Character.ai was still losing $8 million to $9 million a month by August 2026 even as revenue nearly doubled over an eight-month stretch, according to an affidavit filed by CEO Colin Adams in the Delaware bankruptcy court.
The filing says the company posted about $5.3 million in revenue in August 2026, while operating expenses excluding legal fees were about $13.3 million. On that basis, revenue covered less than 40% of spending.
BlockTempo had previously reported that Character.ai filed for bankruptcy protection on Oct. 12. The affidavit adds more detail on where the money went, how fast revenue was growing, and why a sale process failed to produce a workable deal.
Compute was the largest expense
Character.ai said it had about 12 million monthly active users, and longer conversations drove higher compute usage. From January through August 2026, compute costs totaled about $56.1 million, accounting for roughly 45% of operating expenses. Personnel costs were about $19.7 million, or around 16%.
The company’s operating expense base had been coming down. Excluding legal fees, average monthly operating expenses were about $21.9 million in the second half of 2024, after the Google transaction, and fell to about $13.3 million by August 2026, a decline of roughly 39%.
The affidavit describes the cost-cutting measures in direct terms: moving inference workloads to cheaper GPUs, using publicly available open-weight models for post-training, stopping in-house foundation model development, cutting staff, and consolidating offices.
Using the figures in the filing, Character.ai’s compute spending in 2025 worked out to about $10 million a month on average, or about $120 million for the year. Its total revenue for that same year was only about $23.6 million, meaning compute costs alone were about five times annual revenue.
Revenue was growing, but not fast enough
The affidavit says total monthly revenue rose from about $2.8 million in December 2025 to about $5.3 million in August 2026, close to a doubling. On a full-year basis, revenue increased from about $7.4 million in 2024 to about $23.6 million in 2025.
The company identified three revenue streams:
- Subscription revenue rose from about $600,000 a month in January 2024 to about $2.8 million a month in August 2026.
- In-app advertising began in mid-2025. In July 2025, the first full month, it generated about $500,000. By August 2026, that had reached about $2.5 million.
- Character.ai also began selling in-app purchases in early 2026.
Even with that growth, the gap remained wide. As of August 2026, monthly operating losses were still running at $8 million to $9 million.
404 Media points to a broader AI business problem
Jason Koebler, co-founder of 404 Media, said Character.ai was one of the first companies to fall in what he described as a long-building AI bubble: a product that burned large amounts of money, generated limited revenue, and carried heavy legal costs tied to harm to users.
He said the same pattern could be applied to many AI companies that spend heavily on compute while failing to generate enough revenue to support those costs. In his view, the difference is that OpenAI and Anthropic have been able to keep raising fresh capital, while Meta and Google can subsidize AI with their advertising businesses.
His conclusion was that the models from large companies will keep improving and continue taking users from specialized products. He also said it remains unclear whether OpenAI and Anthropic are too large to fail, but that the runway for second-tier players has already run out.
About 28 parties were contacted in the sale process
The affidavit offers another explanation for the company’s position. Character.ai said it hired an investment bank in August 2025 to look for buyers and investors and contacted about 28 parties. The response, according to the filing, was consistent: the product and user base were attractive, but litigation and regulatory burdens were too heavy.
In the end, the company received only one proposal and decided it was not feasible after review.
That leaves two explanations in the record. 404 Media focused on the numbers: revenue was less than 40% of spending, compute was the largest cost item, and growth still did not close the monthly loss gap. The affidavit adds another fact pattern, with potential buyers repeatedly pointing to lawsuits and regulation.
Service remains online for now
Character.ai said in its announcement that the website remains operational, paid subscriptions are still valid, and billing is unchanged. Users can delete their accounts and export their data through the app or the website.
The Disney transaction must close by Dec. 17, 2026, according to the disclosure. If the auction does not produce a buyer willing to keep the site running, the website will shut down.