Commonwealth Income & Growth Fund VII, LP - FORM 10-Q

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EXCEL - IDEA: XBRL DOCUMENT - Commonwealth Income & Growth Fund VII, LP	Financial_Report.xls
EX-31.1 - CIGF7 063011 EXHIBIT 31_1 - Commonwealth Income & Growth Fund VII, LP	ex31_1.htm
EX-31.2 - CIGF7 063011 EXHIBIT 31_2 - Commonwealth Income & Growth Fund VII, LP	ex31_2.htm
EX-32.1 - CIGF7 063011 EXHIBIT 32_1 - Commonwealth Income & Growth Fund VII, LP	ex32_1.htm
EX-32.2 - CIGF7 063011 EXHIBIT 32_2 - Commonwealth Income & Growth Fund VII, LP	ex32_2.htm

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

T QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2011 or

¨ TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Commission File Number: 333-156357

COMMONWEALTH INCOME & GROWTH FUND VII, LP

(Exact name of registrant as specified in its charter)

Pennsylvania	26-3733264
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

Brandywine Bldg. One, Suite 200

2 Christy Drive

Chadds Ford, PA 19317

(Address, including zip code, of principal executive offices)

(484) 785-1480

(Registrant’s telephone number including area code)

Indicate by check mark whether the registrant (i) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months, and (ii) has been subject to such filing requirements for the past 90 days: YES T NO ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YES ¨ NO ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of "accelerated filer, “large accelerated filer" and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨	Smaller reporting company T
(Do not check if a smaller reporting company.)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

YES ¨ NO T

FORM 10-Q

JUNE 30, 2011

TABLE OF CONTENTS

PART I
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	13
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	16
Item 4.	Controls and Procedures	16
PART II
Item 1.	Legal Proceedings	16
Item 1A.	Risk Factors	16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	16
Item 3.	Defaults Upon Senior Securities	16
Item 5.	Other Information	16
Item 6.	Exhibits	16

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Commonwealth Income & Growth Fund VII
Condensed Balance Sheets

	June 30,			December 31,
	2011			2010
	(unaudited)

ASSETS
Cash and cash equivalents	$	9,284,380		$	4,565,356
Lease income receivable		160,332			86,373
Accounts receivable, Commonwealth Capital Corp.		182,879			1,824
Accounts receivable, General Partner		1,626			-
Prepaid expenses		2,045			3,681
		9,631,262			4,657,234

Net investment in finance leases		1,273,132			1,487,993

Technology equipment, at cost		7,044,889			3,783,727
Accumulated depreciation		(1,053,218	)		(345,386	)
		5,991,671			3,438,341

Equipment acquisition costs and deferred expenses, net of
accumulated amortization of approximately $56,000 and $18,000
at June 30, 2011 and December 31, 2010, respectively.		226,495			133,764
Prepaid acquisition fees		399,872			190,379
		626,367			324,143

Total Assets	$	17,522,432		$	9,907,711

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES
Accounts payable	$	40,244		$	8,459
Accounts payable, General Partner		-			6,589
Other accrued expenses		6,808			17,710
Unearned lease income		85,128			84,541
Notes payable		54,647			68,296
Total Liabilities		186,827			185,595

PARTNERS' CAPITAL
General Partner		1,050			1,050
Limited Partners		17,334,555			9,721,066
Total Partners' Capital		17,335,605			9,722,116

Total Liabilities and Partners' Capital	$	17,522,432		$	9,907,711



see accompanying notes to condensed financial statements

Commonwealth Income & Growth Fund VII
Condensed Statements of Operations
(unaudited)


	Three Months Ended June 30, 2011				Three Months Ended June 30, 2010			Six Months Ended June 30, 2011			For the period March 31, 2010 (Commencement of Operations) through June 30, 2010
Revenue
Lease		$	511,304			95,691			919,703			95,691
Interest and other			48,180			-			94,648			-
Gain on sale of computer equipment			851			-			1,139			-
Total revenue			560,335			95,691			1,015,490			95,691

Expenses
Operating, excluding depreciation			177,607			175,914			371,280			175,941
Equipment management fee, General Partner			28,383			4,785			51,620			4,785
Organizational costs			41,608			12,501			101,893			25,038
Interest			1,111			1,058			2,349			1,058
Depreciation			405,050			71,855			707,832			71,855
Amortization of equipment acquisition costs and deferred expenses			21,173			3,879			37,715			3,880
Total expenses			674,932			269,992			1,272,689			282,557

Net (loss)		$	(114,597	)	$	(174,301	)	$	(257,199	)	$	(186,866	)

Net (loss) allocated to limited partners		$	(118,473	)	$	(174,301	)	$	(263,919	)	$	(186,865	)

Net (loss) per equivalent limited partnership unit		$	(0.12	)	$	(2.08	)	$	(0.31	)	$	(2.24	)

Weighted average number of equivalent limited partnership units outstanding during the period			969,976			83,646			843,372			83,386


see accompanying notes to condensed financial statements

Commonwealth Income & Growth Fund VII
Condensed Statement of Partners' Capital
For the six months ended June 30, 2011
(unaudited)


	General		Limited
	Partner		Partner		General			Limited
	Units		Units		Partner			Partners			Total
Balance, January 1, 2011		50		597,462	$	1,050		$	9,721,066		$	9,722,116
Contributions		-		485,715		-			9,714,088			9,714,088
Syndication costs		-		-		-			(1,141,554	)		(1,141,554	)
Net income (loss)		-		-		6,720			(263,919	)		(257,199	)
Distributions		-		-		(6,720	)		(695,126	)		(701,846	)
Balance, June 30, 2011		50		1,083,177	$	1,050		$	17,334,555		$	17,335,605



see accompanying notes to condensed financial statements

Commonwealth Income & Growth Fund VII
Condensed Statements of Cash Flow
(unaudited)

	Six Months ended			For the period March 31, 2010 (Commencement of Operations) through
	June 30, 2011			June 30, 2010

Net cash provided by (used in) operating activities	$	165,200		$	(18,141	)

Investing activities:
Capital expenditures		(3,261,163	)		(1,161,914	)
Payment from finance leases		281,751			-
Equipment acquisition fees, General Partner		(339,940	)		(85,082	)
Net proceeds from the sale of computer equipment		2,488			-
Net cash (used in) investing activities		(3,316,864	)		(1,246,996	)

Financing activities:
Contributions		9,714,088			2,384,580
Syndication costs		(1,141,554	)		(284,957	)
Distributions to partners		(701,846	)		-
Debt placement fee paid to the General Partner		-			(857	)
Net cash provided by financing activities		7,870,688			2,098,766

Net increase in cash and cash equivalents		4,719,024			833,629

Cash and cash equivalents beginning of period		4,565,356			1,050

Cash and cash equivalents end of period	$	9,284,380		$	834,679



see accompanying notes to condensed financial statements

NOTES TO CONDENSED FINANCIAL STATEMENTS

1. Business

Commonwealth Income & Growth Fund VII, LP (the “Partnership”) is a limited partnership organized in the Commonwealth of Pennsylvania on November 14, 2008. The Partnership is offering for sale up to 2,500,000 units of the limited partnership at the purchase price of $20 per unit (the “offering”). The Partnership reached the minimum amount in escrow and commenced operations on March 31, 2010.

The Partnership will use the proceeds of the offering to acquire, own and lease various types of information technology equipment and other similar capital equipment, which will be leased primarily to U.S. corporations and institutions. Commonwealth Capital Corp. (“CCC”), on behalf of the Partnership and other affiliated partnerships, acquires computer equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships that it manages based on certain risk factors.

The Partnership’s General Partner is Commonwealth Income & Growth Fund, Inc. (the “General Partner”), a Pennsylvania corporation which is an indirect wholly owned subsidiary of CCC. CCC is a member of the Investment Program Association (IPA), Real Estate Investment Securities Association (REISA), Financial Planning Association (FPA), and the Equipment Leasing and Finance Association (ELFA). Approximately ten years after the commencement of operations, the Partnership intends to sell or otherwise dispose of all of its equipment, make final distributions to partners, and to dissolve. Unless sooner terminated or extended pursuant to the terms of its Limited Partnership Agreement, the Partnership will continue until December 31, 2021.

2. Summary of Significant Accounting Policies

Basis of Presentation

The financial information presented as of any date other than December 31, 2010 has been prepared from the books and records without audit. Financial information as of December 31, 2010 has been derived from the audited financial statements of the Partnership, but does not include all disclosures required by generally accepted accounting principles to be included in audited financial statements. In the opinion of management, all adjustments, consisting only of normal recurring adjustments, necessary for a fair presentation of the financial information for the periods indicated, have been included. Operating results for the six months ended June 30, 2011 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2011.

Disclosure of Fair Value of Financial Instruments

Estimated fair value was determined by management using available market information and appropriate valuation methodologies. However, judgment was necessary to interpret market data and develop estimated fair value. Cash, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of June 30, 2011 and December 31, 2010.

The Partnership’s long-term debt consists of notes payable, which are secured by specific computer and technology equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at June 30, 2011 and December 31, 2010 approximates the carrying value of these instruments, due to the interest rates approximating current market values.

Disclosure about fair value of financial instruments is based on pertinent information available to management as of June 30, 2011 and December 31, 2010.

Cash and cash equivalents

We consider cash and cash equivalents to be cash on hand and highly liquid investments with the original maturity dates of 90 days or less.

At June 30, 2011, cash was held in two bank accounts maintained at one financial institution with an aggregate balance of approximately $9,286,000. Bank accounts are federally insured up to $250,000, while pursuant to the Dodd/Frank Act of 2010, some accounts are fully insured by the FDIC. At June 2011, the total cash bank balance was as follows:

At June 30, 2011	Amount
Total bank balance	$	9,286,000
FDIC insured		(271,000	)
Uninsured amount	$	9,015,000

The Partnership mitigates the risk of holding uninsured deposits by only depositing funds with major financial institutions. The Partnership has not experienced any losses in our accounts, and believes it is not exposed to any significant credit risk. The amounts in such accounts will fluctuate throughout 2011 due to many factors, including the pace of additional limited partner contributions, cash receipts, equipment acquisitions and distributions to limited partners.

Organizational and Syndication Costs

The General Partner is entitled to be paid an organizational fee for its organizational expenses incurred for its services in organizing the Partnership and preparing the offering. The amount of this fee is based on amounts of units sold in our public offering. Organizational costs are expensed as incurred in the statement of operations. In addition, the General Partner will pay underwriting commissions of up to 10% (consisting of 7% selling commission, 2% dealer manager fee and up to 1% marketing reallowance). These commissions are nondeductible syndication expenses, which are charged against the capital accounts of limited partners.

Recent Accounting Pronouncements

In May of 2011, the FASB issued ASU No. 2011-04 (“ASC Update 2011-04”), Common Fair Value Measurements and Disclosure Requirements in U.S. GAAP and IFRS. This ASU is intended to update the fair value measurement and disclosure requirements in US GAAP for measuring fair value and for disclosing information about fair value measurements. Some of the amendments clarify the Board’s intent about application of existing fair value measurement requirements, while others change a particular principle or requirement for measuring or disclosing fair value measurement information. The amendments in this update are for interim and annual periods beginning after December 15, 2011. The Partnership is currently evaluating the effect this ASU will have on its financial statements.

In April of 2011, the FASB issued ASU No. 2011-03 (“ASC Update 2011-03”), Reconsideration of Effective Control for Repurchase Agreements. This ASU is intended to improve financial reporting of repurchase agreements (“repos”) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The amendments in this Update are effective for the fiscal quarters and years that start on or after December 15, 2011. Early adoption is not permitted. The Partnership is currently evaluating the effect this ASU will have on its financial statements.

In April 2011, the FASB issued ASU No. 2011-02 (“ASC Update 2011-02”) A Creditor’s Determination of Whether a Restructuring Is a Troubled Debt Restructuring. This ASU provides additional guidance on a creditor’s evaluation of whether it has granted a concession and whether a debtor is experiencing financial difficulties. The additional guidance is intended to create additional consistency in the application of generally accepted accounting principles (GAAP) for debt restructuring. The amendments in this Update are effective for the first interim or annual period beginning on or after June 15, 2011, and should be applied retrospectively to the beginning of the annual period of adoption. The Partnership is currently evaluating the effect this ASU will have on its financial statements.

In January 2011, the FASB issued ASU No. 2011-01 (“ASC Update 2011-01”), Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. This ASU temporarily delays the effective date for public entities of the disclosures about troubled debt restructurings (TDRs) in ASU No. 2010-20, Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. This guidance was effective for interim and annual periods ending after June 15, 2011. The Partnership adopted this ASU during the second quarter of 2011 and it did not have a material effect on its financial statements.

3. Information Technology Equipment

The Partnership is the lessor of equipment under operating leases with periods that generally will range from 12 to 48 months. In general, associated costs such as repairs and maintenance, insurance and property taxes are paid by the lessee.

Remarketing fees will be paid to the leasing companies from which the Partnership purchases leases. These are fees that are earned by the leasing companies when the initial terms of the lease have been met. The General Partner believes that this strategy adds value since it entices the leasing company to remain actively involved with lessee and encourages potential extensions, remarketing or sale of the equipment. This strategy is designed to minimize any conflicts the leasing company may have with a new lessee and may assist in maximizing overall portfolio performance. The remarketing fee is tied into lease performance thresholds and is a factor in the negotiation of the fee. No such fees were incurred for the six months ended June 30, 2011.

CCC, on behalf of the Partnership and on behalf of other affiliated partnerships, acquires technology equipment subject to associated debt obligations and lease agreements and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors.

The Partnership’s share of the equipment in which it participates with other partnerships at June 30, 2011 was approximately $3,399,000 and is included in the Partnership’s fixed assets on its balance sheet. The Partnership’s share of the outstanding debt associated with this equipment at June 30, 2011 was approximately $55,000.

The total cost of the equipment shared by the Partnership with other partnerships at June 30, 2011 was approximately $9,629,000. The total outstanding debt related to the equipment shared by the Partnership at June 30, 2011 was approximately $546,000.

The Partnership’s share of the computer equipment in which it participates with other partnerships at December 31, 2010 was approximately $1,591,000 and is included in the fixed assets on its balance sheet. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2010 was approximately $68,000.

The total cost of the equipment shared by the Partnership with other partnerships at December 31, 2010 was approximately $4,880,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2010 was approximately $683,000.

As the Partnership and the other programs managed by the General Partner increase their overall portfolio size, opportunities for shared participation are expected to continue. Sharing in the acquisition of a lease portfolio gives the fund an opportunity to acquire additional assets and revenue streams, while allowing the fund to remain diversified and reducing its overall risk with respect to one portfolio. Thus, total shared equipment and related debt should continue to trend higher for the remainder of 2011 as the Partnership builds its portfolio.

The following is a schedule of future minimum rentals on non-cancellable operating leases at June 30, 2011:

	Amount
Six Months ended December 31, 2011	$	1,130,000
Year ended December 31, 2012		2,161,000
Year ended December 31, 2013		1,670,000
Year ended December 31, 2014		214,000
	$	5,175,000

The following lists the components of the net investment in direct financing leases at June 30, 2011:

	Amount
Total minimum lease payments to be received	$	1,299,000
Initial Direct Costs		39,000
Estimated residual value of leased equipment (unguaranteed)		134,000
Less: unearned income		(199,000	)
Net investment in direct finance leases	$	1,273,000

Our finance lease customers operate in various industries, and we have no significant customer concentration in any one industry. We assess credit risk for all of our customers, including those that lease under finance leases. This credit risk is assessed using an internally developed model which incorporates credits scores from third party providers and our own customer risk ratings and is periodically reviewed. Our internal ratings are weighted based on the industry that the customer operates in. Factors taken into consideration when assessing risk includes both general and industry specific qualitative and quantitative metrics. We separately take in to consideration payment history, open lawsuits, liens and judgments. Typically, we will not extend credit to a company that has been in business for less than 5 years or that has filed for bankruptcy within the same period. Our internally based model may classify a company as high risk based on our analysis of their audited financial statements. Additional considerations of high risk may include history of late payments, open lawsuits and liens or judgments. In an effort to mitigate risk, we typically require deposits from those in this category. The following table presents the credit risk profile, by creditworthiness category, of our finance lease receivables at June 30, 2011:

Risk Level	Percent of Total
Low	-		%
Moderate-Low	-		%
Moderate	1		%
Moderate-High		99	%
High		-	%
Net finance lease receivable		100	%

As of June 30, 2011we determined that there was no need for an allowance for uncollectible accounts associated with any of our finance leases, as there was no material risk of default.

The following is a schedule of future minimum rentals on noncancelable direct financing leases at June 30, 2011:

	Amount
Six Months ended December 31, 2011	$	282,000
Year ended December 31, 2012		564,000
Year ended December 31, 2013		375,000
Year ended December 31, 2014		77,000
Year ended December 31, 2015		1,000
	$	1,299,000

4. Related Party Transactions

Receivables/Payables

As of June 30, 2011, the Partnership’s related party payables are short term, unsecured, and non-interest bearing.

OFFERING AND ORGANIZATION STAGE
Selling commissions and dealer manager fees	For the six months ended June 30, 2011		For the period March 31, 2010 (Commencement of Operations) through June 30, 2010
We will pay to the dealer manager an amount of up to nine percent of capital contributions as underwriting commissions. The dealer manager will reallow to participating broker-dealers out of underwriting commissions a selling commission of up to seven percent of the capital contributions from units sold by such participating brokers. The Dealer Manager will retain the remaining two percent as a Dealer Manager Fee. The actual amount of the underwriting commissions may vary due to the volume discounts available to investors purchasing certain quantities of units. This amount is included in offering costs of the Partnership on the Statement of Partner’s Capital.	$	856,000	$	215,000

Marketing reallowance
We will pay a marketing reallowance of up to 1% of capital contributions to our dealer manager, all of which is expected to be reallowed to certain participating broker-dealers. The reallowance is designed to reimburse those broker-dealers that meet certain requirements for marketing expenses, such as bona fide training and education seminars and related conferences. The actual amount of marketing reallowance paid will depend upon the number of firms earning the reallowance and the agreed upon percentage paid to each selling firm. In no circumstances are any amounts paid to our dealer manager as a marketing reallowance to be retained by the dealer manager. Any amount of this fee not paid out to participating broker-dealers will be returned by the dealer manager to the Partnership. This amount is included in offering costs of the Partnership on the Statement of Partner’s Capital.		$	97,000			$	24,000

Organizational expenses
We pay the general partner an organizational fee equal to three percent of the first $25,000,000 of limited partners’ capital contributions and two percent of the limited partners’ capital contributions in excess of $25,000,000, as reimbursement for the organization of the Partnership. It is anticipated that the organizational and offering expenses, which include legal, accounting and printing expenses, various registration and filing fees, miscellaneous expenses related to the organization and formation of the Partnership, bona fide due diligence expenses, other costs of registration and costs incurred in connection with the preparation, printing and distribution of this prospectus and related sales literature will be as high as $1,377,465, of which the general partner will pay up to $1,250,000 out of its organizational fee it receives as units are sold. We will pay any costs above $1,250,000 out of offering proceeds. If costs are below $1,250,000, the general partner will reimburse us for any payments it received during the offering that exceed this amount. This amount is included in offering and organizational costs of the Partnership on the Statement of Partner’s Capital and on the Statement of Operations.	$	291,000	$	72,000

OPERATIONAL AND SALE OR LIQUIDATION STAGES
Reimbursable Expenses
Reimbursable expenses, which are charged to the Partnership by CCC in connection with the administration and operation of the Partnership, are allocated to the Partnership based upon several factors including, but not limited to, the number of investors, compliance issues, and the number of existing leases.	$	349,000	$	113,000

Equipment acquisition fee
The General Partner earned an equipment acquisition fee of 4% of the purchase price of each item of equipment purchased as compensation for the negotiation of the acquisition of the equipment and lease thereof or sale under a conditional sales contract. At June 30, 2011, the remaining balance of prepaid acquisition fees was approximately $400,000, which is expected to be earned in future periods.	$	130,000	$	50,000

Debt placement fee
As compensation for arranging term debt to finance our acquisition of equipment, we will pay the general partner a fee equal to one percent of such indebtedness; provided, however, that such fee shall be reduced to the extent we incur such fees to third parties unaffiliated with the general partner or the lender with respect to such indebtedness. No such fee will be paid with respect to borrowings from the general partner or its affiliates. We intend to initially acquire leases on an all cash basis with the proceeds of this offering, but may borrow funds after the offering proceeds have been invested. The amount we borrow, and therefore the amount of the fee, will depend upon interest rates at the time of a loan, and the amount of leverage we determine is appropriate at the time. We do not intend to use more than 30% leverage overall in our portfolio. Fees will increase as the amount of leverage we use increases, and as turnover in the portfolio increases and additional equipment is purchased using leverage.		$	-			$	1,000


Equipment management fee
We pay our general partner a monthly fee equal to the lesser of (a) the fees which would be charged by an independent third party in the same geographic market for similar services and equipment or (b) the sum of (i) two percent of gross lease revenues attributable to equipment subject to full payout net leases which contain net lease provisions and (ii) five percent of the gross lease revenues attributable to equipment subject to operating leases. Our general partner, based on its experience in the equipment leasing industry and current dealings with others in the industry, will use its business judgment to determine if a given fee is competitive, reasonable and customary. The amount of the fee will depend upon the amount of equipment we manage, which in turn will depend upon the amount we raise in this offering. Reductions in market rates for similar services would also reduce the amount of this fee we will receive.	$	52,000	$	5,000

Equipment liquidation fee
Also referred to as a "resale fee." With respect to each item of equipment sold by the general partner, we will pay a fee equal to the lesser of (i) 50% of the competitive equipment sale commission or (ii) three percent of the sales price of the equipment. The payment of this fee is subordinated to the receipt by the limited partners of (i) a return of their capital contributions and a 10% per annum cumulative return, compounded daily, on adjusted capital contributions and (ii) the net disposition proceeds from such sale in accordance with the partnership agreement. Our general partner, based on its experience in the equipment leasing industry and current dealings with others in the industry, uses its business judgment to determine if a given sales commission is competitive, reasonable and customary. Such fee will be reduced to the extent any liquidation or resale fees are paid to unaffiliated parties. The amount of such fees will depend upon the sale price of equipment sold. Sale prices will vary depending upon the type, age and condition of equipment sold. The shorter the terms of our leases, the more often we may sell equipment, which will increase liquidation fees we receive.		$	-			$	-

5. Notes Payable

Notes payable consisted of the following approximate amounts:

		June 30, 2011				December 31, 2010
Installment note payable to bank; interest at 7.5% due in monthly installments of $2,666, including interest, with final payment in April 2013		$	55,000			$	68,000

The notes are secured by specific computer equipment and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any debt covenants with which we must comply on either an annual or quarterly basis. Aggregate maturities of notes payable for each of the periods subsequent to June 30, 2011 are as follows:

	Amount
Six months ended December 31, 2011	$	14,000
Year ended December 31, 2012		30,000
Year ended December 31, 2013		11,000
	$	55,000

6. Supplemental Cash Flow Information

Other noncash activities included in the determination of net loss are as follows:

		Six months ended June 30, 2011				For the period March 31, 2010 (Commencement of Operations) through June 30, 2010
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank		$	14,000			$	4,000

No interest or principal on notes payable was paid by the Partnership because direct payment was made by lessee to the bank in lieu of collection of lease income and payment of interest and principal by the Partnership.

Noncash investing and financing activities include the following:

	Six months ended June 30, 2011		For the period March 31, 2010 (Commencement of Operations) through June 30, 2010
Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees	$	130,000	$	50,000

Debt assumed in connection with purchase of technology equipment	$	-	$	86,000

Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD LOOKING STATEMENTS

Forward-looking statement disclaimers, or the “Safe Harbor” Statement under the Private Securities Litigation Reform Act of 1995.

This section, as well as other portions of this document, includes certain forward-looking statements about our business and our prospects, tax treatment of certain transactions and accounting matters, sales of securities, expenses, cash flows, distributions, investments and operating and capital requirements. Such forward-looking statements include, but are not limited to: acquisition policies of our general partner; the nature of present and future leases; provisions for uncollectible accounts; the strength and sustainability of the U.S. economy; the continued difficulties in the credit markets and their impact on the economy in general; and the level of future cash flow, debt levels, revenues, operating expenses, amortization and depreciation expenses. You can identify those statements by the use of words such as “could,” “should,” “would,” “may,” “will,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and “contemplate,” as well as similar words and expressions.

Actual results may differ materially from those in any forward-looking statements because any such statements involve risks and uncertainties and are subject to change based upon various important factors, including, but not limited to, nationwide economic, financial, political and regulatory conditions; the health of debt and equity markets, including interest rates and credit quality; the level and nature of spending in the information, medical and telecommunications technologies markets; and the effect of competitive financing alternatives and lease pricing.

Readers are also directed to other risks and uncertainties discussed in other documents we file with the SEC, including, without limitation, those discussed in Item 1A. “Risk Factors” of our Annual Report on Form 10-K for the fiscal year ended December 31, 2010 filed with the SEC. We undertake no obligation to update or revise any forward-looking information, whether as a result of new information, future developments or otherwise.

CRITICAL ACCOUNTING POLICIES

Our discussion and analysis of our financial condition and results of operations are based upon our financial statements which have been prepared in accordance with generally accepted accounting principles in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. We base our estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe that our critical accounting policies affect our more significant judgments and estimates used in the preparation of our financial statements.

See Note 2 to our condensed financial statements included herein for a discussion of recent accounting pronouncements.

INFORMATION TECHNOLOGY EQUIPMENT

CCC, on our behalf and on behalf of other affiliated partnerships, acquires information technology equipment subject to associated debt obligations and lease revenue and allocates a participation in the cost, debt and lease revenue to the various partnerships based on certain risk factors. Depreciation on information technology equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to four years.

The Equipment Lease Finance Association (“ELFA”) Monthly Leasing and Finance Index which reports economic activity for the $521 billion equipment finance sector, showed overall new business volume for the 2nd Quarter of 2011 increasing 28.5% relative to the second quarter of 2010. Credit quality continues to improve as the rate of receivables aged in excess of 30 days has improved on average 24% from the 2nd quarter of 2010 through the 2nd quarter of 2011. Sixty-three percent of ELFA reporting members reported submitting more transactions for approval during the 2nd quarter 2011 compared to the same period the year prior. For 2011-2012 ELFA has forecast a 12% increase in finance volume year over year.

ACCOUNTS RECEIVABLE

We monitor our accounts receivable to ensure timely and accurate payment by lessees. Our Lease Relations department is responsible for monitoring accounts receivable and, as necessary, resolving outstanding invoices.

We review a customer’s credit history before extending credit. In the event of a default, we may establish a provision for uncollectible accounts receivable based upon the credit risk of specific customers, historical trends or other information.

REVENUE RECOGNITION

Through June 30, 2011, the Partnership’s leasing operations consisted of operating and direct finance leases. Operating lease revenue is recognized on a monthly basis in accordance with the terms of the lease agreement. For finance leases, we record, at lease inception, unearned finance lease income which is calculated as follows: total lease payments, plus any residual value and initial direct costs, less the cost of the leased equipment. Interest income is earned on the finance lease receivable over the lease term using the interest method. As required, at each reporting period, management evaluates the finance lease for impairment and considers any need for an allowance for credit losses.

Our leases do not contain any step-rent provisions or escalation clauses nor are lease revenues adjusted based on any index.

LONG-LIVED ASSETS

We evaluate our long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. We determine whether impairment exists by estimating the undiscounted cash flows to be generated by each asset. If the estimated undiscounted cash flows are less than the carrying value of the asset then impairment exists. The amount of the impairment is determined based on the difference between the carrying value and the fair value. Fair value is determined based on estimated discounted cash flows to be generated by the asset.

Depreciation on computer equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to four years.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary source of cash for the six months ended June 30, 2011 was limited partner contributions of approximately $9,714,000, compared to the period March 31, 2010 (Commencement of Operations) through June 30, 2010 where our primary source of cash was limited partner contributions of approximately $2,385,000. Our primary use of cash for the six months ended June 30, 2011 was for the purchase of new information technology equipment of approximately $3,261,000, syndication costs of $1,142,000 and distributions to partners of approximately $702,000. For the period March 31, 2010 (Commencement of Operations) through June 30, 2010, our primary use of cash was for the purchase of new information technology equipment of approximately $1,162,000 and syndication costs of approximately $285,000. There were no distributions made to partners during the period March 31, 2010 (Commencement of Operations) through June 30, 2010.

Cash was provided by operating activities for the six months ended June 30, 2011 of approximately $165,000, and includes a net loss of approximately $257,000 and depreciation and amortization expenses of approximately $746,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $14,000.

This compares to the period March 31, 2010 (Commencement of Operations) through June 30, 2010 where cash was used in operating activities of approximately $18,000, which includes a net loss of approximately $187,000 and depreciation and amortization expenses of approximately $76,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $4,000.

As we continue to receive contributions from limited partners during our public offering and increase the size of our technology equipment portfolio, we anticipate an increase in our revenues. We also foresee operating expenses increasing, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing this equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes. Additionally, depreciation expenses will likely increase more rapidly than operating expenses as we add technology equipment to our portfolio.

We intend to invest additional funds in equipment during the remainder of 2011. The amount we invest can not be reliably determined at this time, as it is dependent upon the amount of additional capital contributions we will raise from limited partners in our public offering. We expect that investment in equipment may be approximately $13,000,000 or more during the remainder of 2011, depending on the success of the offering and the availability of investment opportunities. The acquisition of this equipment will be primarily funded with cash and some debt financing.

We consider cash and cash equivalents to be cash on hand and highly liquid investments with the original maturity dates of 90 days or less.

At June 30, 2011	Amount
Total bank balance	$	9,286,000
FDIC insured		(271,000	)
Uninsured amount	$	9,015,000

As of June 30, 2011, we had future minimum rentals on non-cancelable operating leases of approximately $1,130,000 for the balance of the year ending December 31, 2011 and approximately $4,045,000 thereafter. As of June 30, 2011, we had future minimum rentals on non-cancelable finance leases of approximately $282,000 for the balance of the year ending December 31, 2011 and approximately $1,017,000 thereafter.

As of June 30, 2011, our debt was approximately $55,000 with an interest rate of 7.50% and is payable through April 2013.

RESULTS OF OPERATIONS

Three months ended June 30, 2011 compared to three months ended June 30, 2010

Revenue

For the three months ended June 30, 2011, we recognized revenue of approximately $560,000, compared to the three months ended June 30, 2010, when we recognized revenue of approximately $96,000. This increase in revenue from the prior period is primarily due to the fact that the Partnership is actively acquiring new leases.

Our lease revenue increased to approximately $511,000 for the three months ended June 30, 2011, from approximately $96,000 for the three months ended June 30, 2010. This increase was also primarily due the acquisition of new leases.

Interest revenue from finance leases and cash held at financial institutions increased to approximately $48,000 for the three months ended June 30, 2011 from $0 for the three months ended June 30, 2010, which is consistent with our acquisition of finance leases and the increase in cash deposited in the bank.

The balances in our revenue accounts will fluctuate throughout 2011 due to many factors, including the pace of cash receipts, equipment acquisitions and distributions to limited partners.

Sale of Information Technology Equipment

We sold equipment with a net book value of approximately $1,000 for the three months ended June 30, 2011 for a net gain of approximately $1,000. For the three months ended June 30, 2010, we did not sell any equipment.

Operating Expenses

Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses were approximately $178,000 and $176,000 for the periods ending June 30, 2011 and March 31, 2010 (Commencements of Operations) through June 30, 2010, respectively.

Equipment Management Fees

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and 2% of the gross lease revenue attributable to equipment that is subject to finance leases. The total equipment management fee increased to approximately $28,000 for the three months ended June 30, 2011, compared to approximately $5,000 of equipment management fees charged for the three months ended June 30, 2010. This increase is consistent with the increase in lease volume and revenue. As offering proceeds continue to be utilized for the acquisition of equipment, management fees are expected to increase throughout the remainder of 2011 as our equipment and lease portfolio grows.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on technology equipment and amortization of equipment acquisition fees. These expenses increased to approximately $426,000 for the three months ended June 30, 2011, from approximately $76,000 for the three months ended June 30, 2010. This increase was due to the acquisition of new equipment associated with the purchase of new leases.

Six months ended June 30, 2011 compared to the period of March 31, 2010 (Commencement of Operations) through June 30, 2010

Revenue

For the six months ended June 30, 2011, we recognized revenue of approximately $1,015,000, compared to the period of March 31, 2010 (Commencement of Operations) through June 30, 2010, when we recognized revenue of approximately $96,000. This increase in revenue from the prior period is consistent with the continued acquisition of new leases.

Our lease revenue increased to approximately $920,000 for the six months ended June 30, 2011, from approximately $96,000 for the period of March 31, 2010 (Commencement of Operations) through June 30, 2010. This increase was also primarily due the acquisition of new leases.

Interest revenue from finance leases and cash held at financial institutions increased to approximately $95,000 for the six months ended June 30, 2011 from approximately $0 for the period of March 31, 2010 (Commencement of Operations) through June 30, 2010, which is consistent with our acquisition of finance leases and the increase in cash deposited in the bank.

The balances in our revenue accounts will fluctuate throughout 2011 due to many factors, including the pace of cash receipts, equipment acquisitions and distributions to limited partners.

Sale of Information Technology Equipment

We sold equipment with a net book value of approximately $1,400 for the six months ended June 30, 2011 for a net gain of approximately $1,100. For the period of March 31, 2010 (Commencement of Operations) through June 30, 2010, we did not sell any equipment.

Operating Expenses

Our operating expenses, excluding depreciation, primarily consist of accounting and legal fees, outside service fees and reimbursement of expenses to CCC for administration and operation of the Partnership. These expenses increased to approximately $371,000 for the six months ended June 30, 2011, from approximately $176,000 for the period of March 31, 2010 (Commencement of Operations) through June 30, 2010. This increase is primarily attributable to increases in administrative expenses associated with management of the fund.

Equipment Management Fees

We pay an equipment management fee to our general partner for managing our equipment portfolio. The equipment management fee is approximately 5% of the gross lease revenue attributable to equipment that is subject to operating leases and 2% of the gross lease revenue attributable to equipment that is subject to finance leases. The total equipment management fee increased to approximately $52,000 for the six months ended June 30, 2011, compared to approximately $5,000 of equipment management fees charged for the period of March 31, 2010 (Commencement of Operations) through June 30, 2010. This increase is consistent with the increase in lease volume and revenue. As offering proceeds continue to be utilized for the acquisition of equipment, management fees are expected to increase throughout the remainder of 2011 as our equipment and lease portfolio grows.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on technology equipment and amortization of equipment acquisition fees. These expenses increased to approximately $746,000 for the six months ended June 30, 2011, from approximately $76,000 for the period of March 31, 2010 (Commencement of Operations) through June 30, 2010. This increase was due to the acquisition of new equipment associated with the purchase of new leases.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

N/A

Item 4. Controls and Procedures

Our management, under the supervision and with the participation of the Chief Executive Officer and Principal Financial Officer, have evaluated the effectiveness of our controls and procedures related to our reporting and disclosure obligations as of June 30, 2011 which is the end of the period covered by this Quarterly Report on Form 10-Q. Based on that evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective to provide that (a) material information relating to us, including our consolidated affiliates is made known to these officers by us and our consolidated affiliates’ other employees, particularly material information related to the period for which this periodic report is being prepared; and (b) this information is recorded, processed, summarized, evaluated and reported, as applicable, within the time periods specified in the rules and forms promulgated by the Securities and Exchange Commission. There were no changes in the Partnership’s internal control over financial reporting during the second quarter of 2011 that have materially affected or are reasonably likely to materially affect its internal control over financial reporting.

Part II: OTHER INFORMATION

Item 1. Legal Proceedings

N/A

Item 1A. Risk Factors

Changes in economic conditions could materially and negatively affect our business.

Our business is directly impacted by factors such as economic, political, and market conditions, broad trends in industry and finance, legislative and regulatory changes, changes in government monetary and fiscal policies, and inflation, all of which are beyond our control. Although we are experiencing a modest improvement in the global economy in 2011, the economic recovery continues to remain somewhat weak, and a prolonged period of economic weakness could result in the following consequences, any of which could materially affect our business: lease delinquencies may increase; problem leases and defaults could increase; and demand for information technology products generally may decrease as businesses attempt to reduce expenses.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

N/A

Item 3. Defaults Upon Senior Securities

N/A

Item 5. Other Information

N/A

Item 6. Exhibits

31.1 RULE 15d-14(a) CERTIFICATION OF CHIEF EXECUTIVE OFFICER

31.2 RULE 15d-14(a) CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

32.1 SECTION 1350 CERTIFICATION OF CHIEF EXECUTIVE OFFICER

32.2 SECTION 1350 CERTIFICATION OF PRINCIPAL FINANCIAL OFFICER

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	COMMONWEALTH INCOME & GROWTH FUND VII, LP
	BY: COMMONWEALTH INCOME & GROWTH FUND, INC., General Partner

August 12, 2011	By: /s/ Kimberly A. Springsteen-Abbott
Date	Kimberly A. Springsteen-Abbott
	Chief Executive Officer


August 12, 2011	By: /s/ Lynn A. Franceschina
Date	Lynn A. Franceschina
	Executive Vice President, Chief Operating Officer

Commonwealth Income & Growth Fund VII, LP - FORM 10-Q - August 12, 2011

Attached files

Commonwealth Income & Growth Fund VII, LP Reports