Source: OnLive Filing for a Form of Bankruptcy, New Company to Take Its Place [UPDATES]

OnLive, the pioneers of cloud gaming, are in dire straits and are preparing to file for a form of bankruptcy, a source inside the company told Kotaku today. An OnLive spokesperson maintains that the OnLive service, which enables people to stream games to their computers and tablets without the need for dedicated hardware, will continue. But it seems as if the company itself is hitting some very hard times.

Note: This story originally indicated that OnLive had filed for "bankruptcy," which carries certain legal definitions. We've seen received clarification that OnLive filed for something similar, but technically different. One Kotaku reader who is well-versed in ABCs said the bankruptcy-like process involves "a process that will assign its assets to an independent fiduciary and likely wind down its affairs in an out-of-court insolvency proceeding governed by State of California."

The source says that everyone at the company knew things were tight. This morning, an all-hands meeting was called at 10 a.m. this morning where CEO Steve Perlman said that OnLive would be filing for ABC bankruptcy for an alternative to bankruptcy called an Assignment for the Benefit of Creditors, or ABC, in the state of California—a status that affords financially troubled companies a level of protection from creditors. Perlman also said that the company as it stands now would cease to exist and that no one would be employed by OnLive. A subset of employees would be brought on to the company created from the remains of OnLive.

Update: GamePolitics has posted a story that confirms what we've heard about the meeting this morning at OnLive and the bankruptcy alternative they've filed.

Meanwhile, Engadget is reporting that an unknown third party has purchased OnLive.

Original story follows:

What exactly is going on with one of the leading cloud gaming companies? OnLive may be shutting down or they may be transforming themselves.

Brian Fargo, game developer and CEO of InXile Entertainment, tweeted earlier today that cloud gaming company OnLive was shutting down. Mashable then reported that OnLive had laid off its entire staff and has shut down operations.

The e-mail in question, sent to Kotaku by Fargo, follows:

I wanted to send a note that by the end of the day today, OnLive as an entity will no longer exist. Unfortunately, my job and everyone else's was included. A new company will be formed and the management of the company will be in contact with you about the current initiatives in place, including the titles that will remain on the service.

It has been an absolute pleasure working with you and I'm sure our path with cross again.

When reached on the phone, Fargo said that the sender of the e-mail then tried to recall the message. Kotaku reached out to OnLive for clarification and received this message in response.

We don't respond to rumors and have no comment.

The exciting news is the first VIZIO Co-Stars (Google TV stream players) with the OnLive app built-in have just arrived in customer homes, and our second of three 'Indie Giveaway Weekends' is going on now. OnLive users can get a free copy of the award-winning games Space Pirates and Zombies and SpaceChem (more details on our blog here:

When asked if any layoffs had happened, an OnLive representative told Joystiq that "the OnLive service is not shutting down." They just managed to skip all the bad-news parts.