The consideration for the Purchased Shares will be payable in shares of common stock of SGN (the “SGN Common Consideration”) and shares of preferred stock of SGN (the “SGN Preferred Consideration” and, together with the SGN Common Consideration, the “SGN Consideration”). The closing of the Transaction (the “Closing”) will be subject to the due diligence investigation by each of SGN and DRCR with respect to the other.

It is expected that the legacy SGN shareholders will retain 8.24% (assuming an SGN equity value of $14.0 million) of the total post-Transaction shares of common stock of SGN on an as-converted and fully diluted basis and that the SGN Consideration issued to the Sellers and the Additional Sellers will constitute approximately 91.76% of the total post-Transaction shares of common stock of SGN on an as-converted and fully diluted basis (assuming a DRCR equity value of $156.0 million). It is hypothetically assumed for this purpose that SGN will acquire 100% of the outstanding shares of DRCR. An adjustment will be made to such percentages based upon the lower percentage of the outstanding shares of DRCR common stock (on an as-converted and fully diluted basis) actually acquired by SGN, which DRCR and SGN expect will be less than 100%. 

For the avoidance of doubt, SGN agrees not to seek to renegotiate the $14.0 million equity value stated above as the result of any increase in the value of SGN’s stock price as the result of the announcement of this Term Sheet, the execution of the Stock Purchase Agreement or any other matter relating to the Transaction.

To support SGN’s valuation SGN agrees to select and hire a third-party valuation expert that is reasonably acceptable to DRCR. The valuation of SGN is subject to the receipt of a fairness opinion from SGN’s financial advisor prior to entry into the Stock Purchase Agreement.

The valuation and relative ownership percentages of SGN post-Closing assumes that SGN is debt-free and cash free at the time of the Closing. If any indebtedness of SGN exists at the Closing or if SGN has net cash at Closing in excess of its liabilities, the valuation and relative ownership percentages will be adjusted accordingly to favor the Sellers and Additional Sellers or SGN, as applicable, through a mutually agreed upon true-up process.

At the Closing, in consideration of the transfer of the Purchased Shares to SGN, SGN will issue to the Sellers and the Additional Sellers the SGN Consideration in the manner described below.

In order to comply with NYSE American rules, the SGN Common Consideration shall be equal to no more than 19.99% of the outstanding shares of common stock of SGN as of the Closing and the balance of the SGN Consideration shall be in the form of the SGN Preferred Consideration.

The SGN Preferred Consideration shall automatically convert into shares of the common stock of SGN (the “Underlying Shares”) only after the stockholders of SGN have approved the issuance of the Underlying Shares and the SGN Preferred Consideration shall otherwise be structured to comply with NYSE American requirements. The SGN Common Consideration, in accordance with NYSE American requirements, shall not be able to vote on issuance of the Underlying Shares.

The Underlying Shares shall be in a number that is equal to the balance of the SGN Consideration to be issued to the Sellers and the Additional Sellers according to the valuation agreed to herein and in the Stock Purchase Agreement(s). The SGN Preferred Consideration shall have no voting rights and no dividend rights, and shall be convertible into shares of common stock.

The SGN Preferred Consideration shall be structured so as to be treated as equity from an accounting perspective and not as debt.

In addition, immediately following the Closing, a number of shares of SGN preferred stock of the same series as the SGN Preferred Consideration that is equal to 3.0% of the enterprise value of the combined post-Transaction entity on an as converted to common stock basis will be issued to DRCR’s financial advisor as consideration for its services provided in connection with the Transaction (the “Advisor Shares”).

Following the completion of the Transaction, DRCR will function as an operating subsidiary of SGN, with SGN consolidating the financials of DRCR. As soon as practical following the Closing, SGN shall contribute all of its legacy assets to a newly-formed, wholly-owned subsidiary of SGN (the “SGN Operating Subsidiary”), and SGN’s current operations will be conducted through the SGN Operating Subsidiary after its establishment.

DRCR and SGN shall each use commercially reasonable efforts to secure adequate funding prior to Closing. Specifically, DRCR and SGN shall seek to raise at least $2.0 million of funding (the “Financing”) as soon as possible after the date hereof.

The net proceeds of the Financing will be equally split between DRCR and SGN and each of them shall use such proceeds for its operations and, in the case of SGN, to pay down its indebtedness and other liabilities. In order to split the net proceeds of the Financing as described above, SGN will make loans of one-half of the net proceeds (or such lesser amount as agreed to by the parties) to DRCR, which loans shall be forgiven (i) upon the Closing or (ii) upon payment by SGN to DRCR of the break-up fee as described under the caption “Break-Up Fee” below.

SGN and DRCR will cooperate to structure such allocation of proceeds and the use of such proceeds on a mutually agreeable basis.

Immediately following the Closing (and prior to the issuance of the Advisor Shares), subject to any adjustments to the valuations set forth in the Stock Purchase Agreement(s) and any purchase price adjustments:

Securities of SGN that are issued to the Sellers, the Additional Sellers, and DRCR’s financial advisor in the Transaction will constitute “restricted securities” as defined in Rule 144 promulgated under the Securities Act of 1933 and, in addition, will be subject to a lockup period of 3 months after the Closing.

Shares of SGN held by Directors and Officers shall be subject to a lockup period of 3 months after the Closing.

SGN, DRCR and the Sellers may include reasonable leak out provisions in the lock up agreements if mutually agreed upon.

At the Closing, Daniel Nelson will resign as Chief Executive Officer of SGN and become the Chief Executive Officer of the SGN Operating Subsidiary and James Gibbons will become the Chief Executive Officer of SGN and remain the Chief Executive Officer of DRCR.

The post-Closing board of SGN shall consist of 5 members, including at least 3 directors that qualify as independent under NYSE American rules. At the Closing, two SGN board members will resign, and DRCR will appoint two directors to fill the vacancies. DRCR’s appointees will be independent or executive directors, depending on the type of director who resigns.

Accordingly, the legacy directors of SGN will continue to control the board of directors of SGN from and after the Closing until the Shareholders’ Meeting is held.

SGN shall cause a slate of directors to be nominated as follows in connection with the Shareholders’ Meeting:

1 board member will be nominated by the SGN board of directors that is in place before the Closing.

1 board member will be nominated by DRCR’s board of directors that is in place before the Closing.

2 of the independent directors will be nominated by DRCR’s board of directors that is in place before the Closing.

1 independent director will be nominated jointly by DRCR’s and SGN’s board of directors that are in place before the Closing.

Each of SGN and DRCR shall present their shortlisted candidates as soon as possible following the entry into the Stock Purchase Agreement.

Each of SGN and DRCR shall also take such action as may be necessary to ensure that the board of directors of DRCR and the SGN Operating Subsidiary mirror the post-Transaction board of directors of SGN.

Stock Purchase Agreement

The obligations of the parties to this Term Sheet to consummate the Transaction is subject to the execution of a Stock Purchase Agreement and other customary and related documents.

The Stock Purchase Agreement(s) will contain customary terms for a transaction of this nature, including without limitation (i) closing conditions (as specified below under “Closing Conditions”), (ii) termination rights, (iii) representations and warranties, indemnification and interim operating covenants with respect to DRCR and SGN and (iv) customary provisions regarding further assurances to cause the Closing to occur, including SGN’s and DRCR’s obligation to obtain any necessary stockholder approvals and to make all necessary filings with the Securities and Exchange Commission, OTC Markets Group, FINRA and NYSE American.

The parties to this Term Sheet will use commercially reasonable efforts to effect the Closing as soon as practicable following the entry by the applicable parties into the Stock Purchase Agreement(s).

SGN, DRCR and the Sellers will be subject to a non-solicitation period for 30 days following the signing of this binding Term Sheet.

SGN, DRCR and the Sellers will be further subject to a no-shop provision for 30 days.

The obligations of any party to a Stock Purchase Agreement to consummate the Transaction will be subject to standard closing conditions for a transaction of this nature, including without limitation:

If SGN, on the one hand, or DRCR or a Seller, on the other hand, terminates this Term Sheet due to an undisputable uncured material breach by DRCR or a Seller, in the case of SGN, or SGN, in the case of DRCR or a Seller (such defaulting party being referred to in this Term Sheet as the “Defaulting Party”), then the Defaulting Party shall be liable to the non-Defaulting Party to an agreed upon break-up fee of $500,000, payable in cash upon first written demand by the non-Defaulting Party.

It is understood that the DRCR, SGN and the Sellers will use commercially reasonable efforts to support SGN in its efforts to raise capital in the Financing. If this Term Sheet is terminated by SGN for any reason other than an udisputable uncured material breach by DRCR or a Seller, then one-half of all net funds (after expenses) raised in any capital raising transaction by SGN will be paid to DRCR (to the extent not already loaned to DRCR) as an additional break-up fee and any loans by SGN to DRCR of amounts of net proceeds already made to DRCR shall be forgiven. For the avoidance of doubt, DRCR shall not be entitled to any more than one-half of the total net proceeds from a Financing.