1.51
    
    
    
    
    
    
    $
    4.03      4.09
    
    
    1,230,000
    
    
    
    0.49
    
    
    
    4.05
    
    
    
    1,230,000
    
    
    
    4.056.02      7.64
    
    
    1,423,668
    
    
    
    1.86
    
    
    
    6.66
    
    
    
    1,093,668
    
    
    
    6.694,303,668
    
    
    
    
    
    
    
    
    
    
    
    2,323,668
 Share-Based Payment
 Note 9. Income (Loss) Per Share
 EPS
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2009
    
    
    2008
    
    
    2009
    
    
    2008Numerator:Net income (loss) as reported for basic EPS
    
    $
    (974,536
    )
    
    $
    1,521,262
    
    
    $
    (1,511,227
    )
    
    $
    1,684,451Adjustments to income (loss) for diluted EPS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net income (loss) for diluted EPS
    
    $
    (974,536
    )
    
    $
    1,521,262
    
    
    $
    (1,511,227
    )
    
    $
    1,684,451Denominator:Weighted average shares for basic EPS
    
    
    26,968,646
    
    
    
    26,346,506
    
    
    
    26,820,718
    
    
    
    26,291,159Effect of dilutive securities  stock options
    
    
    
    
    
    
    998,023
    
    
    
    
    
    
    
    724,002Adjusted weighted average shares and
assumed conversions for diluted EPS
    
    
    26,968,646
    
    
    
    27,344,529
    
    
    
    26,820,718
    
    
    
    27,015,161Basic EPS
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    (0.06
    )
    
    $
    0.06Diluted EPS
    
    $
    (0.04
    )
    
    $
    0.06
    
    
    $
    (0.06
    )
    
    $
    0.06
 8




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##### Table of Contents



Note 10. Segment Information
 Disclosure about
Segments of an Enterprise and Related Information
 Note 11. Commitments
  Maturities of Lease ObligationsRemainder of 2009
    
    $
    1,168,1462010
    
    
    2,267,9732011
    
    
    2,047,0862012
    
    
    847,4422013 and thereafter
    
    
    73,283Total
    
    $
    6,403,930
 Note 12. Recent Accounting Standards
 SFAS No. 168 Accounting Standards
Codification and the Hierarchy of Generally Accepted Accounting Principles
 Oil and Gas Reporting Requirements
 9




---



##### Table of Contents



NGAS Resources, Inc.
 Item 2.
    
    MANAGEMENTS DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS
 General
  Recent Developments
 Liquidity from Sale of Interest in Gathering System Gathering System APA DPI NGAS Gathering II Seminole Seminole Energy
 Option for Sale of Retained Gathering System Interest Seminole Option
 Development of Additional Drilling Prospects
 Business Strategy
  10




---



##### Table of Contents




    
    Organic Growth through Drilling with Reduced Capital Spending. While we are
committed to a long-term strategy of developing our reserves through the drillbit and
retaining most of our available working interest in new wells, we have addressed the
challenging conditions in our industry by reducing our 2009 capital spending budget,
currently set at $15 million, and sharing development costs by returning to our successful
partnership structure for operated initiatives. We raised over $34 million for a
non-operated program last year through our established sales network. To meet our
near-term drilling commitments and objectives, in addition to monetizing our Gathering
System, we are currently sponsoring a partnership to participate in up to 53 horizontal
wells throughout our operated properties. The partnership commenced operations following
an initial closing of its private placement in June 2009. We are maintaining a 20%
interest in this years program and will earn an additional 15% reversionary interest
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 309 Mcf 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.
    
    Advantages from Restructured Infrastructure Position. The Gathering System
covered by our APA with Seminole provides deliverability from 90% of our Appalachian
properties directly from the wellhead to major east coast natural gas markets through an
interconnect with Spectra Energy Partners East Tennessee Interstate pipeline network.
Although our sale of a 50% interest in our Gathering System eliminated the closed-access
status of our field-wide infrastructure, our retained capacity rights ensure long-term
deliverability from our operated Appalachian properties serviced by these facilities.
These capacity rights, currently established at 30,000 Mcf per day, 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.
 Drilling Operations
 General
 Geological Factors EUR
 Horizontal Drilling
 11




---



##### Table of Contents



Staged Completion Technology
 New Albany Shale Play
 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
    
    
    
    Six Months Ended June 30, 2009Vertical
    
    
    10
    
    
    
    1.6972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Horizontal
    
    
    8
    
    
    
    1.7588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    18
    
    
    
    3.4560
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 Producing Activities
 Regional Advantages Dth
 Liquids Extraction
 12




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##### Table of Contents



Oil and Gas Production
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year EndedJune 30,
    
    
    June 30,
    
    
    December 31,2009
    
    
    2008
    
    
    2009
    
    
    2008
    
    
    2008Production volumes:Natural gas (Mcf)
    
    
    836,282
    
    
    
    764,530
    
    
    
    1,704,830
    
    
    
    1,508,528
    
    
    
    3,087,596Oil (Bbl)
    
    
    12,149
    
    
    
    14,994
    
    
    
    25,426
    
    
    
    28,482
    
    
    
    57,291Natural gas liquids (gallons)
    
    
    1,235,477
    
    
    
    1,094,547
    
    
    
    2,436,658
    
    
    
    1,728,682
    
    
    
    3,895,649Equivalents (Mcfe)
    
    
    1,001,838
    
    
    
    950,268
    
    
    
    2,040,135
    
    
    
    1,830,682
    
    
    
    3,745,124Average sales prices:Natural gas (per Mcf)
    
    $
    6.47
    
    
    $
    9.88
    
    
    $
    6.61
    
    
    $
    9.21
    
    
    $
    8.89Oil (per Bbl)
    
    
    51.89
    
    
    
    115.54
    
    
    
    42.07
    
    
    
    103.67
    
    
    
    95.07Natural gas liquids (per gallon)
    
    
    0.69
    
    
    
    1.73
    
    
    
    0.67
    
    
    
    1.64
    
    
    
    1.41
 Future Gas Sales Contracts
 Fixed-Price Contracts for Natural Gas Production
 2009Q3
    
    Q4
    
    2010Average price per Mcf
    
    $
    8.38
    
    
    $
    7.82
    
    
    
    $6.71Percent of anticipated gas production contracted
    
    
    50.7
    %
    
    
    55.3
    %
    
    
    45.4
    %
 Results of Operations  Three Months Ended June 30, 2009 and 2008
 Revenues
 Three Months Ended June 30,% of
    
    
    
    
    
    
    %2009
    
    
    Revenue
    
    
    2008
    
    
    ChangeRevenue:Contract drilling
    
    $
    5,172,998
    
    
    
    35
    %
    
    $
    7,625,356
    
    
    
    (32
    )%Oil and gas production
    
    
    6,891,644
    
    
    
    47
    
    
    
    11,179,620
    
    
    
    (38
    )Gas transmission, compression and processing
    
    
    2,599,229
    
    
    
    18
    
    
    
    2,536,560
    
    
    
    2Total
    
    $
    14,663,871
    
    
    
    100
    %
    
    $
    21,341,536
    
    
    
    (31
    )
  13




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##### Table of Contents



Expenses
 Three Months Ended June 30,2009
    
    
    Margin
    
    
    2008
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    3,873,266
    
    
    
    25
    %
    
    $
    5,756,997
    
    
    
    25
    %Oil and gas production
    
    
    2,614,094
    
    
    
    62
    
    
    
    3,107,095
    
    
    
    72Gas transmission, compression and processing
    
    
    1,025,408
    
    
    
    61
    
    
    
    957,548
    
    
    
    62Total direct expenses
    
    
    7,512,768
    
    
    
    49
    
    
    
    9,821,640
    
    
    
    54% Revenue
    
    
    
    
    
    % RevenueOther Expenses:Selling, general and administrative
    
    
    2,552,740
    
    
    
    17
    %
    
    
    3,442,094
    
    
    
    16
    %Options, warrants and deferred compensation
    
    
    319,192
    
    
    
    2
    
    
    
    234,803
    
    
    
    1Depreciation, depletion and amortization
    
    
    3,687,621
    
    
    
    25
    
    
    
    3,261,192
    
    
    
    15Bad debt expense
    
    
    
    
    
    
    
    
    
    
    59,000
    
    
    
    Interest expense, net of interest income
    
    
    1,453,630
    
    
    
    10
    
    
    
    1,346,550
    
    
    
    6Other, net
    
    
    216,377
    
    
    
    1
    
    
    
    34,632
    
    
    
    Total other expenses
    
    $
    8,229,560
    
    
    
    
    
    
    $
    8,378,271
   14




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##### Table of Contents



SG&A
  DD&A
   Net Income (Loss) and EPS EPS
 Results of Operations  Six Months Ended June 30, 2009 and 2008
 Revenues
 Six Months Ended June 30,% of
    
    
    
    
    
    
    %2009
    
    
    Revenue
    
    
    2008
    
    
    ChangeRevenue:Contract drilling
    
    $
    12,496,750
    
    
    
    39
    %
    
    $
    14,227,474
    
    
    
    (12
    )%Oil and gas production
    
    
    13,958,863
    
    
    
    44
    
    
    
    19,669,054
    
    
    
    (29
    )Gas transmission, compression and processing
    
    
    5,404,211
    
    
    
    17
    
    
    
    5,094,652
    
    
    
    6Total
    
    $
    31,859,824
    
    
    
    100
    %
    
    $
    38,991,180
    
    
    
    (18
    )
 15




---



##### Table of Contents



Expenses
 Six Months Ended June 30,2009
    
    
    Margin
    
    
    2008
    
    
    MarginDirect Expenses:Contract drilling
    
    $
    9,414,692
    
    
    
    25
    %
    
    $
    10,876,846
    
    
    
    24
    %Oil and gas production
    
    
    4,939,059
    
    
    
    65
    
    
    
    5,872,050
    
    
    
    70Gas transmission, compression and processing
    
    
    1,994,325
    
    
    
    63
    
    
    
    2,047,794
    
    
    
    60Total direct expenses
    
    
    16,348,076
    
    
    
    49
    
    
    
    18,796,690
    
    
    
    52% Revenue
    
    
    
    
    
    % RevenueOther Expenses:Selling, general and administrative
    
    
    5,803,005
    
    
    
    18
    %
    
    
    6,730,577
    
    
    
    17
    %Options, warrants and deferred compensation
    
    
    737,465
    
    
    
    2
    
    
    
    372,482
    
    
    
    1Depreciation, depletion and amortization
    
    
    7,306,491
    
    
    
    23
    
    
    
    6,132,952
    
    
    
    16Bad debt expense
    
    
    
    
    
    
    
    
    
    
    406,840
    
    
    
    1Interest expense, net of interest income
    
    
    2,816,855
    
    
    
    9
    
    
    
    2,602,810
    
    
    
    7Other, net
    
    
    295,918
    
    
    
    1
    
    
    
    28,355
    
    
    
    Total other expenses
    
    $
    16,959,734
    
    
    
    
    
    
    $
    16,274,016
     16




---



##### Table of Contents



Net Income (Loss) and EPS
  Liquidity and Capital Resources
 Liquidity
  Capital Resources
   17




---



##### Table of Contents




    
    Redetermination of the borrowing base at $55 million, which included a $10 million
reduction to reflect the release of our Gathering System assets from the collateral
package under the credit agreement;
 
    
    Change in the maximum interest rate for borrowings under the credit agreement to
2.25% above the administrative agents prime rate;
 
    
    Waiver of current ratio financial covenant under the credit agreement until
September 30, 2009, and
 
    
    Adjustments to our other financial covenants under the credit agreement through
December 31, 2010.
     18




---



##### 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 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 oil and gas reserves and projecting future production
rates.
  Contractual Obligations and Commercial Commitments
  Operating Leases
    
    
    Long TermYear
    
    Equipment
    
    
    Premises
    
    
    Total
    
    
    DebtRemainder of 2009
    
    $
    1,044,619
    
    
    $
    123,527
    
    
    $
    1,168,146
    
    
    $
    43,3852010
    
    
    2,020,158
    
    
    
    247,815
    
    
    
    2,267,973
    
    
    
    36,575,653
    (1)2011
    
    
    1,794,697
    
    
    
    252,389
    
    
    
    2,047,086
    
    
    
    80,093,557
    (2)2012
    
    
    591,469
    
    
    
    255,973
    
    
    
    847,442
    
    
    
    2,157,4612013 and thereafter
    
    
    51,929
    
    
    
    21,355
    
    
    
    73,284
    
    
    
    198,818Total
    
    $
    5,502,872
    
    
    $
    901,059
    
    
    $
    6,403,931
    
    
    $
    119,068,874
 
 (1)
    
    Excludes an allocation of $513,944 from our 6% convertible notes in the principal amount of
$37,000,000 based on equity components of their conversion features.(2)
    
    Does not reflect the $28 million reduction in our credit facility borrowings from proceeds of
the sale of a 50% interest in our Gathering System on July 15, 2009. Critical Accounting Policies and Estimates
 General
 Estimates of Proved Reserves and Future Net Cash Flows
 19




---



##### Table of Contents



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
  Disclosure Controls and Procedures
  Managements Report on Internal Control over Financial Reporting
 Internal Control 
 20




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##### Table of Contents



Integrated Framework
 Changes in Internal Control over Financial Reporting
  
 PART II. OTHER INFORMATION
 
 Item 4.
    
    Submission of Matters to a Vote of Security Holders
  Percentage
    
    Votes AgainstVotes For
    
    of Votes
    
    or WithheldProposalFixing the size of the board at five members
    
    
    20,543,095
    
    
    
    89.88
    %
    
    
    2,313,465Election of directors:William S. Daugherty
    
    
    20,168,957
    
    
    
    88.23
    
    
    
    2,690,604Paul R. Ferretti
    
    
    20,093,272
    
    
    
    87.90
    
    
    
    2,766,289James K. Klyman
    
    
    19,865,333
    
    
    
    86.90
    
    
    
    2,994,228Thomas F. Miller
    
    
    19,893,671
    
    
    
    87.03
    
    
    
    2,965,890Steve U. Morgan
    
    
    20,086,344
    
    
    
    87.87
    
    
    
    2,773,217Ratification of independent auditors
    
    
    20,425,469
    
    
    
    89.35
    
    
    
    2,434,092
 
 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 June 30, 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).
 21




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.5
    
    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
    
    Amended and Restated Credit Agreement dated as of May 30, 2008 among NGAS Resources, Inc.,
Daugherty Petroleum, Inc. and KeyBank National Association, as agent for the lenders named
therein (incorporated by reference to Exhibit 10.6 to Quarterly Report on Form 10-Q [File No.
0-12185] for the quarter ended June 30, 2008).10.7
    
    Amendment No. 1 dated as of August 4, 2008 to Amended and Restated Credit Agreement dated
as of May 30, 2008 among NGAS Resources, Inc., Daugherty Petroleum, Inc. and KeyBank National
Association, as agent for the lenders named therein (incorporated by reference to Exhibit
10.7 to Quarterly Report on Form 10-Q [File No. 0-12185] for the quarter ended June 30,
2008).10.8
    
    Third Amendment dated as of June 2, 2009 to Amended and Restated Credit Agreement dated as
of May 30, 2008 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] filed June 5, 2009).10.8
    
    Form of Change of Control Agreement dated as of February 25, 2004 (incorporated by
reference to Exhibit 10.9 to quarterly report on Form 10-QSB [File No. 0-12185] for the
quarter ended June 30, 2004).10.9
    
    Form of Indemnification Agreement dated as of February 25, 2004 (incorporated by reference
to Exhibit 10.10 to quarterly report on Form 10-QSB [File No. 0-12185] for the quarter ended
June 30, 2004).10.10
    
    Form of Long-Term Incentive Agreement dated as of February 25, 2004 (incorporated by
reference to Exhibit 10.11 to quarterly report on Form 10-QSB [File No. 0-12185] for the
quarter ended June 30, 2004).10.11
    
    Form of Long-Term Incentive Agreement dated as of December 9, 2008 (incorporated by
reference to Exhibit 10.11 to annual report on Form 10-K [File No. 0-12185] for the year
ended December 31, 2008).10.12
    
    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).10.13
    
    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).10.14
    
    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).10.15
    
    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).10.16
    
    Asset Purchase Agreement dated May 11, 2009 among Daugherty Petroleum, Inc., NGAS
Gathering, LLC, NGAS Gathering II, LLC and Seminole Gas Company, L.L.C. (incorporated by
reference to Exhibit 10.1 to quarterly report on Form 10-Q [File No. 0-12185] for the quarter
ended March 31, 2009).10.17
    
    Amendment dated as of July 10, 2009 to Asset Purchase Agreement dated May 11, 2009 among
Daugherty Petroleum, Inc., NGAS Gathering, LLC, NGAS Gathering II, LLC and Seminole Gas
Company, L.L.C. (incorporated by reference to Exhibit 10.1 to Current Report on Form 8-K
[File No. 0-12185] filed July 17, 2009).10.18
    
    Joint Ownership Agreement dated as of July 15, 2009 between NGAS Gathering II, LLC and
Seminole Gas Company, L.L.C. (incorporated by reference to Exhibit 10.2 to Current Report on
Form 8-K [File No. 0-12185] filed July 17, 2009).10.19
    
    Option Agreement dated as of July 15, 2009 among Daugherty Petroleum, Inc., NGAS Gathering
II, LLC and Seminole Energy Services, LLC (incorporated by reference to Exhibit 10.3 to
Current Report on Form 8-K [File No. 0-12185] filed July 17, 2009).
 22




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##### Table of Contents



ExhibitNumber
    
    Description of Exhibit10.20
    
    Gas Gathering Agreement dated as of July 15, 2009 among NGAS Gathering II, LLC, Seminole
Gas Company, L.L.C. and Seminole Energy Services, LLC (incorporated by reference to Exhibit
10.4 to Current Report on Form 8-K [File No. 0-12185] filed July 17, 2009).10.5
    
    NAESB Gas Purchase Agreement dated as of July 15, 2009 between Daugherty Petroleum, Inc.
and Seminole Energy Services, LLC (incorporated by reference to Exhibit 10.5 to Current
Report on Form 8-K [File No. 0-12185] filed July 17, 2009).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: August 4, 2009
    By:
    /s/William S. DaughertyWilliam S. DaughertyChief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer) 23