Money is power – MindArk business model based on (lack of) trust.

Unpolished diamond, polished dice - Trust

It will not be a serious exaggeration to say that first-world modern economy model is based on trust. Educated societies are fully aware that money they deposited in the bank are not fully covered, money flows, and no bank can guarantee withdrawal of all the financial resources for all participants at the same time. Bank just simply does not have this money. The exchange ratio between gold and US dollar (so-called Gold Standard) is gone since its abandonment in 1933. That is why so-called “run on banks” is the biggest nightmare in the world of banking – best latest example could be 2012 Cyprus banking crisis. Lack of trust can ruin every economy. Nowadays, the paper you carry in your wallet represents the value of items that can be bought on the market. Technically, it is nothing more than a piece of paper. What makes it a legal tender is you trust. Trust backed by central banks and governments – institutions that supposedly guarantee that piece of papers and chipped plastic in your wallet have real value and can be exchanged to some goods.

From perspective of a customer, all the money deposited to the bank seem to be bank’s asset. Bank can simply borrow that money to someone and make a profit on interests. In accounting theory everything that can be considered a resource with economic value and can provide future benefit is an asset. As a person with experience in banking/accounting area I can tell you that in banking it works a bit differently. All your money deposited on your account are also bank’s liability.

When you choose your bank you mainly seek for an institution that guarantees high level customer care, provide convenient solutions and treat you and your money with respect. That’s how trust is gained. You expect your bank to be always up to date with all law regulations and safety rules. It makes you happy to pay your bank small fee. Why shouldn’t you be happy paying for some products? The services provided by your bank are high quality and make you happier.

But why am I referring to banking area when in this forum we discuss a MMO game? It seems that basic structure of MindArk is very similar to bank deposits. And, as we speak about RCE, this company is also subject for all economical and psychological aspects of money management. In this area, the most important aspect is trust. I have studied recent projects conducted by MindArk (EU itself, Deeptoken, ComPet) and started to think how MA situation looks from accounting perspective. To have clear view I checked their financial report. Some of you probably analyzed the Financial Report already but let me give it a second look and put it between the trust issue and MindArk recent decisions.

Let’s just book the provision

Provision (Accrued Expense) in accounting represents the value of expense recognized in the company accounting books which have not yet been paid. In fact, we just recognize some potential liability that may occur in next accounting period to fully reflect the true financial condition of a company.

As you may expect, MindArk is putting similar provision in their books. This provision covers the money they expect you could withdraw from the game. Since 2017 accounting period, they treat the total value of your avatars as "Unconsumed user holdings". Basing on their 15 year experience they noticed that in long term players usually withdraw approximately 30-35% of the initial deposits. In fact, that is a lot. Financially, they must always be more or less ready to liquify third part of their business. Let’s investigate some MA’s financial data from an accounting perspective, which most likely will provide answers for the questions I have raised in my previous thread.

All the further figures will be calculated according to MinArk official USD/SEK exchange rate (8,58SEK). All financial data is based on issued 3rd September, 2018 “Annual Report for MindArk – Financial year 2017”.
https://www.mindark.com/investor-rel...rk_2017_en.pdf

To click or not to click?

Should I buy the product? Should I click “Proceed the payment” or not? Well, it looks like many of you during previous year answered: No.

Why “No”? Last financial year was a huge disappointment for MA revenues. The sales has dropped by approximately 10% and were equal to 6,698,308 USD. In world of finance, 10% drop is a disaster. Such drop usually indicates that something bad is happening in the company and this seems to be a serious warning for MindArk. You expect your business to grow and develop. Bad managing and thoughtless business decisions lead to such outcome. Some may say that drop in sales was caused by external reasons but it will not be true. Last couple of years have been good for global economy, there were no major threats or turmoil, the prosperity mode was on and people’s wallets were growing.


As we already know, approximately 30-35% of deposited money is being withdrawn from the game (15 years average figure). Total of player debt (your money in MindArk’s pocket) mentioned in the report is 105,4 million PED (they actually use PED equally to other currencies in their financial report) which equals to 10,54 million USD. Value of allocated provision for potential withdrawals is 29,459,145 SEK (3,433,466 USD). It means that from accounting perspective, they forecast that they will have to be able to withdraw a total of 3,4 million USD. But can they do that? Let’s then try to evaluate the financial stability of MindArk.

"If you owe the bank $100 that's your problem. If you owe the bank $100 million, that's the bank's problem."
Jean Paul Getty

In the latest 2017 Financial Report issued in 2018 MindArk reported the value of Cash & Bank balance to be 7,760,760 SEK (904,517 USD). They have also short-time account receivables of value 2,285,976 SEK (266,430 USD) . These receivables are usually invoices/receivables issued to customers and their due date is no longer than 90 days. It means that, if counterparty has the money, it should soon reach MindArk bank account. I shall also mention, that the positions mentioned in report “Receivables from payment providers” and “Other receivables” are considered open items – in fact part of those receivables can be disputed or could be even written-off in future. MindArk have not yet received those payments in the moment of report creating. I guess MindArk should shed some more light on it, additional information does not cover full details about those positions.

Honestly, the whole Financial Report is not very well prepared. That is why it is not easy to retrieve all the required data form the report as it is not detailed and deep enough but still we are able to check the Current Ratio for MindArk (CR Indicator - The Current Ratio is a liquidity ratio that measures a company's ability to pay short-term obligations).

Before we move forward let’s get familiar also with one simple financial term:
Liquid Asset - A liquid asset is an asset that can be converted into cash speedily, with little impact to the price received in the open market.

I will consider the total of current assets as stated in the Report (929,377 USD)

Current Liabilities will be:

Accounts Payable - invoices that MindArk must simply pay to vendors - unconsumed user holdings (your money in MindArk’s pocket) are not present here,
Accrued Expenses (here I bet MA prepares accruals for future expenses related to some vendor invoices),
Liabilities group companies (those may be related to planet partners – lack of details in the Report),
Other liablities(all other liabilities that do not fit previous categories).

The total value of short-term liabilities is 15,234,476 SEK (1,775,579 USD).
Let’s calculate CR then (Current Assets/Current Liabilities):

CR = 929,377/1,775,579 = 0,5234

In theory, CR Ratio below 1,2 indicates that company may have some serious problems with paying their short-term debts and it can directly endanger the financial stability of the company.

And we haven’t even touched the mentioned 10,54 million that MindArk owes you – players. Mostly because MindArk simply do not treat 10,54 million nor the 3,4 million provision as the current or long-term liability. They just allocate the provision on the “Equity and liability” side of the Balance Sheet. If MindArk is clearly not able to withdraw to you most of the PED’s, not even cover their short term liabilities, how can they repay you if most of you decided to withdraw all the money? This is the moment where we should move our curiosity towards MindArk Intangible and Financial assets.

MindArk Assets – what do they ‘own’?

Every company have assets and positions listed under intangible and financial are always interesting. The biggest MA asset is of course the game itself – in the report listed as “Entropia Platform and Entropia Universe” – the value of the game is 53 070 759 SEK (6,185,403 USD). There is zero further information what makes up this value. Clear information what method stands behind the valuation of this asset is not present. Lack of this information in Financial Statement in my opinion is not professional. This information would be very important from investors perspective but only information that we get is:

The value calculated regarding the intangible asset was SEK 52M. The valuation is based on careful consideration of the future number of users and estimated costs.

What is even more interesting is fact that they treat ComPet Game as their asset with value of 9 533 760 SEK (1,111,160 USD). As far as I know the project has been announced dead so we can expect serious drop in the value of this asset in future or it’s liquidation in next Financial Report. Note 18 mentions that next stages of the company growth will be based on token sale (Deeptoken). Maybe they planned to make Deeptoken wallet/platform their intangible asset too. Now we know that it will not happen – no deeptoken equals no growth. I guess we can say that all main growth and development plans for company have failed. This may be a serious threat for MindArk in terms of their future business continuity. They will have to come up with new ideas for development – new solid way of acquiring funds and sustainable growth.

For now, there were no new announcements about MindArk/EU future so we can make clear and simple statement - if you would request all your money to be withdrawn, they would be simply forced to sell their most valuable intangible assets – the game itself and then shut down the company. But still, they somehow are alive…

Otto von Bismarck model

Germany was the first country in the world to introduce social insurance program in 1889 for old-age people who are not able to work anymore but still need money to live. Simply, they have invented pensions. Many countries adapted it later also and created a mode in which current generations work and pay taxes so the State is able to withdraw gathered tax money to the old people as a pensions. This kind of socialism also work for MindArk and keeps their head above the level of water.

Conclusion.

Similarly to banks, MindArk would not be able to withdraw all the money they owe to players, not even a fraction of it. As the Current Ratio shows, they may even face serious problems with covering their short term liabilities to make sure their business is still going. I know that one indicator does not fully show the financial state in which MindArk is. But imagine you are MindArk’s accountant, you see the current short-term liabilities to be paid valued 15,234,476 SEK and all you have for now are receivables you must chase and 7,760,760 SEK on the bank account. All you can do is to prey that players will not withdraw too much money. What would you do if suddenly some players requested only 2% of total player debt (approx. 2 million PED)? Most likely, you would have to perform the withdrawals and cover them with the money inflow that comes from current sales (StrongBoxes, Deposits) – here we can find the spirit of von Bismarck. MindArk would probably have to cover current withdrawals for players who do not play anymore with money of players who currently deposit. What would then happen if some players suddenly requested withdrawal of substantial amount of player debt, let’s say 10% or more?

Money is power – no doubt. You decide if they deserve your trust… and money of course. According to MA Income Statement, Personnel costs (I expect this position to include Salaries, salary-related spending) in 2017 were equal to 27 599 451 SEK (3,216,719 USD). Statement claim that currently they hire 44 employees on average. It means that on average, one MindArk employee cost you 73,107 USD yearly, 6,092 USD monthly. That seems to be nice salary, isn’t it?

That is why, in my humble opinion, the only fuel MindArk runs on is trust. Your trust. The whole project in fact is in your hands. Life and death of Entropia depends entirely on you. You, as a community, entirely decide if EU servers tomorrow will be up or down. You decide if you want to pay Henrik Nel Jerkot’s salary or not. You decide whether other MindArk employees deserve and would receive their salary or not. Entropia is yours, you can develop ideas, provide feedback, make the most of it and the only role MindArk should play is to be your servant and create the Entropia the way you like it or at least provide detailed explanations why particular idea cannot be implemented. I guess MindArk should think of it in the light of recent events, the Deeptoken, ComPet and other failures. I guess everyone deserves second (third, fourth?) chance. And if chance is given to you, it is good to pick it up and make a brand new start – especially when millions of dollars are involved. Entropia community brings a lot to the table, what will MindArk bring in 2019?

Regards,
Boring_player

Additional fact’s – post scriptum.

In my previous thread I asked community why there is no Marketing and Advertisement of Entropia Universe at all. Report seems to provide the answer:

Operating expenses amounted to about 58.5 million SEK (last year about 63.5 million SEK), a decrease of 5 million SEK. The decrease is mostly due to decreased marketing.Lack of marketing is intentional. They don’t do any serious marketing to avoid additional costs. By reducing the marketing operations, they saved up to 5M SEK (approx.. 582,000 USD).

Also, the drop in revenue hit them hard and they admit it:

Revenues did not reach the company's budget targets. The reason why was largely due to the fact that the active customers have not used their funds to the extent expected.

Most interesting, how do they explain the 10% drop in revenues? It’s simple – current customers “are not right type”

Another reason is the difficulty finding the right customers, that is, just that type of player who appreciates Entropia Universe's complexity

My entire previous post was about new player experience and I provided some details why is it bad and how to improve it. I was not surprised that they know that this aspect is bad and even mention it in their report:

The company is also working intensively to make the beginner experience more understandable so that new users more easy start spending money.

 

They will be around as long as community deposits between 6 and 7 million dollars each year. And this is indeed what happens. That is also why they can afford to feed many parasites who do nothing in the company ("Every toilet has its own manager").

It seems that they rely on 100-200 heavy depositors, a 2000 mid depositors and bunch of small customers who depo no more than 5-15 USD/ month or do not depo at all.

Players seem to have a lot tolerance and still believe that MA would improve their product - we will see. I hope AMA with new CEO which is promised to take place in early February will tell us a lot about the current state of the game and its future.

Truth is that many people seem to be simply addicted to this game. It's similar to cigarette industry. Tons of anti-smoking advertisements, high taxation, high price of the product, can cause serious damage - yet many people smoke, and will smoke, and nothing seems to change that.

I am also sure that some of ubers are afraid to sell out and resign - it would probably cause a chain-reaction and a drop in the value of their gear. They must play - it is a loss-loss situation. To win is not to play or stick to a low budged of 10-20$.