In keeping with many investors, I’m not averse to the more adventurous and speculative end of investments, particularly if there is a glimpse of both recovery and growth on the horizon.
One of the key aspects in opting for a position in any such prospect though is the health and strength of the balance sheet, as the last thing I want to encounter - particularly in times of an elevated cost of borrowing - is a company that is saddled with debt.
With that in mind, a new subject for me where I have taken a small interest is Omega Diagnostics, which is based not too far away from me on the edge of Ely.
Omega may not be for the fainthearted, particularly if you look at the torrid time it endured over the last year, which saw the shares crashing to just a few pence after enjoying a meteoric rise that at one point saw the shares trading at over one pound.
Thankfully, the past, which I will run over further along, has been largely put to bed, which sees the company now firmly concentrated on an established area of business that is cash generative and has real hopes of building growth and delivering on profitability.
A key point to commence with in terms of the investment case, is that Omega has no debt issues as it holds a significant net cash position of £6.2m, which accounts for a considerable chunk of the current £9m market cap.
That leaves very little being applied to the business, which is forecast to deliver revenues of £10m this year with an EBITDA breakeven, before moving into profit next year.
Sure, when a company has disappointed in the past and burnt investors severely, it takes both a leap of faith and a high level of belief for them to commit again and no doubt holders or buyers will be looking for firm evidence of a turnaround here before committing.
In order to hear more, on both the past issues, but importantly the way ahead, I was yesterday able to speak directly with the more recently appointed CEO Jag Grewal.
Grewal stepped into the hot seat earlier this year having joined the company as the commercial Director at the Health and Nutrition Division back in 2011, so he is well associated with the business.
Key, is that he has an extensive background across the relative field Omega now serves and amongst others, was previously Chairman at BIVDA (British In Vitro Diagnostics Association).
In speaking with Grewal, I immediately touch upon the past events that can now be deemed largely as history, in order to gain some insight into what went wrong on the business front.
He is happy to elaborate on the period which saw its then Scottish based arm firmly in the spotlight regarding Covid testing.
This related to its (now sold) Alva facility based in Scotland securing a Covid related deal with the DHSC in relation to the producing and providing of lateral flow tests that was muted at the time as being worth a potential £374m.
Unfortunately for Omega the deal subsequently fell apart resulting in a spat between the company and the DHSC in relation to payments being made by the latter, which amounted to £2.5m.
Commenting, Grewal says “we have had a long running dispute with them after they provided us with a prepayment of £2.5m for the Covid test relating to equipment and to help us expand ready for the license to manufacture. However, they didn’t proceed with the license for the company and let the contract lapse, which left us in a hole”.
Grewal adds that Omega had also spent a considerable sum of its own money on expanding and gearing up for the test manufacturing process which subsequently led to a counter claim being made by the company.
The situation now, he explains, is that both parties are committed to a process of mediation which looks likely to commence sometime in the first quarter of next year.
“We believe we have a very strong legal argument as to why we shouldn’t be paying the £2.5m and equally, we also feel we have a very strong argument regarding our claim to damages”.
No doubt this process will probably take some time to reach a conclusion, although it seems quite likely that given the process of mediation an agreement will be reached that successfully puts the issue to bed.
Having found itself in such a tight corner the decision was taken to sell its Alva operation which included the company's important and highly regarded CD4 test in the care and management space of people living with HIV.
The result was that sale proceeds of £4m were held in escrow until the purchaser was satisfied that the WHO had rubber stamped the product to continue to be sold.
That process has clearly reached the expected positive conclusion with the full money having been released and received as announced by Omega this morning.
Whilst the situation has clearly been messy and distracting, the company is now well placed to move on and Grewal is certainly keen to speak of the future.
“For the first time in my eleven years at the company it is not at the wrong end of an overdraft and we are now well funded with an extremely strong balance sheet.
As a result, we are now able to execute on our plans that are really quite exciting in the area of personalised nutrition diagnostics”.
In speaking of this business Grewal stresses that there is increasing evidence to show the correlation between gut health and a direct link to chronic diseases that takes in numerous areas such as diabetes, cancer and skin conditions where the immune systems behaviour is linked to nutrition.
Additionally, increasingly across the western world particularly in the US and the UK where there are high levels of obesity, issues around diet and nutrition are becoming a massive problem, further fueling an increase in chronic diseases.
“There is a very strong link between nutrition and health outcomes and the market we serve is primarily the consumer health market where we occupy a leadership position in sensitivity”.
This has seen Omega looking closely at the immune system over a long period of time and the resulting outcome for patients with gut issues that can also be aggravated by stress and anxiety.
“Typically, customers and patients come to us when they have been suffering from a chronic ailment and they haven’t been resolved by conventional clinical means and pathways and this could be something such as IBS”.
IBS (irritable bowel syndrome) covers a multitude of symptoms derived from gut issues, but as it isn’t clearly defined or specific is something that at present has to be managed as opposed to cured.
Grewal says that their approach at Omega is to always involve a healthcare professional in a patients journey that takes in the likes of gastroenterologists and dieticians which then sees the company providing the necessary path to healing the gut through a pathway that may, amongst others, include specific tailor made supplements.
“We occupy very important points in the journey of gut malfunction and commence the healing process of that going forward. We have a leadership position, in that our products are generally used in a clinical setting or laboratories for testing by healthcare professionals around the world”.
Indeed, Omega is something of a global player with less than 10% of its sales generated in the UK, as it sells its tests and technologies to over 85 countries across the world which also sees more than 170 labs worldwide using one or more of its products.
Within that, the US is also served, but at present makes for just a small contribution, as currently Omega only has one lab partner there.
However, Grewal tells me that the US is very much recognised as a big potential market for the company and they are now in a position to target that for growth through leveraging its platform and replicate what it has done in the UK .
In terms of sales, both the UK and India are undertaken directly, whilst the other global territories are executed in partnership with distribution partners, which helps push and drive the Omega products.
Looking ahead the CEO tells me they are now in a strong position with lots of sales channels and in many countries, which should provide more opportunities as it looks to expand its offerings.
In the last couple of weeks Omega has signed two heads of terms with different companies, one of which is to provide micro bio test reports and Grewal talks of exciting times to come.
“With no distractions now, we can concentrate on personalised nutrition going forward, which also sees us moving into the genomic space which from a medical point of view is an extremely exciting and fast-growing area”.
Worth noting, is that globally the IBS treatment market alone is estimated to grow to $4.7bn by 2030 with a CAGR of 9.5% as gastro related issues continue to increase.
Currently based at Littleport, the CEO tells me that they have plans to relocate to a large, extensive and modern site at Ely which is just sixteen miles north of the Cambridge Science Park.
He says that the new facility will increase their manufacturing facility square meterage three- fold whilst it is ideally located on the edge of the Cambridge cluster.
The headcount currently stands at 75 with the majority based at Littleport. although some are field based people and others Internationally located.
They are also currently hiring the CEO tells me and being on the edge of Cambridge it is an ideal place to secure the right people.
In terms of the strength of the business he adds that they are now very well-funded to execute on their growth plan, but crucially, he says the business is importantly generating cash.
Without the previous distractions the company now looks well placed to go on and execute as envisaged by Grewal who believes growth can be achieved.
Although it remains for now at the more speculative end, the remaining arm of the business has grown, increasing revenues from £2.3m in 2009 to £8.6m for full year 2022.
Broker FinnCap is forecasting revenue for the year in play of £10m rising to £13m next year with the latter expected to deliver a small pre-tax profit of £0.3m.
As I write, the shares stand at 3.9p seemingly finding it hard to break the 4p mark, which may prove stubborn for now.
Having had to raise further money down at 4p there are more shares in issue than I like to see, which means there are also plenty willing to trade the shares or sell into strength.
That said, the direction will be news driven here, along with evidence of growth which could come through positively given the direction and expansion of the market.
Weighing up the risks at or around the current level, it looks skewed to the upside to my eye, as there is well established and highly regarded business that shouldn’t need further funding on the organic path, particularly given that it is generating cash.
As an aside, having spoken with the CEO I am hoping to visit the HQ next year at which time I will hopefully add some further comment.