In that regard they succeeded. The game is finished, it's for sale, and the backers got their game.
But the sales were also disappointing, and so they declared bankruptcy.
The issue here is that they created stickers, dvd crap, soundtracks etc... Kickstarter backer rewards. And they can't ship them as they're bankrupt. The problem obviously is that they didn't earmark funds ahead. I think that's disrespectful towards the backers and it's a genuine complaint, but I don't feel it's very significant in the scheme of things. Kickstarters know the risks. And the creators of the game put their heart and soul into it and ended up bankrupt, yet did deliver the game. I think that's a fair compromise for the backers of the game, even if they don't end up getting their rewards, like an artbook or wallpaper which can be pretty sweet but I doubt anyone will lose sleep over it, while the creators must've lost a lot of sleep going through a bankruptcy.
So this notion they raised $50k for 7 people to build a game in two months isn't really the case at all. Beyond that, your point on merchandise rings true but it depends on context. A soundtrack, artbook and wallpaper usually isn't a big deal. After all, the game has a soundtrack regardless, and they'd already produced tons of artwork in the process of modelling, you can see it on the kickstarter. The effort is printing and shipping it. But if someone is giving you a $20 premium to ship him a PDF you already have on your computer, would you say that's bad business? Not really, any smart indie will pay some highschooler $250 to take care of it, a small price to increase your budget by $10k or something to that effect. The issue is that some kickstarters go way overboard, and the reward/effort ratio plummets to below their IRR or even below 1. So it really depends, in this case I think it wasn't a bad decision as they promised rewards for things they already had laying around, they simply should've earmarked the funds.
For everyone interested, check out gameplay footage from the beginning of the game: https://www.youtube.com/watch?v=PGadziSy_kM I hope my failures are as beautiful as this.
I suppose that $20 for a PDF could be good business. I'm not convinced it's necessarily good business. It depends on the goal. If the business is shipping PDF's then it's obviously good. On the other hand, I suspect the minimum cost of fundraising is non-linear: that raising $10,000 requires more than 1.0% of the effort required to raise $1,000,000. But even if it's easier to raise $20.00 500 times than $10,000 all at once, if $10,000 ain't enough it ain't enough.