Part I – Report Overview
ITEM 1. Disclaimers, Disclosures and Notes
Introduction
These financial statements were prepared by Cowrie – Administrator Services LLC (“Administrator Services”), which has been authorized as a member of Towns Lodge to perform a variety of administrative responsibilities, including the preparation of quarterly and annual financial statements in support of quarterly tax updates.
The Quarterly Financial Statements (“QFS”) for Towns Lodge for the three- and nine-month periods ended September 30, 2026 also include the calculation of estimated U.S. federal income tax liabilities, conducted in accordance with the current standards, rules, and interpretive guidance under the Internal Revenue Code (“IRC”) and relevant US Treasury regulations.
Purpose and Basis of Presentation
The preparation of these financial statements is guided by a primary objective: to analyze the financial activities of Towns Lodge with the express intent of estimating its potential U.S. federal and state income tax obligations. The QFS were not prepared under Generally Accepted Accounting Principles (“GAAP”). Rather, Administrator Services has selectively employed GAAP-informed principles and valuation methodologies where necessary to ensure internal consistency, defensible estimations, and analytical rigor. Please refer to the ITEM 3. Accounting and Tax Policy section below for further discussion.
These statements do not fall under the purview of AR-C Section 70, Preparation of Financial Statements, of the AICPA Statements on Standards for Accounting and Review Services (SSARS), as the preparation is auxiliary to our core tax engagement services. Likewise, AR-C Section 80 and AR-C Section 90 do not apply because we are not performing compilation or review services, respectively.
It is essential to emphasize that these financial statements are exclusively intended for Towns Lodge’s internal use and limited to the specific purposes outlined above. The methodology and scope of this report are tailored to the unique operational characteristics and decentralized governance model of the entity. Furthermore, while Towns Lodge has influence over certain structural parameters of Towns Protocol (the “Protocol”), it does not exert ownership or managerial control. Accordingly, the financial results and associated tax estimates presented here do not include or reflect broader financial activities occurring at the protocol layer or among unrelated stakeholders in the broader Towns ecosystem.
Source of Financial Data
The decentralized nature of Towns Lodge imposes distinct challenges with respect to the sourcing and consolidation of financial data. Unlike traditional enterprises that maintain centralized financial systems, there is no internal finance department. Accordingly, Administrator Services compiled financial data exclusively from blockchain transaction records associated with DUNA-controlled wallets (“Treasury Wallets”) and from offchain transactions executed under the scope authorized by Towns Lodge (e.g., vendor payments, tax payments, interest earned on bank account balance).
Nature and Limitations of the Financial Statements
The QFS prepared herein do not constitute audited financial statements and do not purport to meet the disclosure or presentation requirements applicable under SEC rules or AICPA and PCAOB audit standards. These financial statements have not undergone an audit or review by an independent third party. Administrator Services is not an accounting firm and cannot guarantee the absence of material misstatements.
Accordingly, these financial statements should not be relied upon to detect misstatements, irregularities, fraud, or noncompliance with applicable laws and regulations. The absence of a centralized control environment and the pseudonymous nature of blockchain transactions mean that financial reporting under a DUNA model is subject to novel risks, including incomplete records, classification uncertainty, and data omissions.
It is essential that users of these financial statements exercise discretion and interpret the contents as a best-effort, good-faith, and methodologically sound approximation of Towns Lodge’s financial activity within the defined reporting period. These statements should not be regarded as comprehensive or verified financial records. They are not a substitute for independently audited financial statements and are provided without any warranties, express or implied, as to their completeness or accuracy.
ITEM 2. Towns Lodge DUNA
Towns Lodge DUNA Overview
The Towns Lodge DUNA (“Towns Lodge” or the “Association”) is the membership body composed of participating governance tokenholders with governance rights over the TOWNS tokens held in the Towns Treasury and governance of Towns Lodge. Towns Lodge was initially organized as a WY Unincorporated Nonprofit Association (“UNA”) on January 2, 2025, and operated as a three-member entity prior to token distribution, at which point it transitioned to a WY Decentralized Unincorporated Nonprofit Association (“DUNA”) on August 5, 2025 once the 100-member threshold was met.
Membership in the DUNA results from holding TOWNS and actively participating (e.g., voting, delegating, submitting proposals, or staking); mere token ownership without participation does not constitute membership.
Members do not own Towns Lodge’s property, and per-capita distributions are prohibited other than upon windup and dissolution.
Towns Lodge’s mailing address is:
Towns Lodge
3306 Kelley Drive
Suite 1100
Cheyenne, WY 82001
Tax Election
Upon formation, Administrator Services filed Form 8832 with the Internal Revenue Service (“IRS”) to elect classification of Towns Lodge as a C Corporation for U.S. income tax purposes and obtained an Employer Identification Number.
As a C Corporation, Towns Lodge’s operations are taxed at the standard 21% U.S. federal income tax rate for corporations. Towns Lodge has not elected to be treated as a tax-exempt entity under section 501(c) of the Internal Revenue Code.
Tax Reporting
While DUNAs are not required to maintain member listings, both Towns Lodge and recipients of any outbound disposition from the Towns Treasury must comply with relevant tax reporting requirements.
Treasury and Ecosystem Funding
As of September 30, 2026, the Towns Treasury contained 3,000,000,000 TOWNS tokens.
The use of the Towns Treasury is determined by the Association’s governing principles, which provide token governance procedures for submitting and approving proposals, as well as voting and membership.
Towns Protocol
Towns Protocol is an open-source, decentralized real-time messaging and community platform that lets users create “Spaces” (i.e., ownable, programmable group chats) with end-to-end encryption, onchain memberships/subscriptions, and extendable reputation, built via smart contracts on the Base blockchain and a network of protocol nodes for stream/event replication. Communities can set rules, fees and roles, and retain control over data moderation without relying on a centralized operator. The ecosystem is governed by the TOWNS token, used for protocol governance and to incentivize/secure node operations over time.
The TOWNS token functions as the native token for the Towns Protocol, aligning incentives among builders, space owners, users, node operators and tokenholders. Additionally, the TOWNS token provides the mechanism for members to participate in Towns Lodge, as holders are able to participate in governance decisions that fund the Association and provide control over DUNA operations.
River Eridanus Association
The River Eridanus Association is a Swiss nonprofit entity established in 2024 whose purpose is to support the further growth and development of the Towns Protocol. At present, the River Eridanus Association is funded to operate grant programs and further the development of the Towns Protocol, the surrounding community and its ecosystem. The Towns Lodge Treasury was initially funded through a grant of 3 billion TOWNS tokens from the River Eridanus Association.
Windup and Dissolution
During September 2026, a governance proposal titled "Award Grant to the River Eridanus Association; Windup and Dissolution of the Association" ("Proposal #11") was submitted to Towns Lodge governance. The proposal authorizes the award of all TOWNS tokens held in the Towns Lodge treasury account to the River Eridanus Association in support of the continued growth and development of the Towns Protocol, the surrounding community, and the ecosystem, and, upon completion of that grant, the dissolution of Towns Lodge pursuant to Article 8, Paragraph 1(a) of the Association Agreement, with Cowrie - Administrator Services LLC appointed as Windup Administrator.
The proposal provides for the discharge of all debts and obligations, the closure of custody and bank accounts, the filing of final tax returns, and a windup period of six months from dissolution extended automatically until the final tax returns have been filed and accepted. The temperature check concluded on September 24, 2026, and the final governance vote remained open through October 3, 2026; accordingly, the proposal had not been enacted as of September 30, 2026. Subsequent to quarter end, the final governance vote concluded, and the proposal passed on October 3, 2026, with 214,841,153 TOWNS votes cast in favor and none against. The proposal subsequently cleared Rules Committee review and was finalized on October 6, 2026. The treasury TOWNS tokens were granted to the River Eridanus Association on October 14, 2026. Other transactions required to wind up the Association, including closure of the bank account, are expected to occur later in the fourth quarter of 2026 (see Part II, ITEM 5. Statement of Income).
ITEM 3. Accounting and Tax Policy
Overview of Accounting and Tax Policy Framework
Administrator Services prepared the special-purpose QFS for Towns Lodge to evaluate its revenues and expenses with the ultimate objective of estimating potential U.S. federal and state income tax liabilities. This section outlines how Towns Lodge manages its financial reporting and tax obligations. The aim is to ensure a clear, consistent method for recognizing income and expenses, ultimately enabling the estimation of potential U.S. federal and state tax liabilities.
An accounting method is the set of rules that determines when and how income and expenses are recognized on financial statements and tax returns. An entity can use different methods for financial book vs. tax purposes (e.g. accrual for financial statements, cash for taxes), but whichever methods are chosen must clearly reflect income and be applied consistently year to year. Once an entity adopts a method, it must continue with it in subsequent years barring a justified change. In Towns Lodge’s case, both financial reporting and tax reporting use the accrual basis, as detailed below.
Financial Reporting Approach: Accrual Method
Towns Lodge uses the accrual method of accounting for its financial statements. This provides a more accurate and comprehensive view of Towns Lodge’s financial condition by recognizing revenues when earned and expenses when incurred, regardless of when cash is actually transferred. Under accrual accounting, unrealized gains and losses on Designated Tokens (defined below) are recognized, and deferred tax assets/liabilities are recorded for timing differences between book and tax treatments. This approach ensures the financial statements capture the full economic activity of the treasury, not just cash flows. For example, if the TOWNS tokens held in the Towns Treasury appreciate during the period, that unrealized gain is reflected in the book financial statements (with a corresponding deferred tax liability for the expected taxable gain in the future).
Tax Reporting Approach: Accrual Method
For U.S. income tax purposes, Towns Lodge also reports on an accrual basis. Under Internal Revenue Code (“IRC”) §446, taxpayers are generally allowed to use the method of accounting they use for their own books (cash, accrual, or other) so long as it clearly reflects income.
Under an accrual method of accounting, income and expenses are reported based on when they are earned or incurred, not when cash changes hands. In plain terms, this means an accrual-basis taxpayer generally reports income in the tax year it is earned (regardless of when payment is received) and deducts expenses in the tax year when the liability is incurred (regardless of when payment is made). This approach differs from the cash method and is grounded in specific tax rules (primarily IRC § 451 for income and IRC § 461 for expenses) that ensure revenue and corresponding expenses are matched to the correct period.
Income recognition (all-events test)
For tax purposes, IRC § 451 and the related regulations require that an accrual-method taxpayer recognize income once the “all-events test” is met. This test is satisfied when all events have occurred that fix the right to receive the income and the amount can be determined with reasonable accuracy. In practice, this generally means income is considered at the earliest of the following: (1) when the required performance or service has been provided (i.e. the earnings process is complete), (2) when payment is due from the customer, or (3) when payment is actually received – whichever occurs first. By following this rule, taxpayers ensure that revenue is reported in the correct period (for example, if the DUNA earns fees or rewards in Year X, it must include them in Year X’s income even if the cash is received later). This approach is consistent with tax authority guidance and case law enforcing early recognition once the right to income is fixed.
Expense recognition (liability and economic performance)
On the expense side, accrual-method taxpayers deduct or accrue expenses when the liability is incurred, which similarly hinges on an all-events test plus an economic performance requirement. In simple terms, a taxpayer may deduct an expense only after: (1) all events have occurred that establish the fact of the liability, (2) the amount of the liability can be determined with reasonable accuracy, and (3) economic performance has occurred with respect to that liability. Economic performance means that the underlying goods or services tied to the liability have been provided – in other words, the obligation has been “performed” either by the other party or by the DUNA, as applicable. For example, if the DUNA owes a vendor for services, the expense would be accrued in the year the vendor provides those services (fulfilling the DUNA’s liability), even if the payment is issued later. Only once our obligation is fixed and the service or product has been delivered (or used) can the DUNA say economic performance is met and the expense is incurred for income tax purposes. This rule, found in IRC § 461(h) and related Treasury regulations, ensures that deductions are not taken too early. The DUNA cannot deduct a cost until it is firmly attached to a completed transaction or service.
Revenue and Income Recognition
Towns Lodge recognizes income from all sources including digital asset transactions in the year the income is earned, due or becomes available. This policy applies equally to financial statements and tax filings. However, a key exception involves unsolicited tokens received in DUNA-controlled wallets. In the digital asset ecosystem, it is common for unknown third parties to unilaterally send tokens, whether valuable or worthless, to publicly known wallet addresses, including those under Towns Lodge’s control. These transfers occur without the recipient’s consent and cannot be refused at the protocol level. This means the DUNA might passively receive tokens it never intended to hold.
To mitigate the risk of unintended income tax exposure, unsolicited transfers do not constitute income to Towns Lodge when received as a matter of policy.
This formal policy means that only tokens which Towns Lodge has intentionally and willfully transacted (termed “Designated Tokens”) are recognized in the accounting records. As of September 30, 2026, TOWNS (the Protocol’s governance token) and ETH were the only Designated Tokens under this definition. Any other tokens sent to the Treasury Wallets by unknown parties are ignored in the financial reports and tax computations, as they were neither solicited nor used by the DUNA. Unsolicited Designated Tokens, such as TOWNS sent to the Treasury Wallet by unassociated third parties, will not be included in accounting records.
Accounting for Income from Airdrops
Airdrops refer to token distribution events initiated by blockchain protocol or token projects, where tokens are allocated, typically free of charge, to selected wallet addresses. These events often serve as go-to-market strategies designed to drive user adoption, decentralize governance, reward early supporters, or stimulate onchain activity.
If Towns Lodge actively solicits or consents to receive an airdropped token (for instance, as part of a partnership or application for a distribution), and subsequently does receive those tokens, then the fair market value (“FMV”) of the tokens at receipt will be recognized as ordinary income for U.S. tax purposes and as revenue in the DUNA’s financial statements. The FMV is determined at the time of receipt using the spot market price for the token multiplied by the quantity received. This treatment complies with U.S. tax regulations (income is recognized when one has dominion and control over assets received) and ensures the financial statements reflect all earned resources.
Notably, this recognition occurs regardless of whether the DUNA immediately liquidates the airdropped tokens or holds them, and irrespective of subsequent price fluctuations. The full value at receipt is counted as income.
This policy on airdrops applies to both tax and book accounting, following IRS guidelines by treating airdropped tokens as income at the time they become the DUNA’s property.
TOWNS Disbursement Under Governance Consensus
One of the key functions of Towns Lodge is to support the ongoing development of the protocol and the broader Towns ecosystem. In alignment with its decentralized governance model, Towns Lodge governance proposals may authorize the disbursement of TOWNS tokens from the DUNA’s Treasury to fund protocol development initiatives or broader ecosystem growth.
When such disbursements are approved, the required number of tokens is transferred to an external party or vendor based on either the nominal amount or a specified token value as determined by Towns Lodge governance.
For U.S. federal income tax and financial reporting purposes, token disbursements from the DUNA’s Treasury are treated as comprising two distinct tax accounting transactions:
- Token Disposition: The initial transaction is treated as a sale of the disbursed tokens upon transfer from the Treasury Wallets.
- Expense Recognition: The second transaction pertains to the accounting treatment of the resulting proceeds from the token disposition.
This two-step view is required because under U.S. tax law, cryptocurrencies are property, pursuant to IRS Notice 2014-21. Spending tokens is thus not just an expense; it triggers a disposition of an appreciated asset. Below we detail each component:
Token Disposition (Capital Gain/Loss on Token Transfers)
According to IRS Notice 2014-21, 2014-16 I.R.B. 938, cryptocurrencies are classified as property for U.S. federal income tax purposes. Accordingly, when Towns Lodge transfers out tokens from its treasury (e.g. sending TOWNS to a grant recipient), in exchange for property (including money) or services, it is treated as a taxable sale of those tokens at the market price at the time and date of the transfer. Under IRC § 1001, the DUNA must calculate and recognize a capital gain or loss on that sale or exchange. The gain or loss is computed as follows:
Capital Gain = Gross Proceeds from Sale of Disbursed Tokens – Cost Basis of Tokens Sold
- Gross Proceeds: The value received for the tokens. In the context of a treasury disbursement, this is taken as the market price of the token at the time of the transfer multiplied by the number of tokens disbursed. Since no cash is received, Towns Lodge will treat the tokens’ market value as the proceeds of a deemed sale.
- Cost Basis: The original value of those tokens to Towns Lodge. For initial TOWNS tokens minted and received in the DUNA Treasury, the cost basis is the total number of TOWNS tokens deposited in the treasury multiplied by the FMV of each token determined by a valuation specialist in a token valuation report, and which the DUNA recognized as ordinary income in its 2025 financial statements and tax return.
All such token dispositions are reported to the IRS (e.g. on Form 8949 and Schedule D of the corporate tax return) detailing the asset, date acquired, date disposed, proceeds, basis, and resulting gain or loss. From a financial reporting perspective, the act of disbursing tokens is similarly treated as realizing any built-in gain/loss on those tokens. This ensures the financial statements reflect the economic impact of using appreciated assets to fund expenses.
Expense Recognition (Use of Token Sale Proceeds)
The second part of the transaction is recording the expense for which the tokens were used. The accounting and tax treatment depends on what the expense relates to, which must be evaluated by the nature of each disbursement to determine the proper classification:
- If the expenditure is in furtherance of Towns Lodge’s operational mission (development, community growth, etc.), it will generally be a business expense. For U.S. tax, most ordinary and necessary business expenses are deductible under IRC §162(a). For financial statements, it will be recorded as an expense in the appropriate category (e.g. “Grants expense” or “Legal expense”).
- If the expenditure is of a type that is not deductible for tax, such as lobbying and political spending or payment of U.S. federal income tax, then no tax deduction is taken even though it’s recorded as an expense in the financial books.
Each expense is considered on a case-by-case basis, but they fall into common categories. Below we outline the major expense categories that Towns Lodge is expected to incur, with their typical tax treatment:
Major Expense Categories and Tax Treatment
Grants Program
In its current construction, the Towns Protocol Grants Program is run by the River Eridanus Association to provide resources to developers, researchers, community initiatives, or other recipients that contribute to Towns Protocol’s growth and development; however, governance is not prohibited from awarding grants or making other dispositions in furtherance of the DUNA or the protocol.
Tax Treatment: Tokens disbursed as grants are treated as ordinary business expenses if they further the DUNA’s operations. These are deductible under IRC §162(a) as they are aimed at maintaining or expanding the Towns ecosystem, which is the core purpose of the DUNA.
Financial Reporting: Recorded as “Grant expenses” on the income statement in the period they are approved and distributed.
General & Administrative (G&A)
G&A covers the day-to-day expense overhead of operating the DUNA. This includes routine expenses such as software subscriptions, governance administration, treasury custody management, accounting/bookkeeping services, coordinator stipends, governance tooling, compliance and treasury management services, etc. These are the routine costs of keeping Towns Lodge functional and are not tied to specific product development.
Tax Treatment: G&A expenses are deductible business expenses under IRC §162(a) as ordinary and necessary costs of operating the DUNA. Even as a nonprofit, the DUNA can deduct these operational costs since they directly support its activities.
Financial Reporting: Recorded as “General & Administrative Expenses” in the period incurred.
Legal
Legal expenses encompass costs for attorneys, legal filings, regulatory compliance, and any counsel retained to advise the DUNA. This includes fees for setting up the DUNA’s legal structure, drafting contracts (e.g. grant agreements), obtaining regulatory advice, and any litigation or legal defense if it arises. Essentially, this is the budget for navigating laws and regulations, ensuring the DUNA’s activities are lawful.
Tax Treatment: Legal and professional fees that are directly related to the DUNA’s operations are deductible under IRC §162(a) as ordinary and necessary expenses. (An exception would be if any portion is for something non-deductible, but generally legal fees for business purposes are deductible.)
Financial Reporting: Recorded as “Legal Expenses” on the income statement.
Political Contributions & Lobbying
This category captures any spending aimed at influencing legislation, regulation, or public policy. It could include hiring lobbyists or advocacy firms, making donations to industry advocacy organizations, or funding grassroots campaigns to educate policymakers. Transparency is critical here because these expenses can be controversial and have special tax rules. These expenses are expected to be occasional and purpose-specific (not routine operations).
Tax Treatment: Not deductible. U.S. tax law expressly disallows deductions for lobbying and political expenditures (IRC §162(e)). If Towns Lodge spends treasury funds on lobbying efforts or political contributions, those costs cannot reduce its taxable income.
Financial Reporting: Recorded as “Lobbying Expense” or “Political Contribution” in the financial statements as an expense, which will reduce book income, but with a note that it is non-deductible for U.S. tax purposes.
DUNA Operations
These are expenses related to running and compensating committees of the DUNA. Although Towns Lodge is a decentralized community, certain limited authorizations of authority are formalized. For example, the DUNA may appoint a committee with authorizations defined by governance proposal. Operational costs could include salaries or stipends for committee members, auditors, or other agents that the DUNA engages to perform work.
Tax Treatment: These operational costs are deductible business expenses (IRC §162(a)), since they are ordinary and necessary for the DUNA to function. Paying people to execute the DUNA’s decisions is a fundamental expense of running the organization.
Financial Reporting: Recorded as “DUNA Operations” or similar expense category in the financials.
Research & Development (R&D)
R&D expenses are investments in innovation, future growth, and major improvements to the Towns Protocol and ecosystem. This covers spending on developing new features or products, experimenting with upgrades, auditing new protocol versions, scalability research, and academic collaborations. Unlike routine maintenance, R&D is about building the future of Towns Protocol, work that may not have guaranteed success but could significantly advance the protocol if successful. Towns Lodge may fund internal committees or external developers/researchers to undertake such projects (often via grants).
Tax Treatment: Generally, R&D costs can be deductible as ordinary business expenses (or subject to special R&D capitalization rules under IRC §174).
Financial Reporting: Recorded as “Research & Development” or similar expense category in the financials.
Sales and Marketing
This category includes spending to promote Towns Protocol and grow its user base and community. Even a decentralized project benefits from outreach and marketing to drive adoption. These expenses can cover advertising campaigns, branding and design work, sponsorships of events or hackathons, community meetups, educational content creation, and programs to incentivize usage.
Tax Treatment: Marketing and promotional expenses are deductible under IRC §162(a) as ordinary business expenses. They are akin to advertising costs, which are routinely deductible.
Financial Reporting: Recorded as “Sales and Marketing Expenses” in the financial statements.
Security (Audits & Bug Bounties)
Security is paramount for a blockchain protocol. This category covers expenditures to ensure the security of Towns Protocol’s smart contracts and infrastructure. It includes the cost of external security audits, code review engagements, ongoing monitoring services, and bug bounty programs to reward responsible disclosure of vulnerabilities. Essentially, any funds spent to identify, prevent, or mitigate security risks fall in this bucket.
Tax Treatment: Security expenses are deductible business expenses under IRC §162(a). They are ordinary and necessary costs of maintaining a secure protocol operation. Investing in audits and bounties is akin to an insurance or quality assurance expense.
Financial Reporting: Recorded as “Security Expenses” or included under a broader engineering expense category in the financial statements.
Income Taxes
For financial reporting purposes, Administrator Services records income tax provisions as follows:
- Current Tax Liabilities/Assets: Based on taxable income or loss for the year, the DUNA will estimate the federal and applicable state corporate income tax due for that year. A liability is recorded for taxes expected to be paid, or an asset if there are tax refunds due to overpayments; the benefit of net operating losses carried forward is recorded as a deferred tax asset (see below).
- Deferred Tax Assets/Liabilities: These reflect future tax impacts from temporary differences between book accounting and tax accounting. The primary source of temporary differences for Towns Lodge is likely to be unrealized gains or losses on Designated Tokens. For example, if Towns Lodge’s TOWNS Treasury appreciates in value on the books (creating an unrealized gain that would increase book income), U.S. tax law would not tax that gain until the tokens are sold. This creates a deferred tax liability, which is a future tax due when the gain is realized from sale of the appreciated TOWNS tokens. Conversely, if the DUNA had an expense that is recognized now for book but only deductible later for tax, that would create a deferred tax asset (i.e., future tax savings). Administrator Services evaluates these differences each period and records deferred taxes accordingly.
The net effect is that the financial statements’ income tax expense reflects both current taxes and deferred taxes. This gives a clearer picture of the DUNA’s total tax position.
U.S. tax law expressly disallows tax deductions for amounts paid for current federal income tax.
Balance Sheet Presentation
On the balance sheet, Towns Lodge’s crypto assets are classified as marketable property. This classification is due to their high liquidity – TOWNS can be readily converted to cash at observable market prices. The treasury’s tokens are reported at FMV as of the balance sheet date. Unrealized gains or losses from revaluing these tokens to fair value are recognized in the income statement each period. This is in line with accrual accounting and reflects economic reality, but it does create the deferred tax effects mentioned above.
All Designated Tokens (currently TOWNS and ETH) that the DUNA holds will appear as assets on the balance sheet. The TOWNS tokens held within the treasury are a significant asset – the Towns Lodge treasury held roughly $6.4 million in TOWNS tokens as of September 30, 2026, which are subject to market fluctuations. Using fair value accounting means the balance sheet always shows the latest market value of the treasury.
Fair Value of Designated Tokens
At each reporting date, Administrator Services determines the fair value of each Designated Token in the DUNA’s treasury. The carrying value of these tokens on the balance sheet is updated to the spot price as of the last second (11:59:59 PM Mountain Time) of the period multiplied by the quantity of tokens held.
Using observable spot prices ensures the valuation is objective and current. Any change in value from the previous period’s valuation is recognized as an unrealized gain or loss in the income statement. If TOWNS’ price rose during the quarter, the gain increases net income. If the price fell, an unrealized loss would reduce net income.
In summary, the balance sheet presentation provides a clear picture of the fair market value of Towns Lodge’s token holdings by listing its treasury at fair value. The consistent fair value policy, combined with the accounting and tax policies above, provides transparency and accuracy in how Towns Lodge reports its financial position and performance. Each practice, from accrual accounting, to recognizing only designated tokens, to detailed expense categorization, is geared toward clear, conservative financial reporting and compliance with U.S. tax laws.
Part II - Financial Information
(Summations may not foot precisely due to rounding)
ITEM 4. Balance Sheet (unaudited) – For Informational Purposes Only
Assets
Cash and Cash Equivalents
Cash and cash equivalents include cash held in Towns Lodge's business checking account. As of September 30, 2026, Towns Lodge held $84.58 in that account. Cash on hand is designated to fund the windup and dissolution activities of the DUNA.
There was no cash activity during the three months ended September 30, 2026, and the cash balance was unchanged from June 30, 2026.
Digital Assets
As of September 30, 2026, Towns Lodge's treasury held 3,000,000,000 TOWNS tokens valued at $6.4 million, carried against a cost basis of $240 thousand. The TOWNS treasury position of $6.4 million remains Towns Lodge's principal asset and is subject to market fluctuation; carrying value reflects the spot price at 11:59:59 PM Mountain Time on September 30, 2026.
Towns Lodge's digital asset holdings on September 30, 2026 represent an increase of $0.8 million compared to $5.6 million on June 30, 2026. The increase is attributable entirely to the appreciation of the TOWNS token market price during the quarter, from $0.00186 to $0.00212 per token (approximately 14%); no designated tokens were acquired or disposed of during the quarter.
Prepaid Expenses
Prepaid expenses relate to the upfront token payment to Administrator Services for DUNA administration services under a two-year contract term, recognized ratably over the contract period. As of September 30, 2026, Towns Lodge carried a prepaid expense balance of $70.
The balance decreased from $140 on June 30, 2026 to $70 on September 30, 2026 as $70 was recognized during the quarter.
Liabilities
As of September 30, 2026, Towns Lodge had no current liabilities outstanding, and non-current liabilities were $1.3 million.
Accounts Payable
No accounts payable remain outstanding at September 30, 2026. On August 27, 2026, Anchorage stated that it was not requesting additional token payments and could move forward with closing the account, and it confirmed the arrangement on September 1, 2026, releasing Towns Lodge from its custody obligations. The $17.5 thousand of custody payables was accordingly derecognized at September 30, 2026 as a gain on forgiveness of payables within other income. Token custody services continue into October 2026, and the October fee will be accrued and forgiven in the fourth quarter.
In addition, Administrator Services forgave the $0.8 thousand of accrued 2026 tax return filing and review fees; because Administrator Services is a related party (administrator and authorized member), the forgiveness is presented as a related-party contribution within other income (see ITEM 5. Statement of Income). Administrator Services will make the full charitable contribution upon filing of the final return.
Agora's renewal invoice (TL-002, $20.0 thousand for the annual term beginning August 1, 2026) was likewise released in full: services ceased on September 9, 2026 when site hosting transitioned to Administrator Services, and the $2.2 thousand of license fees for services through that date remains recognized as an expense, while the related $2.2 thousand account payable was derecognized as a gain on forgiveness of payables within other income (see ITEM 5. Statement of Income).
Income Tax Payable
No income tax payable remains outstanding at September 30, 2026. Although the quarter produced taxable income, the year-to-date taxable result is a net operating loss, and accordingly no federal income tax is payable for the year (see Income Taxes under ITEM 5. Statement of Income). The prior-year federal income tax liability of $67.6 thousand was paid in April 2026, and no federal income tax payments were made during the quarter.
Deferred Tax Liabilities
Deferred tax assets and liabilities represent the estimated future income tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and their respective tax bases. A deferred tax liability reflects income taxes expected to become payable in future periods as those differences reverse, and a deferred tax asset reflects income tax benefits expected to be realized in future periods.
As of September 30, 2026, Towns Lodge carried a net deferred tax liability of $1.3 million. The balance is attributable principally to the cumulative net unrealized gain on Towns Lodge's designated-token holdings, which are carried at fair value for financial reporting purposes while the related gains are not recognized for tax purposes until the tokens are disposed of; the 21% federal corporate income tax rate applied to this cumulative unrealized position produces the deferred tax liability, partially offset by a $3.0 thousand deferred tax asset recognized on the year-to-date net operating loss carryforward.
The net deferred tax liability increased from $1.1 million at June 30, 2026 to $1.3 million at September 30, 2026, reflecting a net deferred income tax expense of $163.1 thousand recognized during the quarter - $161.5 thousand driven by the appreciation of the TOWNS token price and $1.6 thousand from the reduction of the net operating loss carryforward by the quarter's taxable income.
Net Assets
Accumulated Surplus
Accumulated Surplus represents the cumulative net profits of Towns Lodge. Each period, it rolls forward pursuant to the following formula: Beginning Accumulated Surplus + Net Income (or – Net Loss) = Ending Accumulated Surplus.
For the current period, Beginning Accumulated Surplus is $4.5 million. Net Income for the quarter is $0.6 million per ITEM 5. Statement of Income, resulting in Ending Accumulated Surplus of $5.1 million.
ITEM 5. Statement of Income (unaudited) – For Informational Purposes Only
Summary of Operating Activities
Operating Expenses
Operating expenses for the three months ended September 30, 2026 totaled $13 thousand, compared to $11 thousand for the three months ended June 30, 2026, and $35 thousand for the nine months ended September 30, 2026. Notable items comprise:
- General and administrative expense of $12.8 thousand, comprising token custody management services of $10.5 thousand (three months at the $3.5 thousand monthly minimum fee), $2.2 thousand of license fees accrued under the Agora renewal invoice for services through September 9, 2026, and $70 of ratable recognition of Administrator Services fees.
- Tax return filing and review services of $0.3 thousand, reflecting accrued 2026 tax return filing and review service fees.
Other Income (Expenses)
Other income for the three months ended September 30, 2026 totaled $0.8 million, compared to other expenses of $4.5 million for the three months ended June 30, 2026. The appreciation of the TOWNS token price during the quarter produced unrealized gains of $0.8 million; because the tokens have not been disposed of, these gains are excluded from current-period taxable income.
Other income for the quarter also includes a $17.5 thousand gain on the forgiveness of the Anchorage Digital Bank custody payables, a $2.2 thousand gain on Agora's release of the license fees accrued under its renewal invoice, and a $0.8 thousand related-party contribution arising from Administrator Services' forgiveness of accrued tax return filing fees, each in connection with the windup of the Association. For the nine months ended September 30, 2026, other expenses totaled $11.8 million, primarily reflecting the year-to-date decline in the TOWNS token price.
Income Taxes
Income taxes comprise current and deferred amounts.
Current income tax applies the 21% federal rate to current taxable income (realized income less tax-deductible expenses, excluding unrealized gains and losses). Taxable income for the three months ended September 30, 2026 was approximately $7.4 thousand, reflecting the $20.4 thousand of payable-forgiveness and related-party contribution income, each of which is taxable, less deductible operating expenses. Because the year-to-date taxable result remains a net operating loss of approximately $14.2 thousand, no federal income tax is payable for the year and no current income tax expense is recognized; the tax effect of the quarter's taxable income is instead recognized as deferred income tax expense through the reduction of the net operating loss carryforward (see below).
Deferred income tax reflects the expected tax effect of current-period unrealized gains or losses and of movements in the net operating loss carryforward. Towns Lodge recognized deferred income tax expense of $163.1 thousand for the quarter, comprising $161.5 thousand on the $0.8 million unrealized gain at the 21% rate and $1.6 thousand from the reduction of the net operating loss carryforward by the quarter's taxable income (year-to-date deferred income tax benefit of $2.5 million). Towns Lodge recognized net income of $0.6 million for the three months ended September 30, 2026, compared to a net loss of $3.6 million for the three months ended June 30, 2026, and a net loss of $9.4 million for the nine months ended September 30, 2026.
Windup and Dissolution
As discussed in Part I, ITEM 2, a governance proposal providing for the award of all treasury TOWNS tokens to the River Eridanus Association and the windup and dissolution of the Association was pending at September 30, 2026. Because the dissolution was approved subsequent to quarter end, liquidation was not imminent at September 30, 2026, and these financial statements are accordingly prepared on a going-concern basis, with the windup disclosed as a subsequent event. Subsequent to quarter end, the final governance vote concluded on October 3, 2026 and the proposal passed, with 214,841,153 TOWNS votes cast in favor and none against, satisfying the token quorum required; the proposal subsequently cleared Rules Committee review and was finalized on October 6, 2026.
The treasury grant to the River Eridanus Association was completed on October 14, 2026. Other transactions required to wind up the Association are expected to occur during the fourth quarter of 2026. The executed grant results in a disposition of the TOWNS tokens at their fair value on the transfer date with an offsetting deduction for the grant award, resulting in an approximate fourth-quarter deduction of the tokens' $240 thousand cost basis. Anchorage Digital Bank custody services continue until the account is closed. No distributions of any kind will be made to members in connection with the windup and dissolution.
ITEM 6. Statement of Digital Assets (unaudited) – For Informational Purposes Only
There were no digital asset movements during the three months ended September 30, 2026; the treasury's 3,000,000,000 TOWNS tokens were unchanged during the quarter. Subsequent to quarter end, the treasury TOWNS tokens were granted to the River Eridanus Association on October 14, 2026 in connection with the windup of the Association (see ITEM 5. Statement of Income).
Note:
The Statement of Digital Assets is a standardized, supplemental report that summarizes Towns Lodge’s digital asset positions and activity. It rolls forward wallet token balances from the beginning of the period to the end of the period, and it also provides fair market value and cost basis figures by wallet. This information allows the reader to understand the potential tax consequences of future dispositions from the DUNA Treasury.