Character Technologies, the company behind Character.ai, today filed a 68-page sworn declaration from its chief executive in the US Bankruptcy Court for the District of Delaware that sets out, for the first time in the case, how the AI chatbot app made and lost money. According to the declaration by Colin M. Adams, advertising revenue grew from approximately $0.5 million in July 2025 to approximately $2.5 million in August 2026, close to half of the company's $5.3 million in revenue that month, while the company was still running at an operating loss of approximately $8-9 million a month.

In Short

Character.ai, an app where people chat with AI characters, told a bankruptcy court today exactly how much it earned from ads and subscriptions, and how much more it spent on computers and staff. Ads had become almost half of its income, but running the AI cost far more than the app brought in, and lawsuits and regulators scared away investors. Unless a buyer appears who wants to keep the app running, it will be shut down after a sale that has to close by December 17, 2026.

The document

The filing is Document 18 in case 26-11603, In re Character Technologies, Inc., a 26-page declaration with a 42-page Exhibit A. It was executed on October 13, 2026, one day after the October 12 petition, and is the factual foundation for every motion the company filed at the start of the case. Earlier first-day motions referred to this declaration; it had not been made available until now.

Adams describes himself as the chief executive of Character Technologies and a Senior Managing Director at Areté Partners, the company's proposed financial adviser. His predecessor is no longer at the company. According to the declaration, Disney hired "the Debtor's chief executive officer up front and prior to the Petition Date," a person the filing describes as an insider under the Bankruptcy Code. The declaration does not name that person. PPC Land reported the petition and the Disney stalking horse bid earlier today.

The declaration is divided into three parts: the business and its capital structure, the circumstances that led to the filing, and the facts supporting the first-day motions and the bidding procedures. Its most detailed new material concerns money and regulators.

12 million monthly users, 120 minutes a day

According to the declaration, Character serves "approximately 12 million active monthly users located around the world and, while usage varies widely, on average, active users spend approximately 120 minutes a day on Character.AI."

Two hours a day is an unusually high figure for any consumer app, and it is the reason the platform was attractive as ad inventory. It also sits uneasily with other numbers in the case. The same declaration describes a platform that "allows tens of millions of users to have immersive, multimodal experiences," and the redaction motion filed earlier puts current and past users at approximately 163 million. Twelve million monthly users is not "tens of millions." The two figures can coexist only if "tens of millions" refers to registered or lifetime accounts, which the declaration does not say.

The 120-minute average also has to be read against the company's own product changes. According to the declaration, Character spent several months beginning in October 2025 restricting users under 18 from open-ended chats, eventually eliminating that access. The filing does not say whether the 12 million figure or the 120-minute average was measured before or after that change.

Where the revenue came from

The declaration names two main revenue lines: subscriptions and in-app advertising.

Subscriptions

Monthly subscription revenue was approximately $0.6 million in January 2024. By August 2026, "due to increased marketing and other efforts," it had reached $2.8 million, according to the declaration. That is roughly a 4.7-fold increase over 31 months. In December 2024, PPC Land reported about 139,000 paid subscribers; the declaration gives no subscriber count.

Advertising

The advertising business is newer. According to the declaration: "In mid-2025, Character launched in-app advertising and partnered with multiple advertising networks to generate additional revenue sources." July 2025 was the first full month. Then, in March 2026, Character "entered into an amended programmatic revenue-share and incentive arrangement with a leading online advertisement provider."

Monthly advertising revenue went from approximately $0.5 million in July 2025 to approximately $2.5 million in August 2026. That is a fivefold increase in 13 months.

The declaration does not name the "leading online advertisement provider," and it does not describe the revenue split or the incentive terms. The documents filed so far do not settle the question. The first PPC Land article on the case found that Character.ai's ads.txt file lists a direct Google publisher account, which Google's own sellers.json attributes to "Character Technologies Inc.," alongside 43 other seller lines; Google LLC is also the largest unsecured creditor on the petition, with a $4.1 million trade claim. Neither fact identifies the March 2026 counterparty, and the creditor claim could relate to cloud services rather than advertising. Google has been testing AdSense ads inside third-party AI chatbot conversations since at least April 2025.

Totals

The declaration gives total revenue in three ways:

  • Fiscal year 2024: approximately $7.4 million
  • Fiscal year 2025: approximately $23.6 million
  • Month of December 2025: approximately $2.8 million, rising to approximately $5.3 million in August 2026

Advertising at $2.5 million and subscriptions at $2.8 million add up to exactly $5.3 million for August 2026. That leaves nothing visible for in-app purchases, which the declaration says Character "also introduced" in early 2026. Either in-app purchases are counted inside one of the two lines, or they are small enough to disappear in the rounding. The filing does not say which.

On those figures, advertising was about 47% of Character's revenue in August 2026. For an app that launched ads barely a year earlier, that is a large share, and it means the end of the platform would remove a supply source that some buyers were spending against every month.

Where the money went

Compute

The cost side is where the declaration is most specific. According to Adams, Character spent approximately $56.1 million on compute between January 1 and August 31, 2026, "consisting primarily of contracted graphics processing units (or 'GPU') capacity from third-party cloud providers." That was approximately 45% of operating expenses. Personnel came next at approximately $19.7 million, or about 16%.

Spread over eight months, compute averaged roughly $7 million a month. Measured against 12 million monthly users, that is about 58 cents of compute per active user per month, while August 2026 revenue worked out to roughly 44 cents per active user, and advertising alone to about 21 cents. These per-user figures are PPC Land calculations from the declaration's own numbers, not figures the company provided.

The time spent figure makes the advertising gap starker. Twelve million users at 120 minutes a day comes to roughly 720 million user-hours in a 30-day month. Against $2.5 million in advertising revenue, that is about a third of a cent per user-hour. Averages hide a great deal here: not every user sees ads, younger users were moved out of open-ended chat, and the declaration does not say how many sessions carried ad placements. But the order of magnitude explains why ads alone could not pay for the inference bill.

The cost history

The declaration traces costs back to the 2024 Google deal:

Period Monthly operating expenses (excluding legal fees) Of which compute Monthly net cash burn
Second half of 2024 $21.9 million $13.8 million $21.5 million
Fiscal year 2025 $18.5 million $10.0 million $17.6 million
August 2026 $13.3 million not stated $8.2 million

According to the declaration, the August 2026 figure is approximately 39% below the second-half 2024 average and approximately 28% below the 2025 average. Both calculations check out against the stated numbers.

The company says it got there by "transitioning inference workloads to lower-cost GPU capacity and post-training open-weight models rather than developing proprietary foundation models," by reducing headcount and by consolidating facilities. In other words, the company that its founders built around their own large language model research stopped building foundation models and started fine-tuning openly available ones.

The cost history does not match an earlier public estimate. In December 2024, PPC Land cited operating costs of $30 million a month. The declaration's average for the second half of 2024 is $21.9 million, but that figure excludes legal fees, so the two are not directly comparable.

Talent

Personnel was a smaller line than compute, but the declaration treats it as the more urgent risk. "In addition to baseline pay, frequent bonuses and the potential for large upside in equity grants are regular features of the enticement for critical personnel to remain with an AI start-up," Adams wrote. By September 2026, according to the declaration, Character was "experiencing mounting employee attrition and diminishing morale," and management feared staff "would start departing Character en masse, which would make Character's platform unstable and unsafe." The company had "significant concerns that it may need to liquidate on an expedited basis absent a stabilizing solution."

That concern shaped the Disney transaction, which moved most of the workforce to Disney before the filing.

Safety costs

The declaration ties part of the cost base to safety work. "Character's changes to its products, including age restrictions and harm detection, have contributed to increased costs, and Character's legal costs are significant," it says. The company developed technology that "can infer users' ages based on their conversations," monitors "long-term detections of harm," and classifies safety risks. A separate model for under-18 users with additional controls was deployed in November 2024, according to the filing, along with "time spent" notifications and a parental insights tool.

Inferring age from conversation content is a form of age assurance that depends on processing what users write. The declaration does not say whether that inference was ever used for ad targeting or ad suppression.

Why investors stayed away

The declaration is direct about why money could not be raised. "Attempts to raise capital or monetize the business have been unsuccessful due to Character's potential liabilities and the current regulatory environment," it says.

According to Adams, the company hired an investment bank in August 2025 that approached approximately 28 potential parties. The feedback was consistent: "although Character's product and engaged user base were impressive, the litigation and regulatory overhang on Character was too great." The outreach produced one proposal, which was "ultimately deemed to be unworkable." The bank's engagement ended in late August 2026. The bank is not named.

To illustrate the regulatory climate, the declaration cites a single outside event: Meta's settlement with "a bipartisan coalition of 51 attorneys general, agreeing to pay $17.1 billion in penalties." That consent judgment was entered in August 2026, covering 51 jurisdictions. A $17.1 billion benchmark is not a number a company with $57 million in cash can absorb as a risk factor.

The regulatory inventory

The longest section of the declaration lists every investigation and lawsuit. Some were public. Several details were not.

The Multistate Group

In November 2025, Character learned that the attorneys general of several states were investigating it. A total of 46 states and territories eventually joined what the declaration calls the "Multistate Group," which formed an executive committee of seven states to negotiate. The civil investigative demand asserted that regulators "had cause to believe that Character had engaged in, or may be engaging in, acts that could trigger liability under certain state consumer protection and other privacy statutes." The company and the executive committee are in "active and ongoing settlement negotiations regarding a consent order," according to the declaration, and Character "hopes to reach a consensual resolution with the Multistate Group through the course of this Chapter 11 Case."

That is the stated purpose of the bankruptcy. "Character intends to use the Chapter 11 Case as a forum to negotiate a consensual resolution with the Multistate Group, personal injury claimants, and other creditor groups," the declaration says.

States outside the group

Five states are listed separately:

  • Kentucky issued a civil investigative demand on March 26, 2025 under the Kentucky Consumer Protection Act and sued Character and its co-founders in Franklin Circuit Court on January 8, 2026. The case is at the motion to dismiss stage, with settlement talks continuing.
  • Pennsylvania's Department of State, for the State Board of Medicine, sued on May 1, 2026, alleging the unlawful practice of medicine by chatbots that held themselves out as licensed doctors. PPC Land covered that complaint. The responsive pleading deadline has been extended to November 2, 2026.
  • Florida's attorney general issued a subpoena on June 11, 2025. The investigation remains open, with settlement talks under way.
  • New Mexico issued a civil investigative demand on February 18, 2025 under the state Unfair Practices Act. It remains open.
  • Texas issued two civil investigative demands, on December 31, 2024 and August 19, 2025. The first concerned the Texas Data Privacy and Security Act and the SCOPE Act in relation to minors. The second concerned "misleading and false assertions of medical licensure, academic credentials, and patient confidentiality, and other privacy assertions." Both remain open. PPC Land reported the August 2025 Texas investigation at the time.

Federal

The FTC issued a civil investigative demand on January 15, 2025, examining possible violations of Section 5 of the FTC Act and COPPA, including "the collection of data from minors." According to the declaration, the FTC "paused the investigation without further action" on or about August 26, 2025.

About two weeks later, on September 10, 2025, the agency issued Section 6(b) orders to seven AI chatbot companies, Character among them. The declaration says the order "sought information similar to the FTC CID," that Character's last production was submitted on July 31, 2026, and that it "has received no further communication from the FTC." Those orders asked how companion chatbot providers monetize engagement, including through advertising.

The company has also received several US Senate letters, which it says it answered "timely and comprehensively."

Abroad

Four foreign jurisdictions appear, and three of them produced outcomes that had not been widely reported:

  • Italy. The Garante opened an investigation into Character's compliance with the GDPR on or about November 8, 2024, including questions about safety and age assurance. It issued a final order on July 3, 2026 with corrective measures and a fine of 79,000 euros. Character paid on August 31, 2026.
  • Russia. Roskomnadzor issued a take-down notice on or about January 20, 2026 over LGBTQ+ content. On May 21, 2026, Moscow's Tagansky District Court fined Character RUB 3,500,000 (about $47,000) and RUB 4,000,000 (about $53,000). A third case, over "propaganda of drugs on the internet," ended on August 12, 2026 with a fine of RUB 1,250,000 (about $15,000). The three Russian fines total RUB 8.75 million, or about $115,000 using the declaration's own conversions.
  • United Kingdom. The ICO opened an investigation on or about September 3, 2024, received a response on November 14, 2024, wrote again on May 9, 2025 about the Privacy and Electronic Communications Regulations and the UK GDPR, opened an investigation on July 23, 2025 and closed it on August 28, 2025. The Medicines and Healthcare products Regulatory Agency opened an investigation into "psychologist" products on November 27, 2025. Then, on September 25, 2026, less than three weeks before the filing, the ICO opened a new investigation into Character's "use of personal information and whether it creates risks of harm for users, including the potential for manipulation, reduced autonomy and excessive or unfair data processing."
  • Australia. The eSafety Commissioner issued a non-periodic reporting notice on October 16, 2025 under the Basic Online Safety Expectations and published findings on Character and other AI companies in March 2026.

The September 2026 ICO investigation is the one most relevant to advertisers. Manipulation and "excessive or unfair data processing" are the same concerns regulators raise about engagement-optimized advertising. The declaration gives no detail beyond that sentence.

Personal injury

According to the declaration, Character settled all then-pending personal injury lawsuits in January 2026. A new complaint was filed in the Northern District of California in August 2026, alleging harm to a minor, and it is "presently" the only outstanding personal injury suit.

The plan: sell, then liquidate

The declaration frames the case around two steps. The first is the sale process. The second is "a chapter 11 plan of liquidation" so the estate can pay creditors "in the near term."

Adams calls the estate "a classic 'melting ice cube' scenario under which a mostly static pool of cash liquidity is reduced by the costs to operate as a chapter 11 debtor." Character had no funded debt and approximately $57 million in unrestricted cash, cash equivalents and investments at the petition date, according to the filing. Its equity holders are all individuals who are current or former directors or employees.

At an $8.2 million monthly burn, $57 million lasts about seven months. The company's projections, the declaration says, show it "can reasonably expect to end the first quarter of 2027 with a positive cash balance," assuming the sale stays on schedule and the case is "unburdened by contentious litigation."

Disney and the December 17 milestone

The Disney arrangement is covered in more detail in the sale filings, but the declaration adds dates. The exclusivity and prepayment letter agreement with Disney was signed on September 18, 2026. That is the same day Disney named Karandeep Anand, who had run Character since 2025, as its first chief technology officer, as PPC Land noted in its petition coverage. Under that letter, Disney paid $7.5 million of the $20 million cash consideration before the filing, $2 million of which is a refundable good faith deposit. The declaration describes the $7.5 million as 37.5% of the total, which is correct. Exclusivity ran from September 18 to the petition date.

The stalking horse agreement grants Disney "a perpetual, worldwide, non-exclusive license to certain of Character's intellectual property and related technology," plus a release and covenant not to sue. It includes milestones that, according to the declaration, "are contingent on the sale closing on or prior to December 17, 2026." That date is more precise than the "late November or early December" window the company used publicly on October 12.

On the platform's future, the declaration is unambiguous: "If such a bid is unavailable, Character's platform will be wound down." The company is asking the court to hear the bidding procedures within two weeks of the petition, a week sooner than the normal notice period allows.

A banker named two ways

The declaration says the sale will be run by "Houlihan Lokey." The board resolution attached to the petition also names Houlihan Lokey. But the supporting declaration filed for the bidding procedures motion, Document 17, comes from a managing director at "Houlihan Capital, Inc.," with offices in Dallas, which is a different firm. The court record does not yet contain the retention application that would settle which bank is being hired.

Smaller details in Exhibit A

Exhibit A repeats the evidentiary basis for each first-day motion. A few figures were not in the earlier motions:

  • Utilities. Character has about three utility accounts and pays approximately $15,000 a month. It proposes an $8,610 adequate assurance deposit at Silicon Valley Bank.
  • Insurance. About 20 policies, including media, technology and cyber liability and excess coverage, brokered by Arthur J. Gallagher and Woodruff-Sawyer. All premiums were paid before the filing.
  • Taxes. Sales and use taxes are handled by a tax processor, Numeral Two, Inc., which charges $50 per US filing and $85 per foreign registration and filing. The company expects a California income and franchise tax refund of approximately $553,473.25 and is subject to two ongoing tax audits.

The tax figures do not reconcile within the exhibit. One paragraph says prepetition taxes and fees "will not exceed approximately $225,000," of which $185,000 is due before the final order. The next paragraph and the table say $230,000, with $190,000 in the interim period.

Why it matters for the marketing industry

For buyers, the declaration answers a question the earlier filings left open: how much ad money was actually flowing to an AI companion app. Roughly $2.5 million a month, or about $30 million a year at the August run rate, from a platform where users averaged two hours a day. That is a real but modest sum, and it arrived through programmatic channels and a revenue-share deal with an unnamed provider rather than through direct brand sales.

The economics are the larger point. Character.ai reduced its compute bill, switched to open-weight models, cut staff, launched ads and grew subscriptions, and still spent about $2.50 for every dollar it brought in during August 2026. AI apps that depend on advertising face the same pressure. OpenAI began selling ChatGPT ads at a $60 CPM in February 2026 and opened a self-serve Ads Manager with cost-per-click bidding in May; Barclays has forecast $2.4 billion in ChatGPT ad revenue for 2026. The Character.ai numbers show what the model looks like without OpenAI's scale: heavy usage, cheap ad yields per hour and a GPU bill that does not shrink with the CPM.

The regulatory list matters too. Brand suitability teams have treated companion chatbots as a teen-adjacent risk; Deepsee.io found Character.AI rated Teen on Google Play and 17+ on iOS in August 2026. The declaration confirms that investors were driven away less by product quality than by the overhang of 46 state attorneys general, five more states, the FTC, the ICO, Italy's Garante and others. A buyer for the app would inherit that overhang unless the bankruptcy resolves it, which is exactly what the company says it is trying to do.

What comes next

The company wants the bidding procedures heard within two weeks of the October 12 petition. Pennsylvania's responsive pleading deadline is November 2, 2026. The Disney milestones require a closing on or before December 17, 2026. If no bidder emerges who wants to keep Character.ai running, the platform will be wound down, and a liquidation plan will follow.

Timeline

  • 2021: Character Technologies is founded by researchers who left Google
  • 2022: The Character.ai platform launches to the public
  • January 2024: Monthly subscription revenue is approximately $0.6 million
  • August 2024: Google strikes a $2.7 billion licensing deal with Character.ai
  • September 3, 2024: UK ICO opens its first investigation into Character
  • November 2024: Character deploys a separate model for under-18 users
  • November 8, 2024: Italy's Garante opens a GDPR investigation
  • December 2024: PPC Land reports about 139,000 paid subscribers and $30 million in monthly operating costs
  • December 31, 2024: Texas issues its first civil investigative demand
  • January 15, 2025: FTC issues a civil investigative demand
  • February 18, 2025: New Mexico issues a civil investigative demand
  • March 26, 2025: Kentucky issues a civil investigative demand
  • April 30, 2025: Google begins placing AdSense ads in AI chatbot conversations
  • June 11, 2025: Florida issues a subpoena
  • Mid-2025: Character launches in-app advertising with multiple ad networks
  • July 2025: First full month of advertising, about $0.5 million in revenue
  • August 2025: Character hires an investment bank, which approaches about 28 parties
  • August 19, 2025: Texas issues a second civil investigative demand
  • August 26, 2025: FTC pauses its investigation
  • September 10, 2025: FTC issues 6(b) orders to seven AI chatbot companies
  • October 2025: Character begins restricting under-18 users from open-ended chats
  • October 16, 2025: Australia's eSafety Commissioner issues a reporting notice
  • November 2025: Character learns of the multistate attorney general investigation, which grows to 46 states and territories
  • November 27, 2025: UK MHRA opens an investigation into "psychologist" products
  • December 2025: Monthly revenue is approximately $2.8 million
  • January 2026: Character settles all then-pending personal injury lawsuits
  • January 8, 2026: Kentucky sues Character and its co-founders
  • January 20, 2026: Roskomnadzor issues a take-down notice
  • February 9, 2026: OpenAI starts testing ads in ChatGPT at a $60 CPM
  • March 2026: Character signs an amended programmatic revenue-share deal with an unnamed ad provider
  • May 1, 2026: Pennsylvania sues over chatbots posing as licensed doctors
  • May 5, 2026: OpenAI opens ChatGPT Ads Manager with CPC bidding
  • May 21, 2026: Moscow court fines Character RUB 3.5 million and RUB 4 million
  • July 3, 2026: Garante fines Character 79,000 euros
  • July 31, 2026: Character's last production to the FTC under the 6(b) order
  • August 3, 2026: Deepsee.io study finds Character.AI rated Teen on Google Play and 17+ on iOS
  • August 12, 2026: Moscow court fines Character RUB 1.25 million
  • August 2026: Advertising revenue reaches about $2.5 million and subscriptions $2.8 million a month; operating expenses fall to $13.3 million; a new personal injury suit is filed in N.D. Cal.
  • August 26, 2026: Meta's consent judgment with 51 attorneys general is entered
  • Late August 2026: The investment bank's engagement ends
  • September 18, 2026: Character signs the exclusivity and prepayment letter with Disney; Disney pays $7.5 million up front
  • September 25, 2026: UK ICO opens a new investigation into manipulation and data processing risks
  • October 1, 2026: Christopher Sontchi joins the board as an independent director
  • October 12, 2026: Character Technologies files for Chapter 11 in Delaware
  • October 13, 2026: Colin M. Adams files the first-day declaration (Doc 18)
  • November 2, 2026: Pennsylvania responsive pleading deadline
  • December 17, 2026: Disney stalking horse milestone deadline for closing
  • First quarter of 2027: Character projects a positive cash balance if the sale stays on schedule

Summary

Who: Character Technologies Inc., operator of Character.ai, through a sworn declaration by its chief executive Colin M. Adams, a Senior Managing Director at Areté Partners. The filing describes dealings with Disney Worldwide Services, an unnamed "leading online advertisement provider," 46 state and territorial attorneys general, five other states, the FTC, Italy's Garante, Russia's Roskomnadzor, the UK ICO and MHRA, and Australia's eSafety Commissioner.

What: A 68-page first-day declaration with Exhibit A. It discloses that advertising revenue grew from about $0.5 million in July 2025 to about $2.5 million in August 2026, close to half of $5.3 million in monthly revenue, while the company lost about $8-9 million a month. Compute cost $56.1 million in the first eight months of 2026, 45% of operating expenses. It lists 12 million monthly active users averaging 120 minutes a day, a 79,000 euro Garante fine, three Russian court fines, and a new UK ICO investigation opened on September 25, 2026.

When: Filed today, October 13, 2026, one day after the October 12 Chapter 11 petition. The Disney deal must close on or before December 17, 2026.

Where: The US Bankruptcy Court for the District of Delaware, case 26-11603 (BLS).

Why: According to the declaration, investors were deterred by "the litigation and regulatory overhang," costs stayed far above revenue despite cuts, and staff were leaving. The company is using Chapter 11 to sell assets, negotiate with the multistate group and liquidate; the platform will be wound down unless a buyer wants to keep it running.