Large microbialite mounds (1–2 m in height) have previously been reported from two units within the Spathian section of the Virgin Limestone Member of the Moenkopi Formation at Lost Cabin Spring, Nevada (United States). Previous investigations led to the interpretation that the mounds were formed under anoxic and alkaline conditions that suppressed metazoan grazers and delayed the biotic recovery from the end-Permian mass extinction. Here we report low organic carbon and total sulfur abundances throughout the section that suggest that anoxia was not prevalent during deposition. We also report that the upper mound-bearing unit contains stromatolite-sponge patch reefs in which mutual encrustation between stromatolites and sponges contributed to the building of a reef framework. The stromatolite-sponge patch reefs contain discrete burrows within stromatolitic laminations, suggesting that there was sufficient oxygen for grazing during the formation of the upper unit mounds. The enhanced ecological complexity of the upper unit mounds leads us to conclude that the mounds represent the transition to biotic recovery following the end-Permian mass extinction.