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-31.2 - CIGF7 EXHIBIT 31.2 06-30-12 - Commonwealth Income & Growth Fund VII, LP	ex31_2.htm
EX-32.1 - CIGF7 EXHIBIT 32.1 06-30-12 - Commonwealth Income & Growth Fund VII, LP	ex32_1.htm
EX-31.1 - CIGF7 EXHIBIT 31.10 6-30-12 - Commonwealth Income & Growth Fund VII, LP	ex31_1.htm
EX-32.2 - CIGF7 EXHIBIT 32.2 06-30-12 - 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, 2012 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 T 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, 2012

TABLE OF CONTENTS

PART I
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	11
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	13
Item 4.	Controls and Procedures	13
PART II
Item 1.	Legal Proceedings	13
Item 1A.	Risk Factors	13
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	13
Item 3.	Defaults Upon Senior Securities	13
Item 4.	Mine Safety Disclosures	13
Item 5.	Other Information	13
Item 6.	Exhibits	13

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

Commonwealth Income & Growth Fund VII
Condensed Balance Sheets
(unaudited)

	June 30,				December 31,
	2012				2011
	(unaudited)

ASSETS
Cash and cash equivalents		$	13,403,339		$	16,126,949
Lease income receivable			117,156			147,592
Accounts receivable, Commonwealth Capital Corp.			387,369			320,588
Accounts receivable, affiliated limited partnerships			5,373			-
Prepaid expenses			4,240			656
			13,917,477			16,595,785

Net investment in finance leases			809,315			1,047,356

Equipment, at cost			11,441,991			9,019,363
Accumulated depreciation			(3,336,990	)		(2,052,270	)
			8,105,001			6,967,093

Equipment acquisition costs and deferred expenses, net of
accumulated amortization of approximately $178,000 and $109,000 at June 30, 2012 and December 31, 2011, respectively			288,048			259,068
Prepaid acquisition fees			578,368			670,052
			866,416			929,120

Total Assets		$	23,698,209		$	25,539,354

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES
Accounts payable		$	55,623		$	45,520
Accounts payable, General Partner			51,910			50,554
Other accrued expenses			57,102			3,321
Unearned lease income			156,122			219,314
Notes payable			570,326			639,628
Total Liabilities			891,083			958,337

PARTNERS' CAPITAL
General Partner			1,050			1,050
Limited Partners			22,806,076			24,579,967
Total Partners' Capital			22,807,126			24,581,017

Total Liabilities and Partners' Capital		$	23,698,209		$	25,539,354



see accompanying notes to condensed financial statements

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


	Three Months Ended June 30, 2012				Three Months Ended June 30, 2011			Six Months Ended June 30, 2012			Six Months Ended June 30, 2011
Revenue
Lease		$	838,564		$	511,304		$	1,573,718		$	919,703
Interest and other			29,118			48,180			62,700			94,648
Gain on sale of computer equipment			-			851			-			1,139
Total revenue			867,682			560,335			1,636,418			1,015,490

Expenses
Operating, excluding depreciation			309,915			177,607			556,045			371,280
Equipment management fee, General Partner			44,746			28,383			84,321			51,620
Organizational costs			-			41,608			-			101,893
Interest			6,490			1,111			12,163			2,349
Depreciation			697,248			405,050			1,284,720			707,832
Amortization of equipment acquisition costs and deferred expenses			37,417			21,173			68,950			37,715
Total expenses			1,095,816			674,932			2,006,199			1,272,689

Net (loss)		$	(228,134	)	$	(114,597	)	$	(369,781	)	$	(257,199	)

Net (loss) allocated to Limited Partners		$	(234,930	)	$	(118,473	)	$	(383,822	)	$	(263,919	)

Net (loss) per equivalent Limited Partnership unit		$	(0.15	)	$	(0.12	)	$	(0.24	)	$	(0.31	)

Weighted average number of equivalent limited partnership units outstanding during the period			1,572,900			969,976			1,572,900			843,372


see accompanying notes to condensed financial statements

Commonwealth Income & Growth Fund VII
Condensed Statement of Partners' Capital
For the six months ended June 30, 2012
(unaudited)


	General		Limited
	Partner		Partner		General			Limited
	Units		Units		Partner			Partners			Total
Balance, January 1, 2012		50		1,572,900	$	1,050		$	24,579,967		$	24,581,017
Net income (loss)		-		-		14,041			(383,822	)		(369,781	)
Distributions		-		-		(14,041	)		(1,390,069	)		(1,404,110	)
Balance, June 30, 2012		50		1,572,900	$	1,050		$	22,806,076		$	22,807,126



see accompanying notes to condensed financial statements

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

	Six Months ended			Six Months ended
	June 30, 2012			June 30, 2011

Net cash provided by operating activities	$	725,123		$	165,200

Investing activities:
Capital Expenditures		(2,320,128	)		(3,261,163	)
Payments received from finance leases		281,751			281,751
Equipment acquisition fees, General Partner		(5,221	)		(339,940	)
Net proceeds from the sale of computer equipment		-			2,488
Net cash (used in) investing activities		(2,043,598	)		(3,316,864	)

Financing activities:
Contributions		-			9,714,088
Syndication costs		-			(1,141,554	)
Distributions to partners		(1,404,110	)		(701,846	)
Debt placement fee paid to the General Partner		(1,025	)		-
Net cash (used in) provided by financing activities		(1,405,135	)		7,870,688

Net (decrease) increase in cash and cash equivalents		(2,723,610	)		4,719,024

Cash and cash equivalents beginning of period		16,126,949			4,565,356

Cash and cash equivalents end of period	$	13,403,339		$	9,284,380



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 offered for sale up to 2,500,000 units of limited partnership interest 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 offering terminated on November 22, 2011 with 1,572,900 units sold for a total of approximately $31,432,000 in limited partner contributions.

The Partnership uses the proceeds of the offering to acquire, own and lease various types of computer information technology, medical technology, telecommunications technology, inventory management and other similar capital equipment, which is 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 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), 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, 2011 has been prepared from the books and records without audit. Financial information as of December 31, 2011 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, 2012 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2012.

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 and cash equivalents, receivables, accounts payable and accrued expenses and other liabilities are carried at amounts which reasonably approximate their fair values as of June 30, 2012 and December 31, 2011 due to the short term nature of these financial instruments.

The Partnership’s long-term debt consists of notes payable, which are secured by specific equipment and are nonrecourse liabilities of the Partnership. The estimated fair value of this debt at June 30, 2012 and December 31, 2011 approximates the carrying value of these instruments, due to the interest rates on the debt approximating current market interest rates. The Partnership classifies the fair value of its notes payable within Level 2 of the valuation hierarchy based on the observable inputs used to estimate fair value.

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, 2012, cash was held in two bank accounts maintained at one financial institution with an aggregate balance of approximately $13,408,000. 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 30, 2012, the total cash bank balance was as follows:

At June 30, 2012	Amount
Total bank balance	$	13,408,000
FDIC insured		(271,000	)
Uninsured amount	$	13,137,000

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 2012 due to many factors, including the pace of additional limited partner contributions, cash receipts, equipment acquisitions and distributions to limited partners.

Recent Accounting Pronouncements

In May 2011, the FASB issued ASU No. 2011-04 (“ASC Update 2011-04”), Amendments to Achieve 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 adopted the provisions of this ASU during the first quarter of 2012, and the required changes in presentation and disclosure requirements have been included in its financial statements. The adoption did not have a material impact on the Partnership’s financial position, results of operations or cash flows.

In December 2011, the FASB issued ASU No. 2011-11 (“ASC Update 2011-11”), Balance Sheet (Topic 210): Disclosures about Offsetting Assets and Liabilities. This ASU requires an entity to disclose information about offsetting and related arrangements to enable user of its financial statements to understand the effect of those arrangements on its financial position. The amendments in this update are effective for annual reporting periods beginning on or after January 1, 2013, and interim periods within those annual periods. The Partnership is currently evaluating the effect this ASU will have on its financial statements.

3. Information Technology, Medical Technology, Telecommunications Technology, Inventory Management and Other Business-Essential Capital Equipment (“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 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. Remarketing fees were incurred of approximately $1,000 and $0 for the six months ended June 30, 2012 and 2011, respectively. For the six months ended June 30, 2012 and 2011 remarketing fees were paid in the amount of approximately $1,000 and $0, respectively.

CCC, on behalf of the Partnership and on behalf of other affiliated partnerships, acquires 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, 2012 was approximately $4,213,000 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, 2012 was approximately $278,000. The total cost of the equipment shared by the Partnership with other partnerships at June 30, 2012 was approximately $10,972,000. The total outstanding debt related to the equipment shared by the Partnership at June 30, 2012 was approximately $595,000.

The Partnership’s share of the equipment in which it participates with other partnerships at December 31, 2011 was approximately $4,119,000 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, 2011 was approximately $377,000. The total cost of the equipment shared by the Partnership with other partnerships at December 31, 2011 was approximately $10,782,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2011 was approximately $853,000.

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 2012 as the Partnership builds its portfolio.

The following is a schedule of future minimum rentals on non-cancellable operating leases at June 30, 2012:

	Amount
Six Months ended December 31, 2012	$	1,670,000
Year ended December 31, 2013		2,853,000
Year ended December 31, 2014		1,195,000
Year ended December 31, 2015		135,000
	$	5,853,000

The following lists the components of the net investment in direct financing leases at June 30, 2012:

	Amount
Total minimum lease payments to be received	$	735,000
Initial Direct Costs		14,000
Estimated residual value of leased equipment (unguaranteed)		135,000
Less: unearned income		(75,000	)
Net investment in direct finance leases	$	809,000

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, 2012:

Risk Level	Percent of Total
Low	-		%
Moderate-Low	19		%
Moderate	54		%
Moderate-High		27	%
High		-	%
Net finance lease receivable		100	%

As of June 30, 2012 we determined that we did not have a need for an allowance for uncollectible accounts associated with any of our finance leases, as the customer payment histories with us, associated with these leases, has been positive, with no late payments.

The following is a schedule of future minimum rentals on noncancelable direct financing leases at June 30, 2012:

	Amount
Six Months ended December 31, 2012	$	282,000
Year ended December 31, 2013		375,000
Year ended December 31, 2014		77,000
Year ended December 31, 2015		1,000
	$	735,000

4. Related Party Transactions

Receivables/Payables

As of June 30, 2012, 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, 2012		For the six months ended June 30, 2011
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

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

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

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.	$	510,000	$	349,000

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, 2012, the remaining balance of prepaid acquisition fees was approximately $578,000, which is expected to be earned in future periods.	$	97,000	$	130,000

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.		$	84,000			$	52,000

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, 2012		December 31, 2011
Installment note payable to bank; interest at 7.5% due in monthly installments of $2,666, including interest, with final payment in April 2013	$	25,000	$	41,000
Installment note payable to bank; interest at 3.95% due in quarterly installments of $30,765, including interest, with final payment in January 2014		207,000		263.000
Installment note payable to bank; interest at 3.95% due in quarterly installments of $29,481, including interest, with final payment in September 2014		253,000		336,000
Installment note payable to bank; interest at 3.95% due in quarterly installments of $8,998, including interest, after an initial payment of $17,240, with final payment in November 2014		85,000		-
	$	570,000	$	640,000

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, 2012 are as follows:

	Amount
Six months ended December 31, 2012	$	143,000
Year ended December 31, 2013		275,000
Year ended December 31, 2014		152,000
	$	570,000

6. Supplemental Cash Flow Information

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

Six months ended June 30,		2012				2011
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank		$	173,000			$	14,000

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:

For the six months ended June 30, 2012:

Six months ended June 30,	2012		2011
Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees	$	92,000	$	130,000
Debt assumed in connection with purchase of technology equipment	$	103,000	$	-

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

FORWARD LOOKING STATEMENTS

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, 2011 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 related to accounting pronouncements.

INFORMATION TECHNOLOGY, MEDICAL TECHNOLOGY, TELECOMMUNICATIONS TECHNOLOGY, INVENTORY MANAGEMENT AND OTHER BUSINESS-ESSENTIAL CAPITAL EQUIPMENT

CCC, on our behalf and on behalf of other affiliated partnerships, acquires 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 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 $628 billion equipment finance sector, showed overall new business volume for the 2nd quarter of 2012 increased 14.5% relative to the same period of 2011. Credit quality continued to improve as the rate of receivables aged in excess of 30 days declined slightly when compared to data from the 2nd quarter of 2011. Additionally, charge-offs declined 45.4% in the 2nd quarter of 2012, relative to the same period in 2011. More than 65% of ELFA reporting members reported submitting more transactions for approval during March, a 62% increase over the previous month. For 2012, the ELFA has forecast a 4.1% increase in finance volume year over year.

LEASE INCOME RECEIVABLE

Lease income receivable includes current lease income receivable net of allowances for uncollectible accounts. The Partnership monitors lease income receivable to ensure timely and accurate payment by lessees. The Partnership’s Lease Relations department is responsible for monitoring lease income receivable and, as necessary, resolving outstanding invoices.

The Partnership reviews a customer’s credit history before extending credit. In the event of a default, the Partnership may establish a provision for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends or other information.

REVENUE RECOGNITION

Through June 30, 2012, 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

The Partnership evaluates its long-lived assets when events or circumstances indicate that the value of the asset may not be recoverable. The Partnership determines 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 and is included in depreciation expense in the accompanying financial statements. The fair value of equipment is calculated using income or market approaches.

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 sources of cash for the six months ended June 30, 2012 were provided by operating activities of approximately $725,000 and payments received from finance leases of approximately $282,000, compared to the six months ended June 30, 2011 where our primary source of cash was limited partner contributions of approximately $9,714,000. Our primary uses of cash for the six months ended June 30, 2012 were for the purchase of new equipment of approximately $2,320,000 and distributions to partners of approximately $1,404,000. For the six months ended June 30, 2011, our primary use of cash was for the purchase of new equipment of approximately $3,261,000, syndication costs of approximately $1,142,000, and distributions to partners of approximately $702,000.

Cash was provided by operating activities for the six months ended June 30, 2012 of approximately $725,000, and includes a net loss of approximately $370,000 and depreciation and amortization expenses of approximately $1,354,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $173,000. This compares to the six months ended June 30, 2011 where cash was provided by operating activities of approximately $165,000, which 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 lessess of approximately $14,000.

As we continue to increase the size of our equipment portfolio, operating expenses will increase, which reflects the administrative costs of servicing the portfolio, but because of our investment strategy of leasing equipment primarily through triple-net leases, we avoid operating expenses related to equipment maintenance or taxes. Depreciation expenses will likely increase more rapidly than operating expenses as we add equipment to our portfolio.

We intend to invest additional funds in equipment during the remainder of 2012. We expect that investment in equipment may be approximately $11,000,000 or more during the remainder of 2012, depending on the availability of investment opportunities. The acquisition of this equipment will be funded by the remaining cash which was raised through limited partner contributions during the initial offering period.

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, 2012	Amount
Total bank balance	$	13,408,000
FDIC insured		(271,000	)
Uninsured amount	$	13,137,000

As of June 30, 2012, we had future minimum rentals on non-cancelable operating leases of approximately $1,670,000 for the balance of the year ending December 31, 2012 and approximately $4,183,000 thereafter. As of June 30, 2012, we had future minimum rentals on non-cancelable finance leases of approximately $282,000 for the balance of the year ending December 31, 2012 and approximately $453,000 thereafter.

As of June 30, 2012, our debt was approximately $570,000 with interest rates ranging from 3.95% through 7.50% and is payable through November 2014.

RESULTS OF OPERATIONS

Three months ended June 30, 2012 compared to three months ended June 30, 2011

Lease Revenue

Our lease revenue increased to approximately $839,000 for the three months ended June 30, 2012, from approximately $511,000 for the three months ended June 30, 2011. This increase was primarily due the acquisition of new lease agreements.

Sale of Equipment

For the three months ended June 30, 2012, the Partnership did not sell any equipment. For the three months ended June 30, 2011, we sold equipment with a net book value of approximately $1,000 for a net gain of approximately $1,000.

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 $310,000 for the three months ended June 30, 2012, from approximately $178,000 for the three months ended June 30, 2011. This increase is primarily attributable to increases in administrative expenses associated with management of the Partnership as the size of the portfolio increases.

Equipment Management Fee

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 $45,000 for the three months ended June 30, 2012 from approximately $28,000 for the three months ended June 30, 2011. This increase is consistent with the increase in lease revenue. As offering proceeds continue to be utilized for the acquisition of equipment, management fees are expected to increase throughout the remainder of 2012 as our equipment and lease portfolio grows.

Organizational Costs

The Partnership did not incur organizational costs for the three months ended June 30, 2012 due to the termination of the offering period during November 2011. The Partnership incurred approximately $42,000 for the three months ended June 30, 2011.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses increased to approximately $735,000 for the three months ended June 30, 2012, from approximately $426,000 for the three months ended June 30, 2011. This increase was due to the acquisition of new equipment associated with the purchase of new leases.

Net Income (Loss)

For the three months ended June 30, 2012, we recognized revenue of approximately $868,000 and expenses of approximately $1,096,000, resulting in a net loss of approximately $228,000. For the three months ended June 30, 2011, we recognized revenue of approximately $560,000 and expenses of approximately $675,000, resulting in a net loss of approximately $115,000. The change in net loss is a result of the changes in revenue and expenses as described above.

Six months ended June 30, 2012 compared to six months ended June 30, 2011

Lease Revenue

Our lease revenue increased to approximately $1,574,000 for the six months ended June 30, 2012, from approximately $920,000 for the six months ended June 30, 2011. This increase was primarily due the acquisition of new lease agreements.

Sale of Equipment

For the six months ended June 30, 2012, the Partnership did not sell any equipment. For the six months ended June 30, 2011, we sold equipment with a net book value of approximately $1,400 for a net gain of approximately $1,100.

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 $556,000 for the six months ended June 30, 2012, from approximately $371,000 for the six months ended June 30, 2011. This increase is primarily attributable to increases in administrative expenses associated with management of the Partnership as the size of the portfolio increases.

Equipment Management Fee

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 $84,000 for the six months ended June 30, 2012 from approximately $52,000 for the six months ended June 30, 2011. This increase is consistent with the increase in lease revenue. As offering proceeds continue to be utilized for the acquisition of equipment, management fees are expected to increase throughout the remainder of 2012 as our equipment and lease portfolio grows.

Organizational Costs

The Partnership did not incur organizational costs for the six months ended June 30, 2012 due to the termination of the offering period during November 2011. The Partnership incurred approximately $102,000 for the six months ended June 30, 2011.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses increased to approximately $1,354,000 for the six months ended June 30, 2012, from approximately $746,000 for the six months ended June 30, 2011. This increase was due to the acquisition of new equipment associated with the purchase of new leases.

Net Income (Loss)

For the six months ended June 30, 2012, we recognized revenue of approximately $1,636,000 and expenses of approximately $2,006,000, resulting in a net loss of approximately $370,000. For the six months ended June 30, 2011, we recognized revenue of approximately $1,015,000 and expenses of approximately $1,273,000, resulting in a net loss of approximately $258,000. The change in net loss is due to the changes in revenue and expenses as described above.

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, has evaluated the effectiveness of our disclosure controls and procedures related to our reporting and disclosure obligations as of the end of the period covered by this Quarterly Report on Form 10-Q. Based on such evaluation, the Chief Executive Officer and Principal Financial Officer have concluded that, as of June 30, 2012, our disclosure controls and procedures are effective in ensuring that information relating to us which is required to be disclosed in our periodic reports filed or submitted under the Securities Exchange Act of 1934 is (a) recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms, and (b) accumulated and communicated to management, including the Chief Executive Officer and Principal Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. There were no changes in the Partnership’s internal control over financial reporting during the second quarter of 2012 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

NONE

Item 1A. Risk Factors

N/A

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

N/A

Item 3. Defaults Upon Senior Securities

N/A

Item 4. Mine Safety Disclosures

N/A

Item 5. Other Information

NONE

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 14, 2012	By: /s/ Kimberly A. Springsteen-Abbott
Date	Kimberly A. Springsteen-Abbott
	Chief Executive Officer


August 14, 2012	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 14, 2012

Attached files

Commonwealth Income & Growth Fund VII, LP Reports