I remember when this happened. So many confusing things, but thats gonna happen in an amateur bout between two dudes that both have losing records.
The referee was probably just flabbergasted and confused at seeing the universal timeout gesture thats used in all sports that actually have timeouts and didn't know what to do.
Had this happened in any of the major sanctioned promotions of MMA, the ref probably would have had the fight called after taking the fighter aside and asking if he wanted to continue. Not to mention taking a point for intentionally dropping the mouthpiece to stop action on more than one occasion. Also, security should've kept the fighter in/near the cage until a doctor checked him out, so as to check for signs of injury and such.
All sorts of shady gak happens in amateur combat sports, but this was the strangest so far.