Remember sitting in high school math class wondering when you would ever need to know the difference between a numerator and a denominator?
GMX Resources Inc. last month received a sharp reminder about why such lessons are important.
A simple math error has led the Oklahoma City energy company to court and could have cost it millions of dollars.
In this case, the mistake apparently is pretty obvious. No shareholders have pressed the issue, and the cost to GMX is minimal.
“It is clear that this is just a scrivener's error,” said Alan Van Horn, GMX's manager of investor relations. “Everyone involved recognizes this for what it is. In our minds and in the minds of everyone who's looked at this, it's really just a formality.”
But as written, shareholders would be due for a massive payout.
At issue is a 2009 issuance of $75 million in preferred convertible senior notes scheduled to convert into common stock in 2015 under certain conditions.
When copying from a previous template, a company GMX hired to write the contract transposed the numerator and denominator (the top and bottom lines in a division problem) in a key conversion formula.
As a result, the document states that each preferred share would convert into more than 693 shares instead of about 4.1 shares under the correct formula.
At that rate, the senior notes would exchange for nearly 52 million shares of common stock, more than eight times the company's 6.1 million total shares outstanding today.
“The result of the erroneous formula is a clearly unintended and unreasonable windfall,” GMX said in a court filing.
The company also said the calculation created “a patently absurd result and clearly not the intent.”
Apparently shareholders agree.
The company's stock price has held fairly constant, and the trading price for the preferred shares has not skyrocketed as you would expect if they were suddenly worth far more than expected.
GMX likely faces only legal and filing fees, which the law firm that made the error is expected to cover.
It could have been much worse. Simple math mistakes can lead to costly results.
In 2009, the U.S. Department of Energy mothballed a high-tech, low-emission coal power plant because a math error overestimated the cost by a half-billion dollars.
One year earlier, the Dallas Independent School District laid off 275 teachers and 40 counselors and assistant principals because a miscalculated budget led to an $84 million deficit.
And in one of the more famous recent math errors, the $125 million Mars Climate Orbiter in 2004 smashed into the red planet because engineers failed to convert its numbers from English to metric measurements.
You never know when you might need to remember the rules of multiplication and division.
But as for simplifying quadrilaterals and factoring imaginary numbers, I still haven't figured out when I'll need to know that.