Hi Thomas
Firstly, i would suggest having two sites is not you trying to monopolies the market. There are many companies out there that have several sites all connected to each other and who are selling various types of products. Have one page about a product you sell and then developing a website within that niche to sell that one product shouldn't be an issue. I have worked with websites before that have done what you have done.
However, i am assuming they designed your other site as well as your main site? At which point this didn't point out their "concerns"?
The last Penguin 2.1 update was around October and the one before that in May. The Penguin update is meant to improve the search results by targeting spam website. Those that have bought links or who have been adding their website to websites specifically boost Google Rankings. This article should explain it better. http://searchengineland.com/library/google/google-penguin-update
I noticed that you said there is no Google Analytic in place? This is very odd for a company that is meant to be doing your SEO. How do they track anything or even see what keywords your customers are coming in onto your site.
I would suggest that they have dropped the ball, if they ever had it. Now your site is suffering and they are blaming Google for it. If they had always been doing your SEO and correctly then there shouldn't have been such a massive dip in your listings. Yes sometimes you can be unlucky. However, from what you have said and the way that Penguin works it shouldn't have affected you this much because of one page and one website.
I would advise you not to pay the £1250 plus VAT. Firstly that is a large amount of money. I would also suggest that you consider shopping around for a new SEO company. That would be my personal thoughts after doing SEO for a few years.
Bex