##### 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
 For the Quarter Ended June 30, 2010
 o
    
    TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
 Commission File No. 0-12185
 
 (NGAS COMPANY LOGO)
 NGAS Resources, Inc.
 (Exact name of registrant as specified in its charter)
 
 Province of British Columbia
    
    Not Applicable(State or other jurisdiction of incorporation)
    
    (I.R.S. Employer Identification No.)
 120 Prosperous Place, Suite 201Lexington, Kentucky
    
    40509-1844(Address of principal executive offices)
    
    (Zip Code)
 (859) 263-3948
 Registrants telephone number, including area code:
 
 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)
 þ




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##### 



NGAS Resources, Inc.  120 Prosperous Place, Suite 201
Lexington, Kentucky 40509
 Form 10-Q  June 30, 2010
 Table of Contents
 PagePart I Financial InformationItem 1 Financial Statements:Condensed Consolidated Balance Sheets 
June 30, 2010 (unaudited) and December 31, 2009
    
    
    1Condensed Consolidated Statement of Operations 
Three months ended June 30, 2010 and 2009
    
    
    2Condensed Consolidated Statement of Cash Flows 
Three months ended June 30, 2010 and 2009
    
    
    3Notes to Condensed Consolidated Financial Statements
    
    
    4Item 2 Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    12Item 3 Quantitative and Qualitative Disclosures About Market Risk
    
    
    22Item 4 Controls and Procedures
    
    
    23Part II Other InformationItem 2 Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    24Item 6 Exhibits
    
    
    24EX-31.1EX-31.2EX-32.1
 
 Additional Information
 NGAS Company we our us NGL CBM Dth Mcf Mcfe Mmcf Mmcf/d Bcf EUR




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##### Table of Contents



NGAS Resources, Inc.
 
 CONSOLIDATED BALANCE SHEETS
 June 30,
    
    
    December 31,2010
    
    
    2009(Unaudited)ASSETSCurrent assets:Cash
    
    $
    4,484,442
    
    
    $
    4,332,650Accounts receivable
    
    
    5,573,732
    
    
    
    7,277,311Note receivable
    
    
    6,501,997
    
    
    
    6,247,880Prepaid expenses and other current assets
    
    
    427,914
    
    
    
    633,884Loans to related parties
    
    
    75,141
    
    
    
    75,679Total current assets
    
    
    17,063,226
    
    
    
    18,567,404Bonds and deposits
    
    
    258,695
    
    
    
    258,695Note receivable
    
    
    3,450,657
    
    
    
    6,766,451Oil and gas properties
    
    
    177,649,224
    
    
    
    182,189,679Property and equipment
    
    
    9,762,595
    
    
    
    5,113,093Loans to related parties
    
    
    171,429
    
    
    
    171,429Deferred financing costs
    
    
    1,023,393
    
    
    
    1,235,705Goodwill
    
    
    313,177
    
    
    
    313,177Total assets
    
    $
    209,692,396
    
    
    $
    214,615,633LIABILITIESCurrent liabilities:Accounts payable
    
    $
    3,885,190
    
    
    $
    5,587,290Accrued liabilities
    
    
    961,774
    
    
    
    938,829Long-term debt, current portion
    
    
    12,547,392
    
    
    
    32,534,084Fair value of derivative financial instruments
    
    
    202,579
    
    
    
    111Customer drilling deposits
    
    
    2,231,915
    
    
    
    5,581,877Total current liabilities
    
    
    19,828,850
    
    
    
    44,642,191Deferred compensation
    
    
    958,561
    
    
    
    651,287Deferred income taxes
    
    
    11,365,136
    
    
    
    12,559,549Long-term debt
    
    
    55,614,095
    
    
    
    40,949,836Fair value of derivative financial instruments
    
    
    399,013
    
    
    
    Other long-term liabilities
    
    
    4,193,107
    
    
    
    3,962,254Total liabilities
    
    
    92,358,762
    
    
    
    102,765,117SHAREHOLDERS EQUITYCapital stockAuthorized:5,000,000         Preferred shares100,000,000     Common sharesIssued:38,597,217       Common shares (2009  30,484,361)
    
    
    128,323,885
    
    
    
    117,142,63921,100              Common shares held in treasury, at cost
    
    
    (23,630
    )
    
    
    (23,630
    )Paid-in capital  options and warrants
    
    
    4,663,201
    
    
    
    4,467,246To be issued:9,185                Common shares
    
    
    45,925
    
    
    
    45,925133,009,381
    
    
    
    121,632,180Deficit
    
    
    (15,675,747
    )
    
    
    (9,781,664
    )Total shareholders equity
    
    
    117,333,634
    
    
    
    111,850,516Total liabilities and shareholders equity
    
    $
    209,692,396
    
    
    $
    214,615,633
 See accompanying notes.
 2




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##### Table of Contents



NGAS Resources, Inc.
 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009REVENUEContract drilling
    
    $
    7,533,179
    
    
    $
    5,172,998
    
    
    $
    11,111,610
    
    
    $
    12,496,750Oil and gas production
    
    
    5,620,851
    
    
    
    6,891,644
    
    
    
    12,028,417
    
    
    
    13,958,863Gas transmission, compression
and processing
    
    
    771,448
    
    
    
    2,599,229
    
    
    
    2,050,577
    
    
    
    5,404,211Total revenue
    
    
    13,925,478
    
    
    
    14,663,871
    
    
    
    25,190,604
    
    
    
    31,859,824DIRECT EXPENSESContract drilling
    
    
    5,688,487
    
    
    
    3,873,266
    
    
    
    8,377,406
    
    
    
    9,414,692Oil and gas production
    
    
    3,703,633
    
    
    
    2,614,094
    
    
    
    7,018,700
    
    
    
    4,939,059Gas transmission, compression
and processing
    
    
    143,446
    
    
    
    1,025,408
    
    
    
    420,550
    
    
    
    1,994,325Total direct expenses
    
    
    9,535,566
    
    
    
    7,512,768
    
    
    
    15,816,656
    
    
    
    16,348,076OTHER EXPENSES (INCOME)Selling, general and administrative
    
    
    3,179,508
    
    
    
    2,552,740
    
    
    
    5,332,376
    
    
    
    5,803,005Options, warrants and deferred compensation
    
    
    237,080
    
    
    
    319,192
    
    
    
    503,229
    
    
    
    737,465Depreciation, depletion and amortization
    
    
    3,280,944
    
    
    
    3,687,621
    
    
    
    6,517,337
    
    
    
    7,306,491Interest expense
    
    
    1,728,217
    
    
    
    2,415,451
    
    
    
    3,470,898
    
    
    
    4,696,459Interest income
    
    
    (221,836
    )
    
    
    (6,194
    )
    
    
    (476,256
    )
    
    
    (15,010
    )Fair value loss (gain) on
derivative financial instruments
    
    
    (1,736,538
    )
    
    
    4,995
    
    
    
    696,593
    
    
    
    (9,324
    )Refinancing costs
    
    
    
    
    
    
    
    
    
    
    625,344
    
    
    
    Other, net
    
    
    (101,578
    )
    
    
    216,377
    
    
    
    (207,077
    )
    
    
    295,918Total other expenses
    
    
    6,365,797
    
    
    
    9,190,182
    
    
    
    16,462,444
    
    
    
    18,815,004LOSS BEFORE INCOME TAXES
    
    
    (1,975,885
    )
    
    
    (2,039,079
    )
    
    
    (7,088,496
    )
    
    
    (3,303,256
    )INCOME TAX EXPENSE (BENEFIT)
    
    
    (911,518
    )
    
    
    (103,921
    )
    
    
    (1,194,413
    )
    
    
    63,241NET LOSS
    
    $
    (1,064,367
    )
    
    $
    (1,935,158
    )
    
    $
    (5,894,083
    )
    
    $
    (3,366,497
    )NET LOSS PER SHAREBasic
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.17
    )
    
    $
    (0.13
    )Diluted
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.17
    )
    
    $
    (0.13
    )WEIGHTED AVERAGE COMMON
SHARES OUTSTANDING:Basic
    
    
    35,847,569
    
    
    
    26,968,646
    
    
    
    34,506,388
    
    
    
    26,820,718Diluted
    
    
    35,847,569
    
    
    
    26,968,646
    
    
    
    34,506,388
    
    
    
    26,820,718
 See accompanying notes.
 3




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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 30,2010
    
    
    2009
    
    
    2010
    
    
    2009OPERATING ACTIVITIESNet loss
    
    $
    (1,064,367
    )
    
    $
    (1,935,158
    )
    
    $
    (5,894,083
    )
    
    $
    (3,366,497
    )Adjustments to reconcile net loss to net cash
provided by (used in) operating activities:Incentive bonus paid in common shares
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    361,250Options, warrants and deferred compensation
    
    
    237,080
    
    
    
    319,192
    
    
    
    503,229
    
    
    
    737,465Depreciation, depletion and amortization
    
    
    3,280,944
    
    
    
    3,687,621
    
    
    
    6,517,337
    
    
    
    7,306,491Gain (loss) on sale of assets
    
    
    6,259
    
    
    
    (3,620
    )
    
    
    7,881
    
    
    
    (12,905
    )Fair value loss (gain) loss on
derivative financial instruments
    
    
    (1,736,538
    )
    
    
    4,995
    
    
    
    696,593
    
    
    
    (9,324
    )Accretion of debt discount
    
    
    705,210
    
    
    
    955,627
    
    
    
    1,452,461
    
    
    
    1,864,594Deferred income taxes (benefit)
    
    
    (911,518
    )
    
    
    (103,921
    )
    
    
    (1,194,413
    )
    
    
    63,241Changes in assets and liabilitiesAccounts receivable
    
    
    1,615,245
    
    
    
    74,059
    
    
    
    1,703,579
    
    
    
    4,766,013Prepaid expenses and other current assets
    
    
    70,729
    
    
    
    94,002
    
    
    
    205,970
    
    
    
    24,405Accounts payable
    
    
    (2,226,415
    )
    
    
    (28,706
    )
    
    
    (1,702,100
    )
    
    
    (7,124,955
    )Accrued liabilities
    
    
    265,504
    
    
    
    23,395
    
    
    
    22,945
    
    
    
    (9,984
    )Deferred compensation
    
    
    
    
    
    
    (115,000
    )
    
    
    
    
    
    
    (115,000
    )Customers drilling deposits
    
    
    813,346
    
    
    
    (895,848
    )
    
    
    (3,349,962
    )
    
    
    (1,564,555
    )Other long-term liabilities
    
    
    107,319
    
    
    
    162,769
    
    
    
    230,853
    
    
    
    322,826Net cash provided by (used in)
operating activities
    
    
    1,162,798
    
    
    
    2,239,407
    
    
    
    (799,710
    )
    
    
    3,243,065INVESTING ACTIVITIESProceeds from sale of assets
    
    
    2,277,096
    
    
    
    34,337
    
    
    
    3,797,777
    
    
    
    54,033Purchase of property and equipment
    
    
    (186,076
    )
    
    
    (2,458,544
    )
    
    
    (5,855,994
    )
    
    
    (2,487,800
    )Change in bonds and deposits
    
    
    
    
    
    
    224,203
    
    
    
    
    
    
    
    10,203Change in oil and gas properties, net
    
    
    1,220,862
    
    
    
    1,931,517
    
    
    
    (1,137,785
    )
    
    
    (4,077,095
    )Net cash provided by (used in)
investing activities
    
    
    3,311,882
    
    
    
    (268,487
    )
    
    
    (3,196,002
    )
    
    
    (6,500,659
    )FINANCING ACTIVITIESDecrease in loans to related parties
    
    
    28
    
    
    
    560
    
    
    
    538
    
    
    
    2,274Proceeds from issuance of common shares
    
    
    4,701,968
    
    
    
    
    
    
    
    4,701,968
    
    
    
    Payments of deferred financing costs
    
    
    
    
    
    
    (371,527
    )
    
    
    (164,274
    )
    
    
    (372,560
    )Proceeds from issuance of long-term debt
    
    
    
    
    
    
    4,800,000
    
    
    
    4,480,000
    
    
    
    10,300,000Payments of long-term debt
    
    
    (5,140,801
    )
    
    
    (6,000
    )
    
    
    (4,870,728
    )
    
    
    (12,000
    )Net cash provided by (used in)
financing activities
    
    
    (438,805
    )
    
    
    4,423,033
    
    
    
    4,147,504
    
    
    
    9,917,714Change in cash
    
    
    4,035,875
    
    
    
    6,393,953
    
    
    
    151,792
    
    
    
    6,660,120Cash, beginning of period
    
    
    448,567
    
    
    
    1,248,066
    
    
    
    4,332,650
    
    
    
    981,899Cash, end of period
    
    $
    4,484,442
    
    
    $
    7,642,019
    
    
    
    4,484,442
    
    
    $
    7,642,019SUPPLEMENTAL DISCLOSUREInterest paid
    
    $
    625,462
    
    
    $
    1,450,714
    
    
    $
    1,610,991
    
    
    $
    2,822,194Income taxes paid
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 See accompanying notes.
 4




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##### Table of Contents



NGAS Resources, Inc.
 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
 Note 1  Summary of Significant Accounting Policies
 General. NGAS GAAP annual report
 Basis of Consolidation. NGAS Production Sentra NGAS Securities we our us
 Estimates.
 Convertible Note Restructuring. 2005 notes 2010 notes
 Subsequent Events.
 Comprehensive Income and Loss.
 Note 2  Recently Adopted Accounting Standards
  Note
3  Oil and Gas Properties
 DD&A
 5




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##### Table of Contents



June 30,
    
    
    December 31,2010
    
    
    2009Proved oil and gas properties
    
    $
    203,555,946
    
    
    $
    203,670,153Unproved oil and gas properties
    
    
    5,907,436
    
    
    
    5,441,933Gathering facilities and well equipment
    
    
    16,198,278
    
    
    
    15,411,788225,661,660
    
    
    
    224,523,874Accumulated DD&A
    
    
    (48,012,436
    )
    
    
    (42,334,195
    )Net oil and gas properties and equipment
    
    $
    177,649,224
    
    
    $
    182,189,679
 Note 4  Other Property and Equipment
  June 30,
    
    
    December 31,2010
    
    
    2009Land
    
    $
    12,908
    
    
    $
    12,908Building and improvements
    
    
    5,664,265
    
    
    
    64,265Machinery and equipment
    
    
    5,362,971
    
    
    
    5,866,853Office furniture and fixtures
    
    
    175,862
    
    
    
    175,862Computer and office equipment
    
    
    704,380
    
    
    
    688,261Vehicles
    
    
    1,735,852
    
    
    
    1,810,06413,656,238
    
    
    
    8,618,213Accumulated depreciation
    
    
    (3,893,643
    )
    
    
    (3,505,120
    )Net other property and equipment
    
    $
    9,762,595
    
    
    $
    5,113,093
 Note 5  Note Receivable
 Appalachian Gathering System Seminole Energy
 Note 6  Loans to Related Parties
  Note 7  Deferred Financing Costs
  6




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##### Table of Contents



Note 8  Goodwill
  Note 9  Customer Drilling Deposits
  Note 10  Long-Term Debt
 Convertible Notes. VWAP
 ASC Debt Derivatives and Hedging
 Credit Facility.
  Building Loan.
 7




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##### Table of Contents



Installment Loan.
 Acquisition Debt.
 Total Long-Term Debt and Maturities.
 June 30,
    
    
    December 31,Principal Amount Outstanding
    
    2010
    
    
    2009Total long-term debt (including current portion)
    
    $
    68,161,487
    
    
    $
    73,483,920Less current portion
    
    
    12,547,392
    
    
    
    32,534,084
    (1)Total long-term debt
    
    $
    55,614,095
    
    
    $
    40,949,836Debt Maturities(1)Remainder of 2010
    


    
     
    
    
    $
    6,105,1982011
    

    
     
    
    
    
    50,252,6152012
    
    
    
     
    
    
    7,533,0242013
    
    
    
     
    
    
    182,0292014
    
    
    
     
    
    
    189,9072015 and thereafter
    
    
    
     
    
    

    3,898,714
 
 (1)
    
    Excludes allocations of $2,688,053 for the unaccreted debt discount on the 2010 notes at
June 30, 2010 and $4,555,513 for the unaccreted debt discount on the 2005 notes at December
31, 2009. Note 11  Capital Stock
 Preferred Shares.
 Common Shares.
 Common Shares Issued
    
    Shares
    
    
    AmountBalance, December 31, 2008
    
    
    26,543,646
    
    
    $
    110,626,912Issued in underwritten offering
    
    
    3,480,000
    
    
    
    6,089,476Issued as stock awards under incentive plan
    
    
    460,715
    
    
    
    426,251Balance, December 31, 2009
    
    
    30,484,361
    
    
    
    117,142,639Issued in convertible note restructuring
    
    
    3,037,151
    
    
    
    5,188,333Issued in underwritten offering
    
    
    3,960,000
    
    
    
    4,701,968Issued in payment of amortization installment under 2010 notes
    
    
    1,115,705
    
    
    
    1,290,945Balance, June 30, 2010
    
    
    38,597,217
    
    
    $
    128,323,885
 8




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##### Table of Contents



Paid In Capital Options and Warrants
    
    
    
    
    
    AmountBalance, December 31, 2008
    
    
    
    
    
    $
    3,774,600Recognized
    
    
    
    
    
    
    692,646Balance, December 31, 2009
    
    
    
    
    
    
    4,467,246Recognized
    
    
    
    
    
    
    195,955Balance, June 30, 2010
    
    
    
    
    
    $
    4,663,201
 Common Shares to be Issued
    
    Shares
    
    
    AmountBalance, June 30, 2010 and December 31, 2009
    
    
    9,185
    
    
    $
    45,925
 Stock Options and Awards.
 Weighted AverageStock Options
    
    Issued
    
    
    Exercisable
    
    
    Exercise PriceBalance, December 31, 2008
    
    
    4,613,668
    
    
    
    1,413,668
    
    
    $
    3.95Vested
    
    
    
    
    
    
    1,225,000
    
    
    
    4.69Expired
    
    
    (740,000
    )
    
    
    (740,000
    )
    
    
    4.06Balance, December 31, 2009
    
    
    3,873,668
    
    
    
    1,898,668
    
    
    
    3.92Vested
    
    
    
    
    
    
    312,500
    
    
    
    6.51Expired
    
    
    (900,000
    )
    
    
    (900,000
    )
    
    
    4.25Forfeited
    
    
    (75,000
    )
    
    
    (27,500
    )
    
    
    3.71Balance, June 30, 2010
    
    
    2,898,668
    
    
    
    1,283,668
    
    
    $
    3.83
  Options Outstanding
    
    
    Options ExercisableWeighted
    
    
    Weighted
    
    
    
    
    
    
    WeightedExercise
    
    
    
    
    
    Average
    
    
    Average
    
    
    
    
    
    
    AveragePrice
    
    
    
    
    
    Remaining
    
    
    Exercise
    
    
    
    
    
    
    Exerciseor Range
    
    Number
    
    
    Life (years)
    
    
    Price
    
    
    Number
    
    
    Price$1.51
    
    
    1,610,000
    
    
    
    4.86
    
    
    $
    1.51
    
    
    
    
    
    
    $
    6.02  7.64
    
    
    1,288,668
    
    
    
    0.96
    
    
    
    6.72
    
    
    
    1,283,668
    
    
    
    6.722,898,668
    
    
    
    
    
    
    
    
    
    
    
    1,283,668
  Common Stock Purchase Warrants.
 9




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##### Table of Contents



Note 12   Loss Per Share
 EPS Earnings per Share
 Three Months Ended
    
    
    Six Months EndedJune 30,
    
    
    June 30,2010
    
    
    2009
    
    
    2010
    
    
    2009Numerator:Net loss as reported for basic EPS
    
    $
    (1,064,367
    )
    
    $
    (1,935,158
    )
    
    $
    (5,894,083
    )
    
    $
    (3,366,497
    )Adjustments to loss for diluted EPS
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Net loss for diluted EPS
    
    $
    (1,064,367
    )
    
    $
    (1,935,198
    )
    
    $
    (5,894,083
    )
    
    $
    (3,366,497
    )Denominator:Weighted average shares for basic
and diluted EPS
    
    
    35,847,569
    
    
    
    26,968,646
    
    
    
    34,506,388
    
    
    
    26,820,718Basic and diluted EPS
    
    $
    (0.03
    )
    
    $
    (0.07
    )
    
    $
    (0.17
    )
    
    $
    (0.13
    )
 Note 13  Related Party Transactions
  Note 14  Segment Information
 Segment Reporting.
 Note 15  Commitments
 Operating Lease Obligations.
 Future Lease ObligationsRemainder of 2010
    
    $
    1,159,7242011
    
    
    1,853,8372012
    
    
    616,0872013
    
    
    77,4952014 and thereafter
    
    
    31,959Total
    
    $
    3,739,102
 Gas Gathering and Sales Commitments.
 10




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##### Table of Contents



Note 16  Subsequent Events
   11




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##### Table of Contents



NGAS Resources, Inc.
 
 Item 2. Managements Discussion and Analysis of Financial Condition and Results
of Operations
 General
  Capital Structure
 Appalachian
Gathering System 2010 notes
 Business Strategy
  
    
    Organic Growth with Reduced Capital Spending. We have addressed the
challenging conditions in our industry by funding our capital budget from cash flow and
opening up our core properties to joint development with industry partners and
sponsored drilling partnerships. Our 2009 drilling partnership raised over $19 million
for participation in 22 horizontal wells. We have a 20% interest in that program,
increasing to 35% after payout. This enabled us to meet our near-term drilling
commitments and objectives with a reduced budget of $12 million in 2009. We have
retained this structure for participation by our current drilling partnership in up to
57 horizontal wells on our core Appalachian properties through the first quarter of
2011, while continuing to maintain our capital expenditures in line with our operating
cash flows.
    
    Horizontal Drilling Advances. Horizontal drilling has enhanced the value
proposition of our properties by substantially increasing recovery volumes and rates at
dramatically lower finding costs. The ability to drill extended lateral legs also
allows us to develop areas that would otherwise be inaccessible due to challenging
terrain or coal mining activities. Most of our horizontals traverse one or more
sections of the Devonian shale formation, which blankets our Appalachian properties at
an average depth of 4,500 feet, or the New Albany shale in the Illinois Basin at depths
from 2,600 to 2,800 feet. By extending the laterals and increasing the number of
completion stages, we continue to improve the performance of our horizontal shale
wells. We have also drilled our first two horizontals through the Weir sandstone
formation in the Roaring Fork field. Although the wells are not yet on line, each had
significant shows of both oil and natural gas. We have over 70,000 undeveloped acres
that are prospective for this play and plan to drill a total of seven Weir horizontals
by year end, with a view to shifting more of our production to crude oil.
 12




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##### Table of Contents




    
    Infrastructure Position. We operate the Appalachian Gathering System and
have firm capacity rights for 30 Mmcf/d of controlled gas through the system, which
interconnects to Spectra Energy Partners East Tennessee Interstate pipeline network.
This ensures long-term deliverability from our connected fields, representing over 90%
of our Appalachian production. Our operating and capacity rights also preserve our
competitive advantages in assembling additional undeveloped acreage around our core
properties in the region as coal mining operations wind down. The sale of the
Appalachian Gathering System did not include our 50% interest in a processing plant for
extracting natural gas liquids (NGL) from system throughput at its delivery point in
Rogersville, Tennessee. This is within 5.5 miles of an 880-megawatt gas-fired power
plant under construction by the Tennessee Valley Authority, which will substantially
increase regional demand when completed later this year.
 Drilling Operations
 Geographic Focus EUR
 Horizontal Air Drilling
 Exploitation of Oil Reserves
 Drilling Results
 Development Wells
    
    
    Exploratory WellsProductive
    
    
    Dry
    
    
    Productive
    
    
    DryGross
    
    
    Net
    
    
    Gross
    
    
    Gross
    
    
    Net
    
    
    GrossYear ended December 31, 2009Vertical
    
    
    10
    
    
    
    1.6972
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Horizontal
    
    
    24
    
    
    
    5.0588
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal(1)
    
    
    34
    
    
    
    6.7560
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Six months ended June 30, 2010Vertical
    
    
    1
    
    
    
    1.0000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Horizontal
    
    
    16
    
    
    
    2.2250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Subtotal
    
    
    17
    
    
    
    3.2250
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Total
    
    
    51
    
    
    
    9.9810
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 
 (1)
    
    Includes 9 gross (1.9560 net) non-operated wells. 13




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##### Table of Contents



Participation Rights
 Drilling Partnerships
 Benefits
 Structure
 Producing Activities
 Regional Advantages
 Liquids Extraction
 Production Profile, Volumes and Prices
 Three Months Ended
    
    
    Six Months Ended
    
    
    Year EndedJune 30,
    
    
    June 30,
    
    
    December 31,2010
    
    
    2009
    
    
    2010
    
    
    2009
    
    
    2009Production volumes:Natural gas (Mcf)
    
    
    709,783
    
    
    
    836,282
    
    
    
    1,375,931
    
    
    
    1,704,830
    
    
    
    3,321,146Oil (Bbl)
    
    
    12,937
    
    
    
    12,149
    
    
    
    24,116
    
    
    
    25,426
    
    
    
    48,737Natural gas liquids (gallons)
    
    
    981,993
    
    
    
    1,235,477
    
    
    
    1,948,973
    
    
    
    2,436,658
    
    
    
    4,858,044Equivalents (Mcfe)
    
    
    861,057
    
    
    
    1,001,838
    
    
    
    1,666,803
    
    
    
    2,040,135
    
    
    
    3,977,920Average sales prices:Natural gas (per Mcf)
    
    $
    5.47
    
    
    $
    6.47
    
    
    $
    6.09
    
    
    $
    6.61
    
    
    $
    6.17Oil (per Bbl)
    
    
    71.41
    
    
    
    51.89
    
    
    
    71.26
    
    
    
    42.07
    
    
    
    52.63Natural gas liquids (per gallon)
    
    
    0.83
    
    
    
    0.69
    
    
    
    0.99
    
    
    
    0.67
    
    
    
    0.73
 14




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##### Table of Contents



Future Gas Sales Contracts
 Fixed price contracts for
    
    2010
    
    
    2011natural gas production:
    
    Q3
    
    
    Q4
    
    
    Q1
    
    
    Q2Percentage of gas contracted
    
    
    51
    %
    
    
    47
    %
    
    
    46
    %
    
    
    20
    %Average price per Mcf
    
    $
    6.54
    
    
    $
    6.61
    
    
    $
    6.64
    
    
    $
    6.67
 Results of Operations  Three Months Ended June 30, 2010 and 2009
 Revenues
 Three Months Ended June 30,% of
    
    
    
    
    
    
    %Revenue:
    
    2010
    
    
    Revenue
    
    
    2009
    
    
    ChangeContract drilling
    
    $
    7,533,179
    
    
    
    54
    %
    
    $
    5,172,998
    
    
    
    46
    %Oil and gas production
    
    
    5,620,851
    
    
    
    40
    
    
    
    6,891,644
    
    
    
    (18
    )Gas transmission, compression and processing
    
    
    771,448
    
    
    
    6
    
    
    
    2,599,229
    
    
    
    (70
    )Total
    
    $
    13,925,478
    
    
    
    100
    %
    
    $
    14,663,871
    
    
    
    (5
    )
     15




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##### Table of Contents



Expenses
 Three Months Ended June 30,Direct Expenses:
    
    2010
    
    
    Margin
    
    
    2009
    
    
    MarginContract drilling
    
    $
    5,688,487
    
    
    
    24
    %
    
    $
    3,873,266
    
    
    
    25
    %Oil and gas production
    
    
    3,703,633
    
    
    
    34
    
    
    
    2,614,094
    
    
    
    62Gas transmission, compression and processing
    
    
    143,446
    
    
    
    81
    
    
    
    1,025,408
    
    
    
    61Total direct expenses
    
    
    9,535,566
    
    
    
    32
    
    
    
    7,512,768
    
    
    
    49
 Other Expenses (Income):
    
    
    
    
    
    % Revenue
    
    
    
    
    
    
    % RevenueSelling, general and administrative
    
    $
    3,179,508
    
    
    
    23
    %
    
    $
    2,552,740
    
    
    
    17
    %Options, warrants and deferred compensation
    
    
    237,080
    
    
    
    2
    
    
    
    319,192
    
    
    
    2Depreciation, depletion and amortization
    
    
    3,280,944
    
    
    
    24
    
    
    
    3,687,621
    
    
    
    25Interest expense, net of interest income
    
    
    1,506,381
    
    
    
    11
    
    
    
    2,409,257
    
    
    
    16Fair value loss (gain) on derivative financial instruments
    
    
    (1,736,538
    )
    
    
    N/A
    
    
    
    4,995
    
    
    
    Other, net
    
    
    (101,578
    )
    
    
    N/A
    
    
    
    216,377
    
    
    
    1Total other expenses
    
    $
    6,365,797
    
    
    
    
    
    
    $
    9,190,182
    SG&A
  DD&A
 16




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##### Table of Contents



Net Loss and EPS EPS
 Results of Operations  Six Months Ended June 30, 2010 and 2009
 Revenues
 Six Months Ended June 30,% of
    
    
    
    
    
    
    %Revenue:
    
    2010
    
    
    Revenue
    
    
    2009
    
    
    ChangeContract drilling
    
    $
    11,111,610
    
    
    
    44
    %
    
    $
    12,496,750
    
    
    
    (11
    )%Oil and gas production
    
    
    12,028,417
    
    
    
    48
    
    
    
    13,958,863
    
    
    
    (14
    )Gas transmission, compression and processing
    
    
    2,050,577
    
    
    
    8
    
    
    
    5,404,211
    
    
    
    (62
    )Total
    
    $
    25,190,604
    
    
    
    100
    %
    
    $
    31,859,824
    
    
    
    (21
    )
    Expenses
 17




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##### Table of Contents



Six Months Ended June 30,Direct Expenses:
    
    2010
    
    
    Margin
    
    
    2009
    
    
    MarginContract drilling
    
    $
    8,377,406
    
    
    
    25
    %
    
    $
    9,414,692
    
    
    
    25
    %Oil and gas production
    
    
    7,018,700
    
    
    
    42
    
    
    
    4,939,059
    
    
    
    65Gas transmission, compression and processing
    
    
    420,550
    
    
    
    79
    
    
    
    1,994,325
    
    
    
    63Total direct expenses
    
    
    15,816,656
    
    
    
    37
    
    
    
    16,348,076
    
    
    
    49
 Other Expenses (Income):
    
    
    
    
    
    % Revenue
    
    
    
    
    
    
    % RevenueSelling, general and administrative
    
    $
    5,332,376
    
    
    
    21
    %
    
    $
    5,803,005
    
    
    
    18
    %Options, warrants and deferred compensation
    
    
    503,229
    
    
    
    2
    
    
    
    737,465
    
    
    
    2Depreciation, depletion and amortization
    
    
    6,517,337
    
    
    
    26
    
    
    
    7,306,491
    
    
    
    23Interest expense, net of interest income
    
    
    2,994,642
    
    
    
    12
    
    
    
    4,681,449
    
    
    
    15Fair value loss (gain) on derivative financial instruments
    
    
    696,593
    
    
    
    3
    
    
    
    (9,324
    )
    
    
    N/ARefinancing costs
    
    
    625,344
    
    
    
    2
    
    
    
    
    
    
    
    N/AOther, net
    
    
    (207,077
    )
    
    
    N/A
    
    
    
    295,918
    
    
    
    1Total other expenses
    
    $
    16,462,444
    
    
    
    
    
    
    $
    18,815,004
         18




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##### Table of Contents



Net Loss and EPS
  Liquidity and Capital Resources
 Liquidity
   Capital Resources
   19




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2005 notes
      20




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##### Table of Contents



Forward Looking Statements
  
    
    uncertainty about future production levels and required capital expenditures;
    
    commodity price volatility;
    
    increases in the cost of developing and producing our reserves;
    
    unavailability or increased costs of drilling rigs, services and materials;
    
    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
 General
 Operating
    
    
    Long-TermYear
    
    Leases
    
    
    Debt(1)Remainder of 2010
    
    $
    1,159,724
    
    
    $
    6,105,1982011
    
    
    1,853,837
    
    
    
    50,252,6152012
    
    
    616,087
    
    
    
    7,533,0242013
    
    
    77,495
    
    
    
    182,0292014
    
    
    31,959
    
    
    
    189,9072015 and thereafter
    
    
    
    
    
    
    3,898,714Total
    
    $
    3,739,102
    
    
    $
    68,161,487
 
 (1)
    
    Excludes an allocation of $2,688,053 for the unaccreted debt discount on the 2010 notes. Gas Gathering and Sales Commitments
 
    
    Base monthly gathering fees of $850,000, with annual escalations at the rate of
1.5%;
    
    Base monthly operating fees of $175,000, plus $0.20 per Mcf of purchased gas; and
    
    Monthly capital fees in amounts intended to yield a 20% internal rate of return for
all capital expenditures on the Appalachian Gathering System by Seminole Energy.
 Related Party Transactions
 General
 21




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##### Table of Contents



Purchase of Office Building
 Critical Accounting Policies and Estimates
 General
 Estimates of Proved Reserves and Future Net Cash Flows
 Impairment of Long-Lived Assets .
 Allowance for Doubtful Accounts .
 Off-Balance Sheet Arrangements
  
 Item 3. Quantitative and Qualitative Disclosures about Market Risk
 Commodity Price Risk
  22




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##### Table of Contents



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
 Changes in Internal Control over Financial Reporting
  23




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##### Table of Contents



PART II. OTHER INFORMATION
 
 Item 2 Unregistered Sales of Equity Securities and Use of Proceeds
  
 Item 6 Exhibits
  SIGNATURES
  NGAS Resources, Inc.Date: August 5, 2010
    By:
    /s/William S. DaughertyWilliam S. DaughertyChief Executive Officer
(Duly Authorized Officer)
(Principal Executive Officer) 24




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##### Table of Contents



Exhibit Index
 ExhibitNumber
    
    Description of Exhibit31.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.31.2
    
    Certification of Chief Financial Officer pursuant to Exchange Act Rule 13a-14(a), as
adopted under Section 302 of the Sarbanes-Oxley Act of 2002.32.1
    
    Certification of Chief Executive Officer pursuant to Exchange Act Rule 13a-14(b), as
adopted under Section 906 of the Sarbanes-Oxley Act of 2002.