XOMA Royalty Corp Income Taxes Disclosure

15. Income Taxes

The domestic and foreign components of income (loss) before income taxes are as follows (in thousands):

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The Company recorded a deferred foreign income tax expense (benefit) as follows (in thousands):

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Upon adoption of ASU 2023-09, as described in Note 2, Basis of Presentation and Significant Accounting Policies, the reconciliation of taxes at the federal statutory rate to the Company’s provision for income taxes for the year ended December 31, 2025, was as follows (in thousands, except for percentages):

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The reconciliation of taxes at the federal statutory rate to the Company’s provision for income taxes for the year ended December 31, 2024 in accordance with the guidance prior to the adoption of ASU 2023-09 was as follows:

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Upon adoption of ASU 2023-09, as described in Note 2, Basis of Presentation and Significant Accounting Policies, the total cash paid for income taxes, net of refunds, during the year ended December 31, 2025 was as follows (in thousands):

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The Company made no cash payments for income taxes and received no income tax refunds during the year ended December 31, 2024.

The significant components of net deferred tax assets as of December 31, 2025 and 2024, were as follows (in thousands):

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The net increase in the valuation allowance was $74.8 million and $26.8 million, for the years ended December 31, 2025 and 2024, respectively. In connection with the acquisition of Pulmokine in 2024, the Company released $5.7 million of valuation allowance to continuing operations.

Deferred tax assets primarily consist of NOL carryforwards, research and development tax credit carryforwards, and capitalized research and development expenditures. The increase in deferred tax assets during the year ended December 31, 2025 was primarily attributable to capitalized research and development expenditures, including amounts arising from business acquisitions. The Company evaluates the realizability of deferred tax assets on a jurisdictional basis by considering all available positive and negative evidence, including historical operating results, cumulative losses, and expectations of future taxable income. Based on the weight of available evidence, including the Company’s history of cumulative losses and historical operating performance, management determined that it was more likely than not that the Company’s deferred tax assets would not be realized. Accordingly, the Company recorded a full valuation allowance against its net deferred tax assets.

Based on an analysis under Section 382 of the Internal Revenue Code (which subjects the amount of pre-change NOLs and certain other pre-change tax attributes that can be utilized to annual limitations), the Company experienced an ownership change in February 2017 which substantially limits the future use of its pre-change NOLs and certain other pre-change tax attributes per year. The Company has excluded the related tax attributes that will expire as a result of the annual

limitations in the deferred tax assets as of December 31, 2025 and 2024. To the extent that the Company does not utilize its carryforwards within the applicable statutory carryforward periods, either because of Section 382 limitations or the lack of sufficient taxable income, the carryforwards will expire unused.

As of December 31, 2025, the Company had federal NOL carryforwards of approximately $198.4 million and state NOL carryforwards of approximately $23.5 million to offset future taxable income. $13.6 million of federal NOL carryforwards will begin to expire in 2036 and the remainder may be carried forward indefinitely. The state NOL carryforwards will begin to expire in 2033.

The Company had federal orphan drug credit of $2.0 million which if not utilized will expire in 2037. The Company also had $19.8 million of California research and development tax credits which have no expiration date.

Under current U.S. federal tax law, NOLs generated in tax years beginning after December 31, 2017 may be carried forward indefinitely. The utilization of such net operating losses is generally limited to 80% of taxable income in any given year.

On July 4, 2025, the “One Big Beautiful Bill Act” (“OBBBA”) was signed into law. The legislation includes significant revisions to U.S. corporate income tax laws, including changes to the treatment of research and development expenditures and certain international tax provisions. The enactment of the OBBBA did not have a material impact on the Company’s consolidated financial statements due to the Company’s cumulative losses and full valuation allowance position.

The Company files income tax returns in the U.S., various states, and foreign jurisdictions. The Company’s federal income tax returns for tax years 2022 and beyond remain subject to examination by the Internal Revenue Service. The Company’s state income tax returns for tax years 2021 and beyond remain subject to examination by state tax authorities. The Company's income tax returns outside the U.S. remain open to examination for 2021 and beyond. In addition, all of the NOLs and research and development credit carryforwards that may be used in future years are still subject to adjustment.

The following table summarizes the Company’s activity related to its unrecognized tax benefits (in thousands):

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As of December 31, 2025, the Company had a total of $5.9 million of gross unrecognized tax benefits, none of which would affect the effective tax rate upon realization as the Company currently has a full valuation allowance against its deferred tax assets. The reversal of related deferred tax assets will be offset by a valuation allowance, should any of these uncertain tax positions be favorably settled in the future.

The Company will recognize interest and penalties accrued on any unrecognized tax benefits as a component of income tax expense. Through December 31, 2025, the Company has not accrued interest or penalties related to uncertain tax positions.