Last week, a number of rumors were spread about cloud gaming provider OnLive shutting down. Apparently, game designer Brian Fargo tweeted that the company was closing, citing the following email sent by an OnLive employee:

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 was also reported by IDG’s Martyn Williams that employees were seen removing personal belongings from the company’s Palo Alto headquarters.

After keeping mum for a few days, the company released an official statement detailing a restructuring plan, which involved selling all of the company assets to a new entity. The board of directors decided that an “Assignment for the Benefit of Creditors” was needed to restructure the company hampered with financial woes. The financial mechanism is similar to an asset mortgage, allowing the defunct company to sell its assets to the new company.

The new company kept the OnLive name along with its cloud gaming, virtual desktop services and existing partnerships. Initial investment was provided by an affiliate of Lauder partners, a venture capital firm based in Atherton, CA.

On the flip side, one of the biggest losers from this snafu is phone manufacturer HTC. The company ended up losing a $40 million investment made towards the original OnLive service.

While the move may have saved the business, all stocks prior to the restructuring were non-transferrable, rendering them worthless. In addition, all employees from the previous OnLive were let go without severance. Only half of those fired received offers to work at the newly restructured company.

The news came as a surprise to the cloud gaming community as OnLive recently announced a partnership with Ouya, an upcoming open source video game console.  LG also integrated the service into their Google TV enabled smart TVs.

After Sony bought competing game provider Gaikai, it was rumored that Microsoft would attempt to purchase OnLive’s assets. Given recent developments, an acquisition may no longer be in the cards.

No interruption of service was reported during the transition. It’s quite possible that customers not keeping tabs on the news ever knew what happened behind the scenes.