Spero Therapeutics, Inc. Income Taxes Disclosure

10. Income Taxes

For the year ended December 31, 2025, the Company did not have any material cash payments or refunds for income taxes.

As of December 31, 2025, the company had United States federal, state and foreign net operating loss carryforwards ("NOLs") of $226.1 million, $184.8 million and $4.7 million, respectively. $212.8 million of the federal NOLs can be carried forward indefinitely and $13.2 million of NOLs begin to expire in 2034. The state NOLs begin to expire in 2035 and will expire at various dates through 2045. The foreign NOLs do not expire. As of December 31, 2025, the Company also had federal and state research and development tax credit carryforwards of $6.7 million and $1.7 million, respectively, and federal orphan drug tax credit carryforwards of $3.1 million, which may be available to offset future income tax liabilities. The federal and state research and development tax credits begin to expire in 2035 and the federal orphan drug credits begin to expire in 2044.

Utilization of the U.S. net operating loss carryforwards and research and development tax credit carryforwards may be subject to a substantial annual limitation under Section 382 of the Internal Revenue Code of 1986, and corresponding provisions of state law, due to ownership changes that have occurred previously or that could occur in the future. These ownership changes may limit the amount of carryforwards that can be utilized annually to offset future taxable income. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain stockholders or public groups in the stock of a corporation by more than 50% over a three-year period. If the Company experiences a change of control, as defined by Section 382, at any time since inception, utilization of the net operating loss carryforwards or research and development tax credit carryforwards would be subject to an annual limitation under Section 382, which is determined by first multiplying the value of the Company’s stock at the time of the ownership change by the applicable long-term tax-exempt rate, and then could be subject to additional adjustments, as required. Any limitation may result in expiration of a portion of the net operating loss carryforwards or research and development tax credit carryforwards before utilization. The Company recently completed a Section 382 study and concluded that it underwent several ownership changes as defined by the Code, the last of which occurred during the year ended December 31, 2018. Any carryforwards that will expire prior to utilization were removed from deferred tax assets, with a corresponding reduction of the valuation allowance. Future ownership changes may limit our ability to utilize remaining tax attributes.

The Company has not conducted a full study of its research and development credit carryforwards since 2023. A study may result in an adjustment to the Company’s research and development credit carryforwards; however, until a study is completed, and any adjustment is known, no amounts will be presented as an uncertain tax position. A full valuation allowance has been provided against the Company’s research and development credit carryforwards and, if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Thus, there would be no impact to the balance sheet or statement of operations at this time, if an adjustment were required.

The Company has evaluated the positive and negative evidence bearing upon its ability to realize the deferred tax assets. Management has considered the Company’s history of cumulative net losses incurred since inception and its lack of commercialization of any products or generation of any revenue from product sales since inception and has concluded that it is more likely than not that the Company will not realize the benefits of the deferred tax assets. Accordingly, a full valuation allowance has been recorded at December 31, 2025 and December 31, 2024, respectively.

Changes in the valuation allowance for deferred tax assets during the year ended December 31, 2025 primarily relates to the increase in pre-tax income and the impact of stock compensation cancellations. Changes in the valuation allowance for deferred tax assets during the year ended December 31, 2024 primarily to the increase in net operating loss carryforwards and research and development tax credit carryforwards partially offset by a reduction in deferred revenue, and were as follows (in thousands):

The Company has not recorded any amounts for unrecognized tax benefits as of December 31, 2025 or 2024. The Company’s policy is to record interest and penalties related to income taxes as part of its income tax provision. As of December 31, 2025 or 2024, the Company had no accrued interest or penalties related to uncertain tax positions and no amounts had been recognized in the Company’s statement of operations and comprehensive loss.

The Company had filed separate U.S. income tax returns return for each of its subsidiaries prior to its reorganization in 2015. The Company now files U.S. income tax returns as a U.S. consolidated group. In Massachusetts, the Company files income tax returns as a combined group except for its Massachusetts Securities Corporation subsidiary, which is a separate income tax filing. The statute of limitations for assessment by the Internal Revenue Service and Massachusetts tax authorities remains open for tax years 2022 and forward. To the extent the Company has tax attribute carryforwards, the tax years in which the attribute was generated may still be adjusted upon examination by the Internal Revenue Service or state authorities to the extent utilized in a future period.

As of December 31, 2025, the Company’s Massachusetts income tax return for the year ended December 31, 2022 is under examination by the Massachusetts Department of Revenue. The Company has reserved any exposure related to this audit in its 2025 financial statements.