UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


Washington,
D.C.  20549




FORM
10-Q




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


For
the Quarterly Period Ended March 31, 2009





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


For
the transition period
from           to





Commission
File Number: 000-25839





DOCUMENT
CAPTURE TECHNOLOGIES, INC.




(Exact
name of registrant as specified in its charter)




Delaware
            
            59-3134518(State
      or other jurisdiction of
            
            (I.R.S.Employerincorporation
      or organization)
            
            Identification
      Number)


1798
Technology Drive


Suite
178


San
Jose, California 95110


(Address
of principal executive offices, Zip code)





408-436-9888
ext. 207


(Registrant’s
telephone number, including area code)





Check
whether the issuer (1) filed all reports required to be filed by Section 13
or 15(d) of the Exchange Act during the preceding 12 months (or for such period
that the registrant was required to file such reports), and (2) has been subject
to such filing requirements for the past 90 days.   Yes
   ý       No
  o





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





Large
accelerated filer  o    Accelerated
filer   o   Non-accelerated
filer  o    Smaller
Reporting Company  ý





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Act). Yes     o     
No    ý





The
number of shares of Common Stock outstanding as of May 12, 2009 was
18,468,770.








SPECIAL
NOTE ON FORWARD LOOKING STATEMENTS





This
Quarterly Report on Form 10-Q, including "Management's Discussion and Analysis
of Financial Condition and Results of Operations" in Item 2 of Part I of this
report include forward-looking statements. These statements involve known and
unknown risks, uncertainties and other factors that may cause our actual
results, levels of activity, performance or achievements to be materially
different from any future results, levels of activity, performance, or
achievements expressed or implied by forward-looking statements.





In some
cases, you can identify forward-looking statements by terminology such as "may,"
"should," "expects," "plans," "anticipates," "believes," "estimates,"
"predicts," "potential," "proposed," "intended," or "continue" or the negative
of these terms or other comparable terminology. You should read statements that
contain these words carefully, because they discuss our expectations about our
future operating results or our future financial condition or state other
"forward-looking" information. There may be events in the future that we are not
able to accurately predict or control. Before you invest in our securities, you
should be aware that the occurrence of any of the events described in this
Quarterly Report could substantially harm our business, results of operations
and financial condition, and that upon the occurrence of any of these events,
the trading price of our securities could decline and you could lose all or part
of your investment. Although we believe that the expectations reflected in the
forward-looking statements are reasonable, we cannot guarantee future results,
growth rates, levels of activity, performance or achievements. We are under no
duty to update any of the forward-looking statements after the date of this
Quarterly Report to conform these statements to actual results.


- 2
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DOCUMENT
CAPTURE TECHNOLOGIES, INC




FORM 10-Q




FOR
THE QUARTER ENDED MARCH 31, 2009




INDEX





PagePART
      I – FINANCIAL INFORMATIONItem
      1
                              Financial
      Statements
                              4Item
      2
                              Management’s
      Discussion and Analysis of Financial Condition and Results of
      Operations
                              17Item
      4
                              Controls
      and Procedures
                              23PART II – OTHER INFORMATIONItem
      1
                              Legal
      Proceedings
                              24Item
      1A
                              Risk
      Factors
                              24Item
      2
                              Unregistered
      Sales of Equity Securities and Use of Proceeds
                              24Item
      3
                              Defaults
      Upon Senior Securities
                              24Item
      4
                              Submission
      of Matters to a Vote of Security Holders
                              24Item
      5
                              Other
      Information
                              24Item
      6
                              Exhibits
                              24Signatures
                              25




- 3
-


PART
I.  FINANCIAL INFORMATION





Item
1 - Financial Statements


DOCUMENT
CAPTURE TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED BALANCE SHEETS


(in
thousands)





March 31,
                  
                  
                  December 31,2009
                  
                  
                  2008ASSETS
                  
                  (unaudited)
                  
                  
                  *Current
      assets:Cash
      and cash equivalents
                  
                  $
                  207
                  
                  
                  $
                  405Trade
      receivables
                  
                  
                  1,249
                  
                  
                  
                  1,366Inventories,
      net
                  
                  
                  1,346
                  
                  
                  
                  1,353Prepaid
      expenses and other current assets
                  
                  
                  137
                  
                  
                  
                  99Total
      current assets
                  
                  
                  2,939
                  
                  
                  
                  3,223Fixed
      assets, net
                  
                  
                  95
                  
                  
                  
                  98Total
      assets
                  
                  $
                  3,034
                  
                  
                  $
                  3,321LIABILITIES
      AND STOCKHOLDERS’ EQUITYCurrent
      liabilities:Line
      of credit
                  
                  $
                  349
                  
                  
                  $
                  -Trade
      payables to related parties
                  
                  
                  241
                  
                  
                  
                  393Trade
      payables and other accrued expenses
                  
                  
                  390
                  
                  
                  
                  398Income
      taxes payable
                  
                  
                  -
                  
                  
                  
                  75Deferred
      revenue and customer deposits
                  
                  
                  138
                  
                  
                  
                  187Fair
      value of warrant liability
                  
                  
                  350
                  
                  
                  
                  350Total
      current liabilities
                  
                  
                  1,468
                  
                  
                  
                  1,403Liability
      under derivative contracts
                  
                  
                  8
                  
                  
                  
                  9Total
      liabilities
                  
                  
                  1,476
                  
                  
                  
                  1,412Commitments
      and contingencies (Note 11)Convertible
      preferred stock:Series
      B convertible preferred stock, $.001 par value, 2,000 authorized, 1.5
      shares issued and outstanding at March 31, 2009 and December 31, 2008;
      liquidation value of $150 at March 31, 2009 and December 31,
      2008
                  
                  
                  132
                  
                  
                  
                  120Stockholders’
      equity:Common
      stock $.001par value, 50,000 authorized, 18,469 and 18,444 shares issued
      and outstanding at March 31, 2009 and December 31, 2008,
      respectively
                  
                  
                  18
                  
                  
                  
                  18Additional
      paid-in capital
                  
                  
                  34,893
                  
                  
                  
                  34,602Accumulated
      deficit
                  
                  
                  (33,485
                  )
                  
                  
                  (32,831
                  )Total
      stockholders’ equity
                  
                  
                  1,426
                  
                  
                  
                  1,789Total
      liabilities and stockholders’ equity
                  
                  $
                  3,034
                  
                  
                  $
                  3,321




*Amounts
derived from the audited financial statements for the year ended December 31,
2008.


- 4
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DOCUMENT
CAPTURE TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)


(in
thousands, except per share amounts)





Three Months Ended March 31,2009
                  
                  
                  2008Net
      sales
                  
                  $
                  2,015
                  
                  
                  $
                  2,538Cost
      of sales
                  
                  
                  1,237
                  
                  
                  
                  1,805Gross
      profit
                  
                  
                  778
                  
                  
                  
                  733Operating
      expenses:Selling,
      general and administrative
                  
                  
                  1,189
                  
                  
                  
                  961Research
      and development
                  
                  
                  231
                  
                  
                  
                  203Total
      operating expenses
                  
                  
                  1,420
                  
                  
                  
                  1,164Operating
      loss
                  
                  
                  (642
                  )
                  
                  
                  (431
                  )Total
      other income (expense)
                  
                  
                  -
                  
                  
                  
                  (47
                  )Net
      loss before income taxes
                  
                  
                  (642
                  )
                  
                  
                  (478
                  )Provision
      for income taxes
                  
                  
                  -
                  
                  
                  
                  2Net
      loss
                  
                  
                  (642
                  )
                  
                  
                  (480
                  )Accretion
      of preferred stock redemption value
                  
                  
                  (12
                  )
                  
                  
                  (89
                  )Preferred
      stock dividends
                  
                  
                  -
                  
                  
                  
                  (13
                  )Deemed
      dividend on preferred stock
                  
                  
                  -
                  
                  
                  
                  (231
                  )Net
      loss available to common stockholders
                  
                  $
                  (654
                  )
                  
                  $
                  (813
                  )Net
      loss available to common stockholders per common share – basic and
      diluted
                  
                  $
                  (0.04
                  )
                  
                  $
                  (0.05
                  )Weighted
      average common shares outstanding:Basic
      and diluted
                  
                  
                  18,463
                  
                  
                  
                  16,442




- 5
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DOCUMENT
CAPTURE TECHNOLOGIES, INC.


CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)


(in
thousands)





Three Months Ended
                  March 31,2009
                
                
                2008Operating
      activities:Net
      loss
                
                $
                (642
                )
                
                $
                (480
                )Adjustments
      to reconcile net loss to net cash provided (used) by operating
      activities:Depreciation
      expense
                
                
                10
                
                
                
                16Stock-based
      compensation cost – options
                
                
                180
                
                
                
                110Fair
      value of common stock and warrants issued for services
      rendered
                
                
                111
                
                
                
                34Interest
      expense attributable to amortization of debt issuance
costs
                
                
                -
                
                
                
                84Change
      in fair value of derivative instruments
                
                
                (1
                )
                
                
                17Other
      non-cash non-operating income/expenses, net
                
                
                -
                
                
                
                (104
                )Changes
      in operating assets and liabilities:Trade
      receivables
                
                
                117
                
                
                
                846Inventories
                
                
                7
                
                
                
                206Prepaid
      expenses and other current assets
                
                
                (38
                )
                
                
                3Trade
      payables to related parties
                
                
                (152
                )
                
                
                137Trade
      payables and other current liabilities
                
                
                (8
                )
                
                
                (127
                )Income
      taxes payable
                
                
                (75
                )
                
                
                -Deferred
      revenue and customer deposits
                
                
                (49
                )
                
                
                -Cash
      (used) provided by operating activities
                
                
                (540
                )
                
                
                742Investing
      activities:Cash
      proceeds from sale of assets
                
                
                -
                
                
                
                400Capital
      expenditures
                
                
                (7
                )
                
                
                -Cash
      (used) provided by investing activities
                
                
                (7
                )
                
                
                400Financing
      activities:Net
      advances(payments) on bank line of credit
                
                
                349
                
                
                
                (1,321
                )Payments
      on notes payable
                
                
                -
                
                
                
                (300
                )Proceeds
      from exercise of employee stock options
                
                
                -
                
                
                
                8Cash
      provided (used) by financing activities
                
                
                349
                
                
                
                (1,613
                )Net
      decrease in cash and cash equivalents
                
                
                (198
                )
                
                
                (471
                )Cash
      and cash equivalents at beginning of period
                
                
                405
                
                
                
                1,770Cash
      and cash equivalents at end of period
                
                $
                207
                
                
                $
                1,299Supplemental
      disclosures of cash flow information:Cash
      paid during the period for:Interest
                
                $
                4
                
                
                $
                63Income
      taxes
                
                $
                75
                
                
                $
                2Non-cash
      investing and financing activities:Conversion
      of convertible preferred stock to common stock
                
                $
                -
                
                
                $
                1,341




- 6
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DOCUMENT
CAPTURE TECHNOLOGIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)


Note
1 – Background and Basis of Presentation





Organization





Document
Capture Technologies, Inc. ("DCT" or "Company") develops, designs and delivers
various imaging technology solutions to all types and sizes of enterprises
including governmental agencies, large corporations, small corporations, small
office-home offices (“SOHO”), professional practices as well as consumers
(referred to herein collectively as “Enterprises”). DCT is a market-leader in
providing USB-powered scanning solutions to a wide variety of industries and
market applications. DCT’s patented and proprietary page-imaging devices
facilitate the way information is stored, shared and managed for both business
and personal use.





Syscan,
Inc., DCT’s wholly-owned subsidiary, was incorporated in California in 1995 to
develop and manufacture a new generation of contact image sensors (“CIS”) that
are complementary metal-oxide-silicon (“CMOS”) imaging sensor devices. During
the late 1990s, DCT established many technical milestones and was granted
numerous patents for its linear imaging technology. DCT’s patented CIS and
mobile imaging scanner technology provides high quality images at extremely low
power consumption levels allowing delivery of compact scanners in a form ideally
suited for laptop or desktop computer users who need a small, lightweight device
to scan or fax documents.





DCT’s
business model was developed around intellectual property (“IP”) driven products
sold primarily to original equipment manufacturers (“OEM”), private label brands
and value added resellers (“VAR”) and can be found in a variety of applications,
including but not limited, to the following:





·
            Document
      and information management;


·
            Identification
      card scanners;


·
            Passport
      security scanners;


·
            Bank
      note and check verification;


·
            Business
      card readers;


·
            Barcode
      scanning; and


·
            Optical
      mark readers used in lottery
terminals.





Basis
of Presentation





The
accompanying unaudited condensed consolidated financial statements of DCT have
been prepared in accordance with accounting principles generally accepted in the
United States for interim financial information and the instructions to Form
10-Q and Article 8-03 of Regulation S-X. Accordingly, they do not include
all information and disclosures necessary for a presentation of the Company’s
financial position, results of operations, and cash flows in conformity with
accounting principles generally accepted in the United States
(“GAAP”).





In the
opinion of management, all adjustments (which include only normal recurring
adjustments) necessary to present fairly the financial position, results of
operations and cash flows for all periods presented have been made. Preparing
financial statements requires management to make estimates and assumptions that
affect the reported amounts of assets, liabilities, revenue and expenses. Actual
results may differ from these estimates. The results of operations for the
period ended March 31, 2009 are not necessarily indicative of the operating
results that may be expected for the entire year ending December 31, 2009. The
interim financial statements should be read in conjunction with the financial
statements in the Company’s Annual Report on Form 10-K for the year ended
December 31, 2008, filed with the Securities and Exchange Commission (“SEC”) on
April 15, 2009.





The
consolidated financial statements include the accounts of DCT and its one
subsidiary Syscan.  All significant intercompany transactions and
balances have been eliminated.  DCT’s functional currency is the
United States (U.S.) dollar.  As such, DCT does not have any
translation adjustments.  Monetary accounts denominated in non-U.S.
currencies, such as cash or payables to vendors, have been re-measured to the
U.S. dollar.  Gains and losses resulting from foreign currency
transactions are included in the results of operations.  To date, DCT
has not entered into hedging activities to offset the impact of foreign currency
fluctuations.


- 7
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DOCUMENT
CAPTURE TECHNOLOGIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)




Certain
accounts have been reclassified to conform to the current period
presentation.  Such reclassifications did not affect DCT’s total net
sales, operating loss, net loss available to common stockholders, financial
position or liquidity.





Note
2 – Recent Accounting Pronouncements





Pronouncements
Adopted During the Current Reporting Period





In March
2008, the Financial Accounting Standards Board (“FASB”) issued Statement of
Financial Accounting Standard (“SFAS”) No. 161, Disclosures about Derivative
Instruments and Hedging Activities-an amendment of FASB Statement No. 133
(“SFAS 161”).  SFAS 161 requires enhanced disclosure related to
derivatives and hedging activities and thereby seeks to improve the transparency
of financial reporting. Under SFAS 161, entities are required to provide
enhanced disclosures relating to: (a) how and why an entity uses derivative
instruments; (b) how derivative instruments and related hedge items are
accounted for under SFAS 133 and related interpretations; and (c) how derivative
instruments and related hedged items affect an entity’s financial position,
financial performance, and cash flows.





SFAS 161
must be applied prospectively to all derivative instruments and non-derivative
instruments that are designated and qualify as hedging instruments and related
hedged items accounted for under SFAS 133 for all financial statements issued
for fiscal years and interim periods beginning after November 15, 2008, and, as
such, SFAS 161 was adopted by DCT on January 1, 2009 and had no impact on the
consolidated financial position, cash flows and results of operations as of or
for the three months ended March 31, 2009.





In May
2008, the FASB issued a FASB Staff Position (“FSP”) APB 14-1 Accounting for Convertible Debt
Instruments That May Be Settled in Cash upon Conversion (Including Partial Cash
Settlement) ("FSP APB 14-1"). FSP APB 14-1 requires the issuer of certain
convertible debt instruments that may be settled in cash (or other assets) on
conversion to separately account for the liability (debt) and equity (conversion
option) components of the instrument in a manner that reflects the issuer's
non-convertible debt borrowing rate. FSP APB 14-1 was adopted by DCT on January
1, 2009 and had no impact on the consolidated financial position, cash flows and
results of operations as of or for the three months ended March 31,
2009.




In June
2008, the FASB ratified the Emerging Issues Task Force (“EITF”) Issue 07-5,
Determining Whether an
Instrument (or Embedded Feature) is Indexed to an Entity’s Own Stock(“EITF-07-5”). EITF 07-5 mandates a two-step process for evaluating
whether an equity-linked financial instrument or embedded feature is indexed to
the entity’s own stock. EITF 07-5 was adopted by DCT on January 1, 2009 and had
no impact on the consolidated financial position, cash flows and results of
operations as of or for the three months ended March 31, 2009.





Other
recent accounting pronouncements issued by the FASB (including its EITF), the
American Institute of Certified Public Accountants (“AICPA”), and the SEC did
not or are not believed by management to have a material impact on the Company's
present or future financial statements.





Note
3 – Related-Party Transactions





Related-Party
Purchases





The
Company purchases the majority of its finished scanner imaging products from
Shenzhen Syscan Technology (“SST”), a wholly-owned subsidiary of Syscan
Technology Holdings Limited ("STH"), the parent company of DCT’s former majority
stockholder.


- 8
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DOCUMENT
CAPTURE TECHNOLOGIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)




Purchases
from SST totaled $1,173,000 and $1,380,000 for the three months ended March 31,
2009 and 2008, respectively.  All purchases from SST were carried out
in the normal course of business. As a result of these purchases, DCT was liable
to SST for $241,000 and $393,000 at March 31, 2009 and December 31, 2008,
respectively.





Note
4 – Concentration of Credit Risk and Major Customers





Financial
instruments that subject DCT to credit risk are cash balances maintained in
excess of federal depository insurance limits and trade
receivables.





Cash
and Cash Equivalents





DCT
maintains cash balances at several banks. Accounts at each institution are
insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As
of March 31, 2009, DCT had consolidated balances of approximately $124,000,
which were not guaranteed by the FDIC. DCT has not experienced any losses in
such accounts and believes the exposure is minimal.





Major
Customers and Trade Receivables





A
relatively small number of customers account for a significant percentage of
DCT’s sales.  Customers that exceeded 10% of total revenues and
accounts receivable were as follows:





Three months Ended
                    March 31,2009
                  
                  
                  2008Customer
      A
                  
                  
                  33
                  %
                  
                  
                  25
                  %Customer
      B
                  
                  
                  21
                  
                  
                  
                  *Customer
      C
                  
                  
                  10
                  
                  
                  
                  21Customer
      D
                  
                  
                  10
                  
                  
                  
                  *Customer
      E
                  
                  
                  *
                  
                  
                  
                  28Customer
      F
                  
                  
                  *
                  
                  
                  
                  10





*
Customer accounted for less than 10% for the period indicated.





Trade
receivables from these customers totaled $1,143,000 at March 31,
2009.  As of March 31, 2009, all the Company's trade receivables were
unsecured.





Note
5 – Concentration of Supplier Risk





DCT
purchases substantially all finished scanner imaging products from one vendor
that is also a wholly-owned subsidiary of the parent company of its former
majority stockholder. See Note 3.  If this vendor became unable or
unwilling to provide materials in a timely manner and DCT was unable to find
alternative vendors, DCT's business, operating results and financial condition
would be materially adversely affected.





Note
6 – Employee Equity Incentive Plans





General





DCT’s
share-based awards are long-term retention plans that are intended to attract,
retain and provide incentives for talented employees.  DCT believes
its share-based awards are critical to its operation and productivity. The
employee share-based award plans allow DCT to grant, on a discretionary basis,
incentive stock options and non-qualified stock options.


- 9
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DOCUMENT
CAPTURE TECHNOLOGIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)




Stock
Options





DCT
issues options under two different stock option plans (both approved by
shareholders) as well as through employment agreements with key employees,
executives and consultants (approved by the board of directors on a case-by-case
basis).  The following table sets forth, by the respective option
plan, certain aspects of DCT’s stock options as of March 31, 2009:





Option Approval Method
                    
                    
                    Options Outstanding and Options AvailableDescription
                    
                    Board of
                      Directors
                    
                    
                    Board of
                      Directors
                      and
                      Shareholders
                    
                    
                    Total
                    
                    
                    Outstanding
                    
                    
                    Available
                      For
                      Future
                      Grant
                    
                    
                    Total2002
      Amended and Restated Stock Option Plan
                    
                    
                    -
                    
                    
                    
                    3,200,000
                    
                    
                    
                    3,200,000
                    
                    
                    
                    3,200,000
                    
                    
                    
                    -
                    
                    
                    
                    3,200,000Key
      Personnel Option Grants
                    
                    
                    6,650,000
                    
                    
                    
                    -
                    
                    
                    
                    6,650,000
                    
                    
                    
                    4,891,165
                    
                    
                    
                    -
                    
                    
                    
                    4,891,1652006
      Stock Option Plan
                    
                    
                    
                    
                    
                    
                    2,500,000
                    
                    
                    
                    2,500,000
                    
                    
                    
                    1,454,333
                    
                    
                    
                    1,045,667
                    
                    
                    
                    2,500,000Total
                    
                    
                    6,650,000
                    
                    
                    
                    5,700,000
                    
                    
                    
                    12,350,000
                    
                    
                    
                    9,545,498
                    
                    
                    
                    1,045,667
                    
                    
                    
                    10,591,165





Stock-Based
Compensation





The
following table sets forth the total stock-based compensation expense included
in DCT’s Statements of Operations (in thousands):


Three Months Ended March
                      31,2009
                    
                    
                    2008Selling,
      general and administrative
                    
                    $
                    147
                    
                    
                    $
                    86Research
      and development
                    
                    
                    33
                    
                    
                    
                    24$
                    180
                    
                    
                    $
                    110





At March
31, 2009, DCT had approximately $1,289,000 of total unrecognized compensation
cost related to unvested stock options. This cost is expected to be recognized
over a weighted-average period of approximately 2.8 years.





Stock
Option Activity and Outstanding





DCT had
the following stock option activity during the three months ended March 31,
2009:





Options
                
                
                Weighted-
                  Average
                  Exercise
                  PriceOutstanding
      at December 31, 2008
                
                
                9,295,498
                
                
                $
                0.32Granted
                
                
                250,000
                
                
                
                0.49Exercised
                
                
                -
                
                
                
                -Cancelled
                
                
                -
                
                
                
                -Outstanding
      at March 31, 2009
                
                
                9,545,498
                
                
                $
                0.32





- 10
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DOCUMENT
CAPTURE TECHNOLOGIES, INC.
 NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)


The
following table summarizes all options outstanding and exercisable by price
range as of March 31, 2009:





Options Outstanding
                  
                  
                  Options ExercisableRange of
                    Exercise Prices
                  
                  Number
                    Outstanding
                  
                  
                  Weighted-
                    Average
                    Remaining
                    Contractual
                    Life (Years)
                  
                  
                  Weighted-
                    Average
                    Exercise
                    Price
                  
                  
                  Number
                    Exercisable
                  
                  
                  Weighted-
                    Average
                    Exercise
                    Price$0.01
                  
                  
                  2,241,165
                  
                  
                  
                  3.07
                  
                  
                  $
                  0.01
                  
                  
                  
                  2,241,165
                  
                  
                  $
                  0.01$0.30
                  
                  
                  5,035,000
                  
                  
                  
                  9.29
                  
                  
                  $
                  0.30
                  
                  
                  
                  -
                  
                  
                  
                  -$0.45 - $0.51
                  
                  
                  250,000
                  
                  
                  
                  6.81
                  
                  
                  $
                  0.49
                  
                  
                  
                  -
                  
                  
                  
                  -$0.60 - $0.70
                  
                  
                  2,019,333
                  
                  
                  
                  9.81
                  
                  
                  $
                  0.69
                  
                  
                  
                  2,019,333
                  
                  
                  $
                  0.699,545,498
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  
                  4,260,498





The
“intrinsic value” of options is the excess of the value of DCT stock and the
exercise price of such options.  The total intrinsic value of options
outstanding was approximately $1,378,000 and $1,870,000 at March 31, 2009 and
December 31, 2008, respectively. The total intrinsic value for exercisable
options was $874,000 and $1,031,000 at March 31, 2009 and December 31, 2008,
respectively.





Note
7 – Basic and Diluted Net Loss Per Common Share





Basic net
loss per common share is computed by dividing net loss by the weighted average
number of shares of common stock outstanding during the
period.  Diluted net loss per common share is computed by dividing net
loss by the weighted average number of shares of common stock and common stock
equivalents outstanding during the period.  Common stock equivalents
of 3,885,000 and 2,883,000 were not considered in calculating DCT’s diluted net
loss per common share for the three months ended March 31, 2009 and 2008,
respectively, as their effect would be anti-dilutive.  As a result,
for all periods presented, DCT’s basic and diluted net loss per common share is
the same.





Note
8 – Equity





Common
Stock





DCT’s
Board of Directors approved the issuance of 25,000 restricted common shares to a
consultant for investor relations services rendered during the three months
ended March 31, 2009.  The common shares have piggyback registration
rights to the next registration statement filed by DCT.  DCT amortized
the estimated fair value of the common shares ratably over the service period,
which was completed prior to March 31, 2009. Accordingly, $11,000 was charged to
selling, general and administrative expense and credited to additional paid-in
capital during the three months ended March 31, 2009.





Preferred
Stock





Preferred
Stock Accounting Treatment





Preferred Stock
Classification.  Pursuant to EITF 00-19, Accounting for Derivative Financial
Instruments (“EITF 00-19”), and EITF Topic D-98, Classification and Measurement of
Redeemable Securities (“Topic D-98”), DCT’s series A 5% cumulative
convertible redeemable preferred stock (“Series A Stock”) and series B
convertible redeemable preferred stock (“Series B Stock”) was reported as
temporary equity.





The
difference between the initial recorded value of the Series A Stock and Series B
Stock and the minimum redemption value is accreted, on a straight-line basis,
from the respective issuance date through the maturity date with the offset
booked to DCT’s accumulated deficit.  The accretion of DCT’s Series A
Stock and Series B Stock redemption value is disclosed as a reconciling item and
adjusts DCT’s reported net loss, together with the Series A Stock dividends and
deemed dividends, to net loss available to common stockholders.


- 11
-




DOCUMENT
CAPTURE TECHNOLOGIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)




Likely Embedded
Derivative.  Under the provisions of SFAS No. 133, Accounting for Derivative
Instruments and Hedging Activities (“SFAS 133”) and EITF 00-19, the
conversion feature of DCT’s Series A Stock (until the March 15, 2008 maturity
date) and Series B Stock are derivative instruments (referred to collectively as
“Derivative Instruments”) that require bifurcation from the host
contract.  Accordingly, the fair value of DCT’s outstanding Derivative
Instruments has been recorded in DCT’s Balance Sheet as a
liability.  The fair value of the Derivative Instruments is adjusted
at each reporting date.  Increases in the estimated fair value of
DCT’s Derivative Instruments are recorded as non-operating expense on DCT’s
Statements of Operations.  Decreases in the estimated fair value of
DCT’s Derivative Instruments are recorded as non-operating income on DCT’s
Statements of Operations.





DCT
estimates the fair value of these derivatives using the Black-Scholes valuation
model. The Black-Scholes valuation model was developed for use in estimating the
fair value of traded options that have no vesting restrictions and are fully
transferable. The Black-Scholes valuation model requires the input of highly
subjective assumptions, including the expected stock price volatility. DCT's
Derivative Instruments have characteristics significantly different from traded
options, and the input assumptions used in the model can materially affect the
fair value estimate.





The fair
values of DCT’s Derivative Instruments were determined under the following
assumptions:





March 31,
                    2009
                  
                  
                  December 31,
                    2008Series
      B Stock remaining contractual term (years)
                  
                  
                  0.35
                  
                  
                  
                  0.6Expected
      volatility
                  
                  
                  137
                  %
                  
                  
                  111
                  %Expected
      dividend yield
                  
                  
                  -
                  
                  
                  
                  -Risk
      free interest rate
                  
                  
                  0.2
                  %
                  
                  
                  0.3
                  %





See
further discussion and disclosure of fair value at Note 9.





Preferred
Stock Activity





DCT had
no preferred stock activity during the three months ended March 31,
2009.





Series
A Stock Dividends





Through
the maturity date of March 15, 2008, DCT’s Series A Stock called for cumulative
dividends at a rate of five percent per annum, payable semiannually on July 1
and January 1.  Dividends were payable in cash, by accretion of the
stated value or in shares of common stock. Subject to certain terms and
conditions, the decision whether to accrete dividends to the stated value of the
Series A Stock or to pay for dividends in cash or in shares of common stock, was
at DCT’s discretion.  DCT did not pay any cash dividends on its Series
A Stock.  During the three months ended March 31, 2008, Series A Stock
dividends were approximately $13,000, and were recorded as a reconciling item
adjusting reported net loss to net loss available to common
stockholders.





Series
A Stock Maturity





On March
15, 2008 (the "Series A Stock Redemption Date"), all of DCT’s outstanding Series
A Stock was redeemed for a per share redemption price equal to the stated value
on the Series A Stock Redemption Date (the "Series A Stock Redemption
Price").  The Series A Stock Redemption Price included principal and
accrued dividends.  The Series A Stock Redemption Price was payable
either in cash or in shares of common stock at DCT’s sole
discretion.  DCT elected to pay all of the Series A Stock Redemption
Price in shares of common stock.  According to the terms of the Series
A Stock agreement, the shares of common stock that were delivered to holders of
the Series A Stock were valued at 85% of the fifteen-day volume weighted average
price of the common stock on the Series A Redemption Date.


- 12
-




DOCUMENT
CAPTURE TECHNOLOGIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)




Series
A Stock Deemed Dividends





In
accordance with EITF Issue No. 98-5, Accounting for Convertible
Securities with Beneficial Conversion Features or Contingently Adjustable
Conversion Ratios(“EITF 98-5”), and EITF Issue No. 00-27, Application of Issue 98-5 to Certain
Convertible Instruments(“EITF 00-27”), DCT’s Series A Stock had an
embedded contingent beneficial conversion feature because the conversion price
was less than the fair value of DCT’s common stock on the maturity and
conversion of the Series A Stock into common stock.  The embedded
beneficial conversion feature was considered contingent because it was based on
how much of the Series A Stock Redemption Price was paid in DCT’s common stock
versus cash.





Under
EITF 98-5, a contingent beneficial conversion feature should be recognized in
earnings when all contingencies are resolved.  DCT recorded a deemed
dividend on its Series A Stock during the three months ended March 31, 2008
totaling $231,000.  This non-cash dividend was recorded to reflect the
implied economic value to the preferred stockholder of converting Series A
shares into common stock at a 15% discount of the common stock price at the time
of conversion.  The fair value was calculated using the difference
between the agreed-upon conversion price of the Series A Preferred Stock into
shares of common stock and the fair market value of DCT's common stock on the
conversion date. This amount was charged to accumulated deficit with the
offsetting credit to additional paid-in-capital.





DCT
treated the deemed dividend on Series A Stock as a reconciling item to adjust
its reported net loss, together with Series A Stock dividends recorded during
the applicable period, to the net loss available to common stockholders line
item on the Statements of Operations.





Common
Stock Warrants





DCT had
the following common stock warrant activity during the three months ended March
31, 2009:





WarrantsOutstanding
      at December 31, 2008
                  
                  
                  3,284,000Cancelled
                  
                  
                  (25,000
                  )Outstanding
      at March 31, 2009
                  
                  
                  3,259,000





The
following table summarizes certain aspects of DCT’s outstanding warrants as of
March 31, 2009:





Warrants Issued in Connection
                  with:
                
                Number of
                  Shares
                
                
                Number of
                  Shares Vested
                
                
                Exercise
                  Price
                
                Issuance
                  Date
                Expiration
                  DateSeries
      A Stock
                
                
                186,500
                
                
                
                186,500
                
                
                $
                1.00
                
                3/15/05
                3/15/10Series
      A Stock
                
                
                932,500
                
                
                
                932,500
                
                
                
                2.00
                
                3/15/05
                3/15/10Series
      B Stock
                
                
                675,000
                
                
                
                675,000
                
                
                
                1.50
                
                8/7/06
                8/7/09Consulting
      agreement
                
                
                90,000
                
                
                
                90,000
                
                
                
                0.65
                
                1/1/07
                1/1/10Notes
      payable financing (Note 10)
                
                
                650,000
                
                
                
                650,000
                
                
                
                0.60
                
                9/26/07
                9/26/12Consulting
      agreement
                
                
                110,000
                
                
                
                110,000
                
                
                
                0.65
                
                1/1/08
                1/1/11Consulting
      agreement
                
                
                615,000
                
                
                
                615,000
                
                
                
                0.60
                
                11/6/08
                11/6/113,259,000
                
                
                
                3,259,000




- 13
-




DOCUMENT
CAPTURE TECHNOLOGIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)


In
certain instances, DCT issues warrants for investor relations
services.  DCT amortizes the fair value of such warrants over the
service period.  In connection with such common stock warrants issued
and outstanding, DCT charged selling, general and administrative expense with
the offset credit to additional paid in capital for $100,000 and $34,000 during
the three months ended March 31, 2009 and 2008, respectively. DCT estimated the
fair value of the warrants issued under the Black-Scholes valuation model using
the following weighted average assumptions: contractual term of three years,
1.8% risk-free interest rate, expected volatility of 266% and expected dividend
yield of 0%.





Note
9 – Fair Value





SFAS 157,
Fair Value Measurements
(“SFAS 157”) defines fair value as the exchange price that would be received for
an asset or paid to transfer a liability in the principal or most advantageous
market in an orderly transaction between market participants at the measurement
date.





SFAS 157
establishes three levels of inputs that may be used to measure fair
value:




Level 1. Quoted
prices in active markets for identical assets or liabilities.  DCT had
no Level 1 assets or liabilities at March 31, 2009.





Level 2. Observable
inputs other than Level 1 prices, such as quoted prices for similar assets
or liabilities, quoted prices in markets with insufficient volume or infrequent
transactions (less active markets), or model-derived valuations in which all
significant inputs are observable or can be derived principally from or
corroborated with observable market data for substantially the full term of the
assets or liabilities.  DCT had no Level 2 assets or liabilities at
March 31, 2009.





Level 3.  Unobservable
inputs to the valuation methodology that are significant to the measurement of
the fair value of assets or liabilities.  DCT had no Level 3
assets.  Level 3 liabilities include (i) warrant and (ii) derivative
contracts liabilities.  DCT estimates the fair value of Level 3
liabilities using the Black-Scholes valuation model.




The
carrying value of cash and cash equivalents, trade receivables and payables,
prepaid expenses and other current assets, amounts due to related parties, and
other payables and accruals approximates fair value due to the short period of
time to maturity.





Level 3
liabilities were presented on DCT’s Balance Sheet as of March 31, 2009 as
follows (in
thousands):





Description
                      
                      Balance Sheet Presentation
                      
                      Fair Value(1)Warrantliabilityforputtablewarrants
                      
                      Fair value of warrant liability
                      
                      $
                      350Derivativeliabilities
                      
                      Liability under derivative contracts
                      
                      
                      8$
                      358





(1) Fair
value measurement at reporting date using significant unobservable inputs (Level
3).





The
following table summarizes the changes in Level 3 liabilities measured at fair
value on a recurring basis for the three months ended March 31, 2009 (in thousands):





Fair Value of
                  Warrant
                  Liability
                
                
                Liability
                  under
                  Derivative
                  Contracts
                
                
                TotalBalance
      at December 31, 2008
                
                $
                350
                
                
                $
                9
                
                
                $
                359Unrealized
      gain included in Net loss
                
                
                -
                
                
                
                (1
                )
                
                
                (1
                )Balance
      at March 31, 2009
                
                $
                350
                
                
                $
                8
                
                
                $
                358


- 14
-




DOCUMENT
CAPTURE TECHNOLOGIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)




Note
10 – Bank Line of Credit





As of
March 31, 2009, DCT had a $3,000,000 line of credit (“LOC”) at a commercial
bank.  Borrowings under the LOC are limited to 80% of eligible accounts
receivable and 40% of eligible inventory, as defined in the LOC agreement. 
The LOC bears an annual interest rate of prime (3.25% at March 31, 2009) plus
1.25% for advances drawn against accounts receivables, with a minimum interest
rate of 9%, and prime plus 2.25% for advances drawn against inventory, with a
minimum interest rate of 10%.  Interest payments are due monthly and all
unpaid interest and principal is due in full on September 13, 2009.  Upon
certain events of default, the default variable interest rate increases to prime
plus 5%. As of March 31, 2009, DCT had unused borrowing capacity of $744,000 on
its LOC.




As of
March 31, 2009, DCT was in compliance with all LOC debt covenants.




Note
11 – Commitments and Contingencies




Operating
Leases




The
Company is committed under various non-cancelable operating leases which extend
through February 2011. Future minimum rental commitments as of March 31, 2009
are as follows (in
thousands):




Year Ending
                  March 31,
                
                Future
                  Minimum
                  Lease
                  Payments2009
                
                $
                2192010
                
                
                55Total
                
                $
                274




Employment
Agreements




DCT
maintains employment agreements with its executive officers which extend through
2010. The agreements provide for a base salary and annual bonus to be determined
by the Board of Directors.  The agreements also provide for
termination payments, stock options, non-competition provisions, and other terms
and conditions of employment. In addition, DCT maintains employment agreements
with other key employees with similar terms and conditions.  As of
March 31, 2009 termination payments totaling $1,026,000 remain in
effect.




Consulting
Agreement




Effective
November 6, 2008, DCT entered an investor relations consulting agreement for an
initial term of six months.  Under the terms of the original contract,
DCT agreed to pay the consultant (i) $10,000 per month for six months, (ii) up
to $150,000 for additional marketing materials and activities, and (iii) 640,000
warrants (of which 25,000 were effectively cancelled during the three months
ended March 31, 2009) with an exercise price of $0.60 per share, expiring in
three years from the issuance date.  As of March 31, 2009, the
remaining amount owed on the contract was $10,000.




Litigation,
Claims and Assessments




The
Company experiences routine litigation in the normal course of its business and
does not believe that any pending litigation will have a material adverse effect
on DCT’s financial condition, results of operations or cash
flows.


- 15
-




DOCUMENT
CAPTURE TECHNOLOGIES, INC.


NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)





Note
12 – Segment and Geographic Information





Segment
Information





DCT
currently operates in one segment, the design, development and delivery of
various imaging technology solutions, most notably scanners, as defined by SFAS
131, Disclosures about
Segments of an Enterprise and Related Information(“SFAS
131”).





Geographic
Information





During
the three months ended March 31, 2009 and 2008, DCT recorded net sales
throughout the U.S. and Europe as determined by the final destination of the
product.  The following table summarizes total net sales attributable
to significant countries (in
thousands):





ThreeMonthsEnded
                    March31,2009
                  
                  
                  2008U.S.
                  
                  $
                  1,711
                  
                  
                  $
                  2,351Europe
      and other
                  
                  
                  304
                  
                  
                  
                  187$
                  2,015
                  
                  
                  $
                  2,538





Presented
below is information regarding identifiable assets, classified by operations
located in the U.S., Europe and Asia (in thousands):




March31,
                    2009
                  
                  
                  December31,
                    2008U.S.
                  
                  $
                  2,793
                  
                  
                  $
                  3,093Asia
                  
                  
                  50
                  
                  
                  
                  59Europe
                  
                  
                  191
                  
                  
                  
                  169$
                  3,034
                  
                  
                  $
                  3,321


Assets
located in Asia relate to tooling equipment required to manufacture DCT’s
product.  Assets located in Europe relate to DCT’s field service,
sales, distribution and inventory management in the
Netherlands.


- 16
-


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




The
following discussion should be read in conjunction with Document Capture
Technologies, Inc.’s (“DCT” or “Company”) unaudited condensed consolidated
financial statements and notes included herein.  The results described
below are not necessarily indicative of the results to be expected in any future
period.  Certain statements in this discussion and analysis, including
statements regarding our strategy, financial performance and revenue sources,
are forward-looking statements based on current expectations and entail various
risks and uncertainties that could cause actual results to differ materially
from those expressed in the forward-looking statements.  Readers are
referred to DCT’s Annual Report on Form 10-K for the year ended December 31,
2008 as filed with the Securities and Exchange Commission on April 15,
2009.  We undertake no duty to update any forward-looking statement to
conform the statement to actual results or changes in our
expectations.




Management's
discussion and analysis of financial condition and results of operations
("MD&A") is provided as a supplement to the accompanying unaudited condensed
consolidated financial statements and notes to help provide an understanding of
our financial condition, changes in financial condition and results of
operations. The MD&A section is organized as follows:




·
            Overview.
      This section provides a general description of the Company's business, as
      well as recent developments that we believe are important in understanding
      the results of operations and to anticipate future trends in those
      operations.




·
            Critical
      accounting policies. This section provides an analysis of the
      significant estimates and judgments that affect the reported amounts of
      assets, liabilities, revenues and expenses, and related disclosure of
      contingent assets and liabilities.




·
            Results of
      operations. This section provides an analysis of our results of
      operations for the three months ended March 31, 2009 compared to the three
      months ended March 31, 2008.  A brief description of certain
      aspects, transactions and events is provided, including related-party
      transactions that impact the comparability of the results being
      analyzed.




·
            Liquidity
      and capital resources. This section provides an analysis of our
      financial condition and cash flows as of and for the three months ended
      March 31, 2009 as compared to the three months ended March 31,
      2008.




Overview




We are in
the business of designing, developing and delivering imaging technology
solutions. Our technology is protected under multiple patents.  We
focus our research and development toward new deliverable and marketable
technologies. We sell our products to customers throughout the world, including
the United States, Canada, Europe, South America, Australia and
Asia.




Our
strategy includes a plan to expand our document/image-capture product line and
technology while leveraging our assets in other areas of the imaging industry.
We are actively shipping six groups of image-capture products.  We
have expanded our document/image-capture product offerings, and will continue to
expand our product offerings in the future in response to the increased market
demand for faster, easier-to-use products and increased security to meet the
growing need for information protection, including identity and financial
transaction protection.




During
2008 DCT focused on re-aligning its operations toward its core
revenue-generating competencies in an effort to cut costs and maximize profits.
Looking forward, DCT has significant market opportunities in 2009 and we believe
that with the corporate initiatives taken during 2008, we are well positioned to
capitalize on such opportunities.


- 17
-




Critical
Accounting Policies




Our
MD&A is based upon our condensed consolidated financial statements, which
have been prepared in accordance with accounting principles generally accepted
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, and related disclosure of contingent assets
and liabilities. On an on-going basis, we evaluate our estimates, including
those related to revenue recognition, trade receivables and allowance for
doubtful accounts, inventories, and income taxes. We base our estimates on
historical experience and on various other assumptions that we believe are
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.




An
accounting policy is deemed to be critical if it requires an accounting estimate
to be made based on assumptions about matters that are highly uncertain at the
time the estimate is made, and if different estimates that reasonably could have
been used or changes in the accounting estimate that are reasonably likely to
occur could materially change the financial statements.




Our
disclosures of critical accounting policies in our Annual Report on Form 10-K
for the year ended December 31, 2008 have not materially changed since that
report was filed.


- 18
-


Results
of Operations





The
following table summarizes certain aspects of our results of operations for the
three months ended March 31, 2009 compared to the three months ended March 31,
2008 (in
thousands):





Three Months
                      Ended March 31,2009
                    
                    
                    2008
                    
                    
                    $ Change
                    
                    
                    % ChangeNet
      sales
                    
                    $
                    2,015
                    
                    
                    $
                    2,538
                    
                    
                    $
                    (523
                    )
                    
                    
                    (21
                    )%Cost
      of sales
                    
                    
                    1,237
                    
                    
                    
                    1,805
                    
                    
                    
                    (568
                    )
                    
                    
                    (31
                    )As
      a percentage of sales
                    
                    
                    61
                    %
                    
                    
                    71
                    %Selling,
      general and administrative expense
                    
                    
                    1,189
                    
                    
                    
                    961
                    
                    
                    
                    228
                    
                    
                    
                    24Research
      and development expense
                    
                    
                    231
                    
                    
                    
                    203
                    
                    
                    
                    28
                    
                    
                    
                    14Total
      other income (expense)
                    
                    
                    -
                    
                    
                    
                    (47
                    )
                    
                    NM
                    
                    
                    NMDividend
      and deemed dividend on 5% convertible preferred stock and accretion of
      preferred stock redemption value
                    
                    
                    (12
                    )
                    
                    
                    (333
                    )
                    
                    NM
                    
                    
                    NM





NM = Not
Meaningful





Net
Sales





The
decrease in net sales during the three months ended March 31, 2009 as compared
to the three months ended March 31, 2008 is attributable to the overall slowdown
of the general economic and market conditions in the U.S. economy and the
related slowdown of information technology (“IT”) capital spending.





Our
international sales have grown significantly in both absolute dollars and as a
percentage of our net sales as a result of (i) the increasing demand in the
European markets for our products, and (ii) our continued efforts toward
increasing our distribution network within this market.  Our European
sales were $304,000, or 15% of net sales, and $187,000, or 7% of net sales,
during the three months ended March 31, 2009 and 2008,
respectively.  We expect our European sales to continue to increase as
we continue to improve our ability to deliver all channel products from our
Netherlands-based warehouse and improve our time-to-market.





From time
to time, our key customers place large orders causing our quarterly net revenue
to fluctuate significantly. We expect this trend and resulting fluctuations to
continue.  Although the number of scanners shipped during any quarter
has fluctuated significantly, our average selling price has remained fairly
stable and we expect this stability to continue for the foreseeable
future.





Although
we continually concentrate on expanding our significant customer base, our
revenue remains dependent on a small number of significant
customers.  Total sales to significant customers (customers who
represent more than 10% of our net sales) were 74% and 84% during the three
months ended March 31, 2009 and 2008, respectively.  See “Note 4:
 Concentration of Credit Risk and Major Customers” in Part I, Item 1 of
this Form 10-Q.   The identities of our largest customers and
their respective contributions to our net sales have varied in the past and will
likely continue to vary from period to period.





Cost
of Sales, Including Gross Profit




Cost of
sales includes all direct costs related to the purchase of scanners, imaging
modules and services related to the delivery of those items manufactured in
China, and to a lesser extent engineering services and software
royalties.  Cost of sales as a percentage of sales decreased during
the three months ended March 31, 2009 compared to the same period in 2008 and
was due to the following:


- 19
-




·
            A
      higher proportion of overall net sales were generated from our more
      feature-rich products, which typically bear higher gross margins than our
      scanners with fewer product
features;




·
            The
      negotiated price reduction of some of our finished
  product;




·
            The
      price reduction of certain third-party software as we move toward less
      costly value-add software; and




·
            Our
      continued efforts toward reducing the cost of our
  products.




The above
noted factors were somewhat offset by the fluctuation of the U.S. dollar against
the Chinese Yuan.





We expect
our cost of sales as a percentage of net sales to fluctuate somewhat during the
remainder of 2009 as we experience changes in our product mix, the value of the
U.S. dollar remains volatile and we work toward implementing further product
cost reduction strategies.





Selling,
General and Administrative Expense




Selling,
general and administrative expenses consist primarily of personnel-related
expenses, including stock-based compensation costs, facilities-related expenses
and outside professional services such as legal and accounting.  To a
lesser extent, market development and promotional funds for our retail
distribution channels, tradeshows, website support, warehousing, logistics and
certain sales representative fees are also included.




The
increase in selling and marketing expense during the three months ended March
31, 2009 as compared to the three months ended March 31, 2008 was primarily
attributable to the following:




·
            Increased
      stock-based compensation costs (a non-cash charge) to $147,000 during the
      three months ended March 31, 2009 from $86,000 during three months ended
      March 31, 2008.  See “Note 6:  Employee Equity Incentive
      Plans” in Part I, Item 1 of this Form
10-Q.




·
            Increased
      investor relations efforts associated with DCT’s initiatives toward
      increasing DCT’s awareness in the investment
  community.




·
            Increased
      amortization of the fair value (a non-cash charge) of equity instruments
      issued for investor relations consulting services to $111,000 during the
      three months ended March 31, 2009 from $34,000 during the three months
      ended March 31, 2008.  See “Note 8:  Equity” in Part I,
      Item 1 of this Form 10-Q.




·
            Increased
      legal fees associated with enforcing DCT’s
  patents.




We
anticipate that selling, general and administrative expenses will continue to
increase as our business continues to grow and the costs associated with being a
public company continue to increase as a result of our reporting requirements
including, but not limited to, expenses incurred to comply with the
Sarbanes-Oxley Act of 2002.





Research
and Development Expense





Research
and development expense consists primarily of salaries and related costs,
including stock-based compensation costs of employees engaged in product
research, design and development activities, compliance testing, documentation,
prototypes and expenses associated with transitioning the product to
production.  The increase during the three months ended March 31, 2009
as compared to the three months ended March 31, 2008 was attributable to
utilizing outside, specialized engineering contractors to enhance our product
development program.





We
anticipate that research and development expense will continue to increase over
the long term as a result of the growth of our existing products, new product
opportunities and any expansion into new markets and technologies. We remain
committed to significant research and development efforts to extend our
technology leadership in the imaging technology markets.


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-





Total
Other Income (Expense)





Our other
income (expense) during the three months ended March 31, 2009 was immaterial to
our results of operations.





The most
significant component of our other income (expense) during the three months
ended March 31, 2008 was a non-recurring $400,000 gain on sale of assets, which
was offset by (i) the non-cash charge associated with the increase in the fair
value of the liability for derivative contracts and (ii) increased
debt.  The increased debt resulted in interest expense
totaling  $147,000 during the three months ended March 31, 2008, of
which $84,000 was non-cash and attributable to amortization of debt issuance
costs.





Dividend
and Deemed Dividend on Series A Stock and Accretion of Preferred Stock
Redemption Value





During
the three months ended March 31, 2009 and 2008, the total accretion on our
preferred stock was $12,000 and $89,000, respectively.  The decrease
was attributable to the maturity of our Series A Stock on March 15,
2008.





We
accrued dividends on our Series A Stock through the March 15, 2008 maturity
date, which totaled $13,000 for the three months ended March 31,
2008.  We do not pay dividends on our Series B Stock.





DCT
recorded a deemed dividend on its Series A Stock during the three months ended
March 31, 2008 totaling $231,000.  This non-cash dividend is to
reflect the implied economic value to the preferred stockholder of converting
Series A shares into common stock at a 15% discount of the common stock price at
the time of conversion.  The fair value was calculated using the
difference between the agreed-upon conversion price of the Series A Preferred
Stock into shares of common stock and the fair market value of DCT's common
stock on the conversion date. See “Note 8:  Equity” in Part I, Item 1 of
this Form 10-Q.





Liquidity
and Capital Resources





At March
31, 2009, our principal sources of liquidity included cash and cash equivalents
of $207,000 and an available borrowing capacity of $744,000 on our bank line of
credit.  We had no significant cash outlays, except as part of our
normal operations, during the three months ended March 31, 2009 or March 31,
2008.  Our sales generally have followed a seasonal trend.
Historically, our sales have been higher in the second half of the year than in
the first half of the year.  This seasonal trend has occurred during
the past several years as well as during the three months ended March 31,
2009.  This historical trend has typically constrained our working
capital during the first part of the year.  And although we expect the
historical trend of higher sales in the second half of the year as compared to
the first half of the year, there can be no assurance that it will continue in
2009, especially in light of the current economic downturn in the US
economy.





Operating
activities:  During the three months ended March 31, 2009, our
operating activities used $540,000 of cash.  This was primarily a
result of our $642,000 net loss, $300,000 of net non-cash expenses, and $198,000
net cash used by changes in operating assets and liabilities.  During
the three months ended March 31, 2008, our operating activities provided
$742,000 of cash.  This was primarily a result of our $480,000 net
loss, $157,000 of net non-cash expenses and $1,065,000 net cash used by changes
in operating assets and liabilities.  Non-cash items included in net
loss for both the three months ended March 31, 2009 and 2008 include
depreciation expense, stock-based compensation cost of options, fair value of
equity instruments (including restricted common stock and warrants) issued for
services rendered, and the change in fair value of our derivative
instruments.  Changes in our operating assets and liabilities are
indicative of the normal operational fluctuations related to the timing of
product shipments, trade receivables collections, inventory management and
timing of vendor payments.





Investing
activities:  Our investing activities for the three months
ended March 31, 2009 were minimal capital purchases to support normal business
operations.  During the three months ended March 31, 2008, cash
provided by investing activities included $400,000 in cash proceeds from the
sale of assets related to terminated research and development activities, which
positively impacted our cash position.


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-




Financing
activities:  During the three months ended March 31, 2009, our
financing activities consisted of a $349,000 draw against our bank line of
credit to meet short-term obligations, including payment on the purchase of our
product.  During the three months ended March 31, 2008, our financing
activities consisted of paying down our bank line of credit and our notes
payable according to the terms of the agreement.





Cash
and Working Capital Requirements





Although
our net sales have declined somewhat, we are actively controlling our operating
expenses and we anticipate that future operating expenses will be aligned with
our projected net sales.  If we successfully manage our projected net
sales and control our operating expenses, of which there can be no assurance,
management believes that current cash and other sources of liquidity are
sufficient to fund normal operations through the next 12 months.





Our
current line of credit matures on September 13, 2009.  DCT is
currently in the process of renegotiating its line of credit and has already
received an extension term sheet from its current lender.  Although
management believes DCT will be able to obtain an additional line of credit upon
maturity of the existing line of credit, there is no guarantee that DCT will be
able to secure a line of credit on terms that are acceptable to
DCT.





Contractual
Obligations





The
following table summarizes our contractual obligations at March 31, 2009, and
the effect such obligations are expected to have on our liquidity and cash flows
in future periods (in
thousands):




Less Than
                  
                  
                  One – Three
                  
                  
                  Three – FiveTotal
                  
                  
                  One Year
                  
                  
                  Years
                  
                  
                  YearsLong-term
      bank line of credit (1)
                  
                  $
                  349
                  
                  
                  $
                  349
                  
                  
                  $
                  -
                  
                  
                  $
                  -Series
      B Stock principal(2)
                  
                  
                  150
                  
                  
                  
                  150
                  
                  
                  
                  -
                  
                  
                  
                  -Operating
      lease obligations
                  
                  
                  274
                  
                  
                  
                  219
                  
                  
                  
                  55
                  
                  
                  
                  -Consulting
      agreement
                  
                  
                  10
                  
                  
                  
                  10
                  
                  
                  
                  -
                  
                  
                  
                  -Total
      contractual cash obligations
                  
                  $
                  783
                  
                  
                  $
                  728
                  
                  
                  $
                  55
                  
                  
                  $
                  -





(1)
As of March 31, 2009, DCT had a $3,000,000 line of credit (“LOC”) at a
commercial bank.  Borrowings under the LOC are limited to 80% of eligible
accounts receivable and 40% of eligible inventory, as defined in the LOC
agreement.  The LOC bears an annual interest rate of prime (3.25% at March
31, 2009) plus 1.25% for advances drawn against accounts receivables, with a
minimum interest rate of 9%, and prime plus 2.25% for advances drawn against
inventory, with a minimum interest rate of 10%.  Interest payments are due
monthly and all unpaid interest and principal is due in full on September 13,
2009.  Upon certain events of default, the default variable interest rate
increases to prime plus 5%. As of March 31, 2009, DCT had unused borrowing
capacity of $744,000 on its LOC.




As of
March 31, 2009, DCT was in compliance with all LOC debt covenants.





(2)On
August 7, 2009 (the "Series B Stock Redemption Date"), all of our outstanding
Series B Stock shall be redeemed for a per share redemption price equal to the
stated value on the Series B Stock Redemption Date (the "Series B Stock
Redemption Price"). The Series B Stock Redemption Price is payable by us in cash
or in shares of common stock at our discretion and shall be paid within five
trading days after the Series B Stock Redemption Date. In the event we elect to
pay all or some of the Series B Stock Redemption Price in shares of common
stock, the shares of common stock to be delivered to the purchasers shall be
valued at 85% of the fifteen-day volume weighted average price of the common
stock on the Series B Stock Redemption Date.





Off-Balance
Sheet Arrangements





At March
31, 2009, we did not have any relationship with unconsolidated entities or
financial partnerships, which other companies have established for the purpose
of facilitating off-balance sheet arrangements or other contractually narrow or
limited purposes. Therefore, we are not materially exposed to any financing,
liquidity, market or credit risk that could arise if we had engaged in such
relationships.


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-





Trends





To the
best of our knowledge, except for the commitments described in “Note 11:
Commitments and Contingencies” in Part I, Item 1 of this Form 10-Q, there are no
other known trends or demands, commitments, events or uncertaintiesthat existed at March
31, 2009, which are likely to have a material effect on our future
liquidity.





Item
4 – Controls and Procedures





Evaluation
of Disclosure Controls and Procedures





Under the
supervision and with the participation of our management, including our
principal executive officer and principal financial officer, we conducted an
evaluation of the effectiveness of the design and operation of our disclosure
controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934 as of the end of the period covered by this
report (the “Evaluation Date”). Based upon the evaluation, our principal
executive officer and principal financial officer concluded as of the Evaluation
Date that our disclosure controls and procedures were effective. Disclosure
controls are controls and procedures designed to reasonably ensure that
information required to be disclosed in our reports filed under the Exchange
Act, such as this report, is recorded, processed, summarized and reported within
the time periods specified in the Securities and Exchange Commission’s rules and
forms. Disclosure controls include controls and procedures designed to
reasonably ensure that such information is accumulated and communicated to our
management, including our chief executive officer and chief financial officer,
as appropriate to allow timely decisions regarding required
disclosure.





Changes
in Internal Controls Over Financial Reporting





There
were no changes in our internal controls over financial reporting that occurred
during the quarterly period covered by this report that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting.


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-


PART
II.  OTHER INFORMATION





Item
1 - Legal Proceedings





We are
subject to various legal proceedings from time to time in the ordinary course of
business, none of which is required to be disclosed under this Item
1.





Item
1A – Risk Factors





There
have been no changes to the risk factors included in our Annual Report on Form
10-K for the year ended December 31, 2008 as filed with the Securities and
Exchange Commission on April 15, 2009.





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





None.





Item
3 - Defaults Upon Senior Securities





None.





Item
4 - Submission of Matters to a Vote of Security Holders





None.





Item
5 - Other Information





None.





Item
6 - Exhibits





Exhibit
                Number
              
              DescriptionofExhibit
              
              MethodofFiling31.1
              
              Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act – David P.
      Clark
              
              Filed
      herewith31.2
              
              Certification
      Pursuant to Section 302 of the Sarbanes-Oxley Act – M. Carolyn
      Ellis
              
              Filed
      herewith32.1
              
              Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act – David P.
      Clark
              
              Filed
      herewith32.2
              
              Certifications
      Pursuant to Section 906 of the Sarbanes-Oxley Act – M. Carolyn
      Ellis
              
              Filed
      herewith


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-


SIGNATURES





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





Document
      Capture Technologies, Inc.Date: May 15,
      2009/s/David P.
      ClarkDavid
      P. Clark, Chief Executive OfficerDate:
      May 15, 2009/s/M.
      Carolyn EllisM.
      Carolyn EllisChief
      Financial Officer




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