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

Attached files

file	filename
EX-32.1 - CIGF7 EXHIBIT 32.1 3-31-14 - Commonwealth Income & Growth Fund VII, LP	ex32_1.htm
EX-32.2 - CIGF7 EXHIBIT 32.2 3-31-14 - Commonwealth Income & Growth Fund VII, LP	ex32_2.htm
EX-31.1 - CIGF7 EXHIBIT 31.1 3-31-14 - Commonwealth Income & Growth Fund VII, LP	ex31_1.htm
EXCEL - IDEA: XBRL DOCUMENT - Commonwealth Income & Growth Fund VII, LP	Financial_Report.xls
EX-31.2 - CIGF7 EXHIBIT 31.2 3-31-14 - Commonwealth Income & Growth Fund VII, LP	ex31_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 MARCH 31, 2014 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

MARCH 31, 2014

TABLE OF CONTENTS

PART I
Item 1.	Financial Statements	3
Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	10
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	12
Item 4.	Controls and Procedures	12
PART II
Item 1.	Legal Proceedings	12
Item 1A.	Risk Factors	12
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	12
Item 3.	Defaults Upon Senior Securities	12
Item 4.	Mine Safety Disclosures	12
Item 5.	Other Information	12
Item 6.	Exhibits	12

Part I. FINANCIAL INFORMATION

Item 1. Financial Statements

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

	March 31,				December 31,
	2014				2013
	(unaudited)

ASSETS
Cash and cash equivalents		$	3,904,419		$	5,287,349
Lease income receivable			604,913			109,271
Accounts receivable, Commonwealth Capital Corp., net			824,764			874,889
Other receivables			8,931			110,922
Prepaid expenses			4,555			1,364
			5,347,582			6,383,795

Net investment in finance leases			185,251			99,019

Equipment			23,371,664			22,340,138
Accumulated depreciation			(9,842,746	)		(8,906,007	)
			13,528,918			13,434,131

Equipment acquisition costs and deferred expenses, net of
accumulated amortization of approximately $370,000 and $391,000 at March 31, 2014 and December 31, 2013, respectively			485,201			459,167
Prepaid acquisition fees			192,556			223,867
			677,757			683,034

Total Assets		$	19,739,508		$	20,599,979

LIABILITIES AND PARTNERS' CAPITAL

LIABILITIES
Accounts payable		$	88,597		$	79,613
Accounts payable, CIGF, Inc., net			25,533			93,576
Other accrued expenses			88,815			1,331,813
Unearned lease income			191,680			164,299
Notes payable			2,969,992			1,542,920
Total Liabilities			3,364,617			3,212,221

PARTNERS' CAPITAL
General Partner			1,050			1,050
Limited Partners			16,373,841			17,386,708
Total Partners' Capital			16,374,891			17,387,758

Total Liabilities and Partners' Capital		$	19,739,508		$	20,599,979



see accompanying notes to condensed financial statements

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


	Three Months Ended March 31, 2014			Three Months Ended March 31, 2013
Revenue
Lease	$	1,859,143		$	1,308,845
Interest and other		15,707			12,491
Total revenue		1,874,850			1,321,336

Expenses
Operating, excluding depreciation		374,284			321,710
Equipment management fee, General Partner		93,170			67,353
Interest		15,084			5,177
Depreciation		1,464,505			1,062,770
Amortization of equipment acquisition costs and deferred expenses		70,674			57,329
Loss on sale of equipment		201,147			3,976
Total expenses		2,218,864			1,518,315

Net loss	$	(344,014	)	$	(196,979	)

Net loss allocated to Limited Partners	$	(350,699	)	$	(203,668	)

Net loss per equivalent Limited Partnership unit	$	(0.22	)	$	(0.13	)

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


see accompanying notes to condensed financial statements

Commonwealth Income & Growth Fund VII
Condensed Statement of Partners' Capital
For the three months ended March 31, 2014
(unaudited)


	General		Limited
	Partner		Partner		General			Limited
	Units		Units		Partner			Partners			Total
Balance, January 1, 2014		50		1,572,900	$	1,050		$	17,386,708		$	17,387,758
Net income (loss)		-		-		6,685			(350,699	)		(344,014	)
Distributions		-		-		(6,685	)		(662,168	)		(668,853	)
Balance, March 31, 2014		50		1,572,900	$	1,050		$	16,373,841		$	16,374,891



see accompanying notes to condensed financial statements

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

	Three Months Ended			Three Months Ended
	March 31, 2014			March 31, 2013

Net cash provided by operating activities	$	232,862		$	569,112

Investing activities:
Capital Expenditures		(977,525	)		(1,887,975	)
Purchase of finance leases		(90,912	)		-
Payments received from finance leases		10,630			-
Equipment acquisition fees, General Partner		(49,939	)		-
Net proceeds from the sale of equipment		179,901			8,307
Net cash used in investing activities		(927,845	)		(1,879,668	)

Financing activities:
Distributions to partners		(668,853	)		(668,857	)
Debt placement fee paid to the General Partner		(19,094	)		-
Net cash used in financing activities		(687,947	)		(668,857	)

Net decrease in cash and cash equivalents		(1,382,930	)		(1,979,413	)

Cash and cash equivalents beginning of period		5,287,349			9,099,947

Cash and cash equivalents end of period	$	3,904,419		$	7,120,534



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, 2013 has been prepared from the books and records without audit. Financial information as of December 31, 2013 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 three months ended March 31, 2014 are not necessarily indicative of financial results that may be expected for the full year ended December 31, 2014.

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 March 31, 2014 and December 31, 2013 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 March 31, 2014 and December 31, 2013 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 equivalents to be highly liquid investments with the original maturity dates of 90 days or less.

At March 31, 2014, cash was held in two bank accounts maintained at one financial institution with an aggregate balance of approximately $3,952,000. Bank accounts are federally insured up to $250,000 by the FDIC. At March 31, 2014, the total cash bank balance was as follows:

At March 31, 2014	Amount
Total bank balance	$	3,952,000
FDIC insured		(250,000	)
Uninsured amount	$	3,702,000

The Partnership believes it 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 2014 due to many factors, including cash receipts, equipment acquisitions, interest rates and distributions to limited partners.

Recent Accounting Pronouncements

In April 2014, the FASB issued ASU No. 2014-08 (“ASU Updated 2014-08”), Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity. This ASU provides guidance on the change in criteria established to enhance the presentation of reporting discontinued operations. The guidance is effective for annual financial statements beginning on or after December 15, 2014 that report discontinued operations or disposals of components of an entity. The Partnership is currently evaluating the effect that this ASU will have on its financial statements.

In March 2014, the FASB issued ASU No. 2014-06 (“ASU Updated 2014-06”), Technical Corrections and Improvements Related to Glossary Terms. This ASU provides updates to the FASB Accounting Standards Codification established in September 2009 as the source of authoritative U.S. GAAP recognized by the FASB. The update is effectively immediately upon issuance. The Partnership adopted this ASU during the first quarter of 2014 and there was no material impact on its financial statements.

In April 2013, the FASB issued ASU No. 2013-07 (“ASU Updated 2013-07”), Presentation of Financial Statements (Topic 205): Liquidation Basis of Accounting. This ASU provides guidance on the application of the liquidation basis of accounting as provided by U.S. GAAP. The guidance will improve the consistency of financial reporting for liquidating entities. The guidance in this ASU is effective for entities that determine liquidation is imminent during annual reporting periods beginning after December 15, 2013, and interim reporting periods therein. The Partnership is currently evaluating the effect that this ASU will have on its financial statements during the liquidation phase of its life cycle.

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 of approximately $0 and $4,000 were incurred for the three months ended March 31, 2014 and 2013, respectively. For the three months ended March 31, 2014 and 2013, there was no cash paid for remarketing fees.

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 cost of the equipment in which it participates with other partnerships at March 31, 2014 was approximately $7,534,000 and is included in the Partnership’s equipment on its balance sheet. The Partnership’s share of the outstanding debt associated with this equipment at March 31, 2014 was approximately $1,281,000 and is included in the Partnership’s notes payable on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at March 31, 2014 was approximately $18,634,000. The total outstanding debt related to the equipment shared by the Partnership at March 31, 2014 was approximately $2,988,000.

The Partnership’s share of the cost of the equipment in which it participates with other partnerships at December 31, 2013 was approximately $7,621,000 and is included in the Partnership’s equipment on its balance sheet. The Partnership’s share of the outstanding debt associated with this equipment at December 31, 2013 was approximately $805,000 and is included in the Partnership’s notes payable on its balance sheet. The total cost of the equipment shared by the Partnership with other partnerships at December 31, 2013 was approximately $18,806,000. The total outstanding debt related to the equipment shared by the Partnership at December 31, 2013 was approximately $1,844,000.

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 2014 as the Partnership builds its portfolio.

The following is a schedule of future minimum rentals on non-cancellable operating leases at March 31, 2014:

	Amount
Nine Months ended December 31, 2014	$	4,242,000
Year ended December 31, 2015		4,326,000
Year ended December 31, 2016		1,481,000
Year ended December 31, 2017		102,000
	$	10,151,000

During the quarter ended March 31, 2014, due to an early buyout, the Partnership sold equipment held under operating leases. The lessee that purchased the equipment, as a part of the terms of the sale agreement, paid the Partnership the future rentals due at the time of the sale. The lessee paid approximately $245,000 in future rentals due. The net book value of the equipment sold was approximately $335,000. The net loss on the sale of equipment was approximately $207,000.

Finance Leases:

The following lists the components of the net investment in direct financing leases at March 31, 2014:

	Amount
Total minimum lease payments to be received	$	184,000
Initial Direct Costs		6,000
Estimated residual value of leased equipment (unguaranteed)		23,000
Less: unearned income		(28,000	)
Net investment in direct finance leases	$	185,000

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 and their payment history. 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 March 31, 2014:

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

The following is a schedule of future minimum rentals on noncancelable direct financing leases at March 31, 2014:

	Amount
Nine Months ended December 31, 2014	$	37,000
Year ended December 31, 2015		50,000
Year ended December 31, 2016		50,000
Year ended December 31, 2017		45,000
Year ended December 31, 2018		2,000
	$	184,000

4. Related Party Transactions

Receivables/Payables

As of March 31, 2014, the Partnership’s related party payables are short term, unsecured, and non-interest bearing.

Reimbursable Expenses	For the Three Months Ended March 31, 2014		For the Three Months Ended March 31, 2013
The General Partner and its affiliates are entitled to reimbursement by the Partnership for the cost of goods, supplies or services obtained and used by the General Partner in connection with the administration and operation of the Partnership from third parties unaffiliated with the General Partner. In addition, the General Partner and its affiliates are entitled to reimbursement of certain expenses incurred by the General Partner and its affiliates in connection with the administration and operation of the Partnership. For the three months ended March 31, 2014 and 2013, the Partnership was charged approximately $141,000 and $163,000 in other LP expense, respectively.	$	339,000	$	320,000

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 March 31, 2014, the remaining balance of prepaid acquisition fees was approximately $193,000, which is expected to be earned in future periods.	$	82,000	$	76,000

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.		$	19,000			$	-

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.		$	93,000			$	67,000

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.		$	6,000			$	300

5. Notes Payable

Notes payable consisted of the following approximate amounts:

	March 31, 2014		December 31, 2013
Installment note payable to bank; interest at 3.95% due in quarterly installments of $30,765, including interest, with final payment in January 2014	$	-	$	30,000
Installment note payable to bank; interest at 3.95% due in quarterly installments of $29,481, including interest, with final payment in September 2014		58,000		87,000
Installment note payable to bank; interest at 3.95% due in quarterly installments of $8,998, including interest, with final payment in November 2014		26,000		35,000
Installment note payable to bank; interest at 4.23% due in quarterly installments of $10,311, including interest, with final payment in September 2015		60,000		69,000
Installment note payable to bank; interest at 4.23% due in quarterly installments of $24,780, including interest, with final payment in May 2016		212,000		234,000
Installment note payable to bank; interest at 4.23% due in quarterly installments of $11,329, including interest, with final payment in June 2016		97,000		107,000
Installment notes payable to bank; interest at 4.23% due in quarterly instalments ranging from $14,427 to $19,170, including interest, with final payment in July 2016		317,000		383,000
Installment note payable to bank; interest at 4.23% due in quarterly installments of $25,798, including interest, with final payment in August 2016		244,000		294,000
Installment note payable to bank; interest at 4.23% due in quarterly installments of $26,817, including interest, with final payment in September 2016		253,000		304,000
Installment note payable to bank; interest at 3.68% due in monthly installments of $17,828, including interest; with final payment in November 2015		345,000		-
Installment note payable to bank; interest at 3.68% due in monthly installments of $16,526, including interest; with final payment in February 2016		366,000		-
Installment note payable to bank; interest at 4.85% due in quarterly installments of $47,859, including interest; with final payment due in August 2016		448,000		-
Installment note payable to bank; interest at 4.23% due in quarterly installments of $22,434, including interest; with final payment due in December 2016		255,000		-
Installment note payable to bank; interest at 4.85% due in monthly installments of $6,284, including interest; with final payment due in December 2016		194,000		-
Installment note payable to bank; interest at 4.85% due in monthly installments of $2,318, including interest; with final payment in December 2017		95,000		-
	$	2,970,000	$	1,543,000

The notes are secured by specific equipment with a carrying value of approximately $4,201,000 and are nonrecourse liabilities of the Partnership. As such, the notes do not contain any financial 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 March 31, 2014 are as follows:

	Amount
Nine months ended December 31, 2014	$	1,022,000
Year ended December 31, 2015		1,237,000
Year ended December 31, 2016		684,000
Year ended December 31, 2017		27,000
	$	2,970,000

6. Supplemental Cash Flow Information

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

Three months ended March 31,		2014				2013
Lease revenue net of interest expense on notes payable realized as a result of direct payment of principal by lessee to bank		$	482,000			$	93,000

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:

Three months ended March 31,	2014		2013
Equipment acquisition fees earned by General Partner upon purchase of equipment from prepaid acquisition fees	$	31,000	$	76,000
Debt assumed in connection with purchase of equipment	$	950,000	$	-
Debt assumed and satisfaction of liability in 2014 in connection with acquisition of equipment in 2013	$	959,000	$	-
Accrued expenses incurred in connection with the purchase of technology equipment	$	12,000	$	-

During the three months ended March 31, 2014, the Partnership wrote-off fully amortized acquisition fees of approximately $92,000.

During the three months ended March 31, 2014, the Partnership wrote off fully depreciated equipment of approximately $24,000.

7. Commitments and Contingencies

SEC Settlement

In August 2012 the staff of the U.S. Securities and Exchange Commission raised a question with Commonwealth Capital Corp. (“Commonwealth”), the sponsor of our funds, regarding the interpretation and application of the term “control person.” The term affected the scope of the reimbursement to Commonwealth of certain expenses incurred for the funds. The staff was concerned that some investors may not have understood the meaning and methodology used by the funds. Commonwealth worked with the staff to assure that our disclosure was clarified. Commonwealth Income and Growth Fund, Inc., the General Partner of the funds, entered into a settlement with the SEC in September 2013. The settlement had no impact on the financial position or results of operations of the Partnership.

FINRA Review

On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming CCSC and the owner of the firm, Kimberly Springsteen-Abbott, as respondents. The complaint alleges that Ms. Springsteen-Abbott approved misallocation of certain expenses to the funds. On October 22, 2013, FINRA filed an amended complaint that dropped the allegations against CCSC and reduced the scope of the allegations against Kimberly Springsteen-Abbott. Management believes that the expenses at issue include amounts that were proper and were properly allocated to funds, and expenses that had been allocated in error but were previously adjusted and repaid to the affected funds when they were identified. CCSC and Ms. Springsteen-Abbott deny the allegations and intend to vigorously defend the proceeding. Management believes that resolution of the charge will not result in any material adverse financial impact on the Funds, but no assurance can be provided until the proceeding is resolved.

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, 2012 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.

INDUSTRY OVERVIEW

The Equipment Lease Finance Association (ELFA) Monthly Leasing and Finance Index which reports economic activity for the $827 billion equipment finance sector showed overall new business volume for quarter ending March 31, 2014 increased at rate of 5.8% relative to the same period of 2013. Credit quality remained flat as the rate of receivables aged in excess of 30 days increased to 2.1% from the same period last year. Additionally, charge-offs remain unchanged at the all-time low of 0.2%. More than 65% of ELFA reporting members reported submitting more transactions for approval during the month of March. According to the Equipment Lease Foundation, growth for 2014 is forecast at 4.0%.

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 recent accounting pronouncements.

LEASE INCOME RECEIVABLE

Lease income receivable includes current lease income receivable net of allowances for uncollectible amounts, if any. 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. When the analysis indicates that the probability of full collection is unlikely, the Partnership may establish an allowance for uncollectible lease income receivable based upon the credit risk of specific customers, historical trends and other information. The Partnership writes off its lease income receivable when it determines that it is uncollectible and all economically sensible means of recovery have been exhausted.

REVENUE RECOGNITION

Through March 31, 2014, the Partnership’s lease portfolio consisted of operating leases and finance leases. For operating leases, lease revenue is recognized on a straight-line basis in accordance with the terms of the lease agreement.

Finance lease interest income is recorded over the term of the lease using the effective interest method. 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.

Upon the end of the lease term, if the lessee has not met the return conditions as set out in the lease, the Partnership is entitled in certain cases to additional compensation from the lessee. The Partnership’s accounting policy for recording such payments is to treat them as revenue.

Gains or losses from sales of leased and off-lease equipment are recorded on a net basis in the Partnership’s Statement of Operations

Gains from the termination of leases are recognized when the lease is modified and terminated concurrently. Gains from lease termination included in lease revenue for the three months ended March 31, 2014 and 2013 were approximately $245,000 and $0, respectively.

LONG-LIVED ASSETS

Depreciation on technology and inventory management equipment for financial statement purposes is based on the straight-line method estimated generally over useful lives of two to five years. Once an asset comes off lease or is released, the Partnership reassesses the useful life of an asset.

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. Fair value is determined based on estimated discounted cash flows to be generated by the asset, third party appraisals or comparable sales of similar assets, as applicable, based on asset type.

Residual values are determined by management and are calculated using information from both internal and external sources, as well as other economic indicators.

LIQUIDITY AND CAPITAL RESOURCES

Sources and Uses of Cash

Our primary sources of cash for the three months ended March 31, 2014 were provided by operating activities of approximately $233,000, net proceeds from the sale of equipment of approximately $180,000 and payments received from finance leases of approximately $11,000, compared to the three months ended March 31, 2013 where our primary sources of cash were provided by operating activities of approximately $569,000 and net proceeds from the sale of equipment of approximately $8,000. Our primary uses of cash for the three months ended March 31, 2014 were for the purchase of new equipment of approximately $978,000, distributions to partners of approximately $669,000, equipment acquisition fees paid to the General Partner of approximately $50,000, purchase of finance leases of approximately $91,000 and debt placement fees paid to the General Partner of approximately $19,000. For the three months ended March 31, 2013, our primary uses of cash were for the purchase of new equipment of approximately $1,888,000 and distributions to partners of approximately $669,000.

Cash was provided by operating activities for the three months ended March 31, 2014 of approximately $233,000, and includes a net loss of approximately $344,000 and depreciation and amortization expenses of approximately $1,535,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $482,000. This compares to the three months ended March 31, 2013 where cash was provided by operating activities of approximately $569,000, and includes a net loss of approximately $197,000 and depreciation and amortization expenses of approximately $1,120,000. Other noncash activities included in the determination of net loss include direct payments to banks by lessees of approximately $93,000.

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.

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.

Capital expenditures and distributions are expected to continue to increase overall during the remainder of 2014 as management focuses on additional equipment acquisitions and funding limited partner distributions. We intend to invest approximately $12,000,000 or more during the remainder of 2014, depending on the availability of investment opportunities.

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

At March 31, 2014, cash was held in two bank accounts maintained at one financial institution with an aggregate balance of approximately $3,952,000. Bank accounts are federally insured up to $250,000. At March 31, 2014, the total cash bank balance was as follows:

At March 31, 2014	Amount
Total bank balance	$	3,952,000
FDIC insured		(250,000	)
Uninsured amount	$	3,702,000

The Partnership believes it 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 2014 due to many factors, including the pace of cash receipts, equipment acquisitions and distributions to limited partners.

As of March 31, 2014, we had future minimum rentals on non-cancelable operating leases of approximately $4,242,000 for the balance of the year ending December 31, 2014 and approximately $5,909,000 thereafter.

As of March 31, 2014, we had future minimum rentals on non-cancelable finance leases of approximately $37,000 for the balance of the year ending December 31, 2014 and approximately $147,000 thereafter.

As of March 31, 2014, our non-recourse debt was approximately $2,970,000 with interest rates ranging from 3.68% through 4.85% and is payable through December 2017.

RESULTS OF OPERATIONS

Three months ended March 31, 2014 compared to three months ended March 31, 2013

Lease Revenue

Our lease revenue increased to approximately $1,859,000 for the three months ended March 31, 2014, from approximately $1,309,000 for the three months ended March 31, 2013. This increase was primarily due the acquisition of new lease agreements and the associated increase in lease revenue.

The Partnership had 113 active operating leases that generated lease revenue of approximately $1,859,000 for the three months ended March 31, 2014. The Partnership had 86 active operating leases that generated lease revenue of approximately $1,309,000 for the three months ended March 31, 2013. Management expects to continue to add new leases to the Partnership’s portfolio throughout 2014. We expect increases in portfolio size to increase aggregate lease revenue.

Sale of Equipment

For the three months ended March 31, 2014, the Partnership sold equipment with a net book value of approximately $381,000 for a net loss of approximately $201,000. For the three months ended March 31, 2013, the Partnership sold equipment with a net book value of approximately $12,000 for a net loss of approximately $4,000. The increase in the loss on the sale of equipment is primarily a result of an early buyout by a lessee, which resulted in an overall loss on the sale of 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 $374,000 for the three months ended March 31, 2014, from approximately $322,000 for the three months ended March 31, 2013. This increase is primarily due to an increase in legal fees and accounting fees, partially offset by a decrease in other LP expense charged by CCC for the administration of the Partnership.

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 $93,000 for the three months ended March 31, 2014 from approximately $67,000 for the three months ended March 31, 2013. This increase is consistent with the increase in lease volume and revenue. As more equipment is acquired to the Partnership’s equipment portfolio, management fees are expected to increase throughout the remainder of 2014 as our equipment and lease portfolio grows.

Depreciation and Amortization Expense

Depreciation and amortization expenses consist of depreciation on equipment and amortization of equipment acquisition fees. These expenses increased to approximately $1,535,000 for the three months ended March 31, 2014, from approximately $1,120,000 for the three months ended March 31, 2013. 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 March 31, 2014, we recognized revenue of approximately $1,875,000 and expenses of approximately $2,219,000, resulting in a net loss of approximately $344,000. This net loss is attributable to the changes in revenue and expenses as discussed above. For the three months ended March 31, 2013, we recognized revenue of approximately $1,321,000 and expenses of approximately $1,518,000, resulting in a net loss of approximately $197,000.

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 General Partner’s 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 General Partner’s Chief Executive Officer and Principal Financial Officer have concluded that, as of March 31, 2014, 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 General Partner’s 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 first quarter of 2014 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

SEC Settlement

FINRA Review

On May 3, 2013, the FINRA Department of Enforcement filed a complaint naming CCSC and the owner of the firm, Kimberly Springsteen-Abbott, as respondents. The complaint alleges that Ms. Springsteen-Abbott approved misallocation of certain expenses to the funds. On October 22, 2013, FINRA filed an amended complaint that dropped the allegations against CCSC and reduced the scope of the allegations against Kimberly Springsteen-Abbott. Management believes that the expenses at issue include amounts that were proper and were properly allocated to funds, and expenses that had been allocated in error but were previously adjusted and repaid to the affected funds when they were identified. CCSC and Ms. Springsteen-Abbott deny the allegations and intend to vigorously defend the proceeding. In addition, to avoid any future issues concerning the allocation of expenses, Commonwealth has implemented new procedures to better monitor the allocation of expenses, which procedures have been in effect since 2012. Management believes that resolution of the charge will not result in any material adverse financial impact on the Funds, but no assurance can be provided until the proceeding is resolved.

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

May 15, 2014	By: /s/ Kimberly A. Springsteen-Abbott
Date	Kimberly A. Springsteen-Abbott
	Chief Executive Officer Commonwealth Income & Growth Fund, Inc.


May 15, 2014	By: /s/ Lynn A. Franceschina
Date	Lynn A. Franceschina
	Executive Vice President, Chief Operating Officer

Attached files

Commonwealth Income & Growth Fund VII, LP Reports

Also read