UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the Quarterly Period Ended ~~March 31,~~June 30, 2013

¨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		80-0133251
(State or other jurisdiction of		(I.R.S.Employer
incorporation or organization)		Identification Number)

4255 Burton Drive

San Jose, California 95054

(Address of principal executive offices, Zip code)

408-436-9888

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) 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 (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing ~~requirements~~ requirements for the past 90 days. Yes xý No ¨o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes xý 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 x ý

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

The number of shares of ~~Common~~common ~~Stock~~stock, $0.001 par value per share, outstanding as of ~~May 15~~August 9, 2013 was 22,~~076~~420,~~976~~441.

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 includes ~~include~~ forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These forward-looking statements ~~involve~~include 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 these forward-looking statements. These forward-looking statements are not guarantees of future performance and are subject to risks, uncertainties and assumptions that are difficult to predict.

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, and levels of activity, performance or achievements. We ~~are~~undertake ~~under~~ no ~~duty~~obligation to ~~update~~revise ~~any~~or ofupdate ~~the~~publicly any forward-looking ~~statements~~ statement after the date of this ~~Quarterly~~report ~~Report~~ to ~~conform~~reflect ~~these~~future ~~statements~~events toor ~~actual results~~circumstances.

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DOCUMENT CAPTURE TECHNOLOGIES, INC

FORM 10-Q

FOR THE QUARTER ENDED ~~MARCH~~JUNE 3130, 2013

INDEX

		Page
PART I – FINANCIAL INFORMATION		Page
PART I – FINANCIAL INFORMATION		4
Item 1	Condensed Consolidated Financial Statements	4
Item 1	Financial Statements	4
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15
Item 3	Quantitative and Qualitative Disclosures About Market Risk	22
Item 4	Controls and Procedures	2123
PART II – OTHER INFORMATION		22
Item 1	Legal Proceedings	2224
Item 1A	Risk Factors	2224
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	2224
Item 3	Defaults Upon Senior Securities	2224
Item 4	~~Removed~~Mine ~~and~~Safety ~~Reserved~~Disclosures	2224
Item 5	Other Information	2224
Item 6	Exhibits	2325
	Signatures	2426

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PART I. FINANCIAL INFORMATION

Item 1 - Financial Statements

DOCUMENT CAPTURE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS (UNAUDITED)

(in thousands, except par value and shares)

	March 31,			December 31,
	June 30,			December 31,
	2013			2012
ASSETS					*
Current assets:
Cash and cash equivalents	$	2,~~515~~527		$	2,166
Trade receivables		12,~~759~~278			2,362
Inventories, net		1,~~545~~338			1,727
Note receivable		300			300
Prepaid expenses and other current assets		~~107~~136			155
Total current assets		6,~~226~~579			6,710
Other non-current assets		3649			36
Fixed assets, net		9280			104
Total assets	$	6,~~354~~708		$	6,850
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Line of credit	$	–		$	–
Trade payables to related parties		693			720
Trade payables to related parties, net		527			720
Trade payables and other accrued expenses		~~371~~365			395
Deferred revenue		60			–
Accrued compensation and benefits		385			206
Total current liabilities		1,~~449~~337			1,321
Long-term deferred rent		120			126
Long-term deferred revenue		240			–
Long-term deferred rent		113			126
Commitments and contingencies (Note 11)
Stockholders’ equity:
Preferred stock $.001 par value, 2,000 authorized, none issued and outstanding at March 31, 2013 and December 31, 2012
Preferred stock $.001 par value, 2,000 authorized, none issued and outstanding at June 30, 2013 and December 31, 2012
Common stock $.001par value, 50,000 authorized, 22,077 shares issued and outstanding at March 31, 2013 and December 31, 2012		22			22
Common stock $.001par value, 50,000 authorized, 22,420 and 22,077 shares issued and outstanding at June 30, 2013 and December 31, 2012, respectively		22			22
Additional paid-in capital		39,~~432~~527			39,256
Accumulated deficit		(34,~~669~~531	)		(33,875	)
Total stockholders’ equity		45,~~785~~018			5,403
Total liabilities and stockholders’ equity	$	6,~~354~~708		$	6,850

*Amounts derived from the audited financial statements for the year ended December 31, 2012.

The accompanying notes are an integral part of these consolidated financial statements.

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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,
	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Net sales	$	34,~~453~~247		$	4,~~410~~615		$	7,700		$	9,025
Cost of sales		2,~~132~~576			23,~~709~~125			4,708			5,834
Gross profit		1,~~321~~671			1,~~701~~490			2,992			3,191
Operating expenses:
Selling, general and administrative		1,~~654~~071			1,~~434~~409			2,725			2,843
Research and development		~~443~~438			~~467~~368			881			835
Total operating expenses		21,~~097~~509			1,~~901~~777			3,606			3,678
Operating loss		(776	)		(200	)
Operating income (loss)		162			(287	)		(614	)		(487	)
Non-operating income (expense), net		(18	)		143
Non-operating (expense) income, net		(24	)		303			(42	)		446
Net loss	$	(794	)	$	(57	)
Net income (loss)	$	138		$	16		$	(656	)	$	(41	)
Earnings per common share – basic and diluted	$	(0.04	)	$	(0.00	)
Basic income (loss) per common share – basic and diluted	$	0.01		$	0.00		$	(0.03	)	$	(0.00	)
Weighted average common shares outstanding – basic and diluted:		22,077			20,597
Weighted average common shares outstanding –
Basic		22,420			21,567			22,248			20,637
Diluted		22,794			22,225			22,248			20,637

The accompanying notes are an integral part of these consolidated financial statements.

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DOCUMENT CAPTURE TECHNOLOGIES, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

(in thousands)

	Three Months Ended March 31,
	Six Months Ended June 30,
	2013			2012
Operating activities:
Net loss	$	(~~794~~656	)	$	(5741	)
Adjustments to reconcile net loss to net cash provided (used) by operating activities:
Depreciation expense included in operating expenses		713			1020
Depreciation expense included in cost of sales		511			1019
Stock-based compensation cost – options		~~176~~268			~~247~~503
Fair value of warrants issued for services rendered		–			2039
Interest expense attributable to amortization of debt issuance costs		24			24
Change in fair value of stock option liability		–			(155	)
Allowance for slow-moving inventory		–			113
Change in fair value of stock option liability		–			(463	)
Changes in operating assets and liabilities:
Trade receivables		~~603~~84			(~~807~~473	)
Inventories		~~182~~389			~~361~~1,105
Prepaid expenses and other current assets		46			16
Prepaid expenses and other		2			19
Trade payables to related parties		(27	)		(725	)
Trade payables to related parties, net		(193	)		(731	)
Trade payables and other accrued expenses		(24	)		(427	)
Trade payables and other current liabilities		149			(646	)
Accrued compensation and benefits		179			(30	)
Income taxes payable		–			(23	)
Long-term deferred rent		(6	)		5
Deferred revenue		300			–
Net cash provided (used) by operating activities		349			(1,553	)
Deferred rent		(13	)		10
Cash provided (used) by operating activities		358			(545	)
Investing activities:
Capital expenditures		–			(5	)
Cash used by investing activities		–			(5	)
Financing activities:
Proceeds from exercise of common stock options		–3			115
Cash provided by financing activities		–3			115
Change in cash and cash equivalents		349			(1,552	)
Net increase (decrease) in cash and cash equivalents		361			(535	)
Cash and cash equivalents at beginning of period		2,166			2,455
Cash and cash equivalents at end of period	$	2,~~515~~527		$	~~903~~1,920
Supplemental disclosures of cash flow information:
Cash paid during the period for:
Income taxes	$	–		$	45
Non-cash investing and financing activities:
Transfer of deposits to fixed assets	$	–		$	26

The accompanying notes are an integral part of these consolidated financial statements.

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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 USB-powered image-scanning solutions to all types and sizes of enterprises. The Company’s patented and proprietary page-imaging devices facilitate the way information is stored, shared and managed, and are designed to reduce organizations’ operating costs, improve information accuracy and security, and speed processing time. End users include governmental agencies, large and small corporations, small office-home offices (“SOHO”), professional practices, as well as consumers.

To date, DCT offers more than 40 variations of its imaging platforms sold primarily to original equipment manufacturers (“OEM”), private label brands and value added resellers (“VAR”). DCT’s image-scanning products can be found in a variety of applications, including:

Document and information management;

Identification card and driver license 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 ofand ~~DCT~~related notes 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~~Rule 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~~ results of operations for the period ended ~~March~~June 3130, 2013 are not necessarily indicative of the operating results that may be expected for the entire year ending December 31, 2013. 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, 2012, filed with the Securities and Exchange Commission (“SEC”) on April 15, 2013.

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.

-Liquidity ~~7 -~~

As shown in the financial statements, during the six months ended June 30, 2013, DCT incurred a net loss of $656,000. During the years ended December 31, 2012 and 2011, DCT incurred net losses of $676,000 and $356,000, respectively. As of June 30, 2013, accumulated deficit was $34,531,000. Management believes that current cash and other sources of liquidity, including available borrowings on the bank line of credit, are sufficient to fund normal operations through the next 12 months.

-7-

DOCUMENT CAPTURE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

Liquidity

As shown in the financial statements, during the three months ended March 31, 2013, DCT incurred a net loss of $794,000. During the years ended December 31, 2012 and 2011, DCT incurred net losses of $676,000 and $356,000, respectively. As of March 31, 2013, accumulated deficit was $34,669,000. Management believes that current cash and other sources of liquidity are sufficient to fund normal operations through the next 12 months.

Executive Management Restructuring

In January 2013, weDCT restructured (“2013 Restructure”) ~~our~~its executive management team and terminated both ~~our~~the chief executive officer (“CEO”) and president. In connection with the 2013 Restructure, ~~our~~the former CEO resigned from the Board of Directors. Concurrently with the former CEO’s resignation, weDCT entered into an employment agreement with Michael Campbell to become ~~our~~the new CEO and President. The purpose of the 2013 Restructure iswas to enhance and strengthen DCT’s strategic leadership and reduce overhead expenses. Mr. Campbell has twenty-three years of experience in the technology industry, has been the CEO of four companies in the technology and industry, and is a seasoned business development and marketing executive. Mr. Campbell ~~will~~is ~~focus~~focused on mapping DCT’s existing technology and human assets to emerging market opportunities, and accelerating financial strength through focused business initiatives.

One-time expenses associated with the 2013 Restructure, including severance payments to terminated executives, totaled $306,000, which were recorded as ~~Selling~~selling, general and administrative expense during the ~~three~~first ~~months~~quarter ~~ended~~of ~~March 31,~~ 2013.

Note 2 – Related-Party Transactions

Purchases

Historically, DCT has purchased the majority of its finished scanner imaging products from various related entities (referred to collectively as “Scanner Manufacturers”) owned by a DCT stockholder who currently owns approximately 14% of DCT’s outstanding common stock.

The Scanner Manufacturers purchase the non-critical raw materials, parts and components. DCT procures the critical components required to manufacture its proprietary scanners. Subsequently, the Scanner Manufacturers reimburse DCT for the cost of procuring these critical components.

Purchases from Scanner Manufacturers totaled $12,~~788~~248,000 and $24,~~339~~036,000 for the three and six months ended ~~March~~June 3130, 2013, respectively, and $2,414,000 and $4,753,000 for the three and six months ended June 30, 2012, respectively. All purchases to and from Scanner Manufacturers were carried out in the normal course of business. As a result of ~~the~~these ~~aforementioned~~ purchases, the net due to related parties was $~~693~~527,000 and $720,000 at ~~March~~June 3130, 2013 and December 31, 2012, respectively.

Legal Services Agreement

In September 2009, DCT entered into a legal services agreement (“Agreement”) with Jody R. Samuels, a director of the Company. Pursuant to the Agreement, Mr. Samuels ~~will provide~~provides certain legal services to usDCT which ~~will~~consists ~~consist~~ of assisting the Company in (i) the preparation of its periodic and other filings with the ~~Securities and Exchange Commission (“~~SEC”), including proxy statements, special and annual meetings of ~~shareholders~~stockholders, (ii) the negotiation of financing and corporate development transactions, (iii) preparation and review of documentation related to financing arrangements and corporate development transactions, (iv) preparing registration statements, and responding to any SEC inquiries/comment letters, (v) documenting corporate governance policies and procedures, and (vi) any other legal matters reasonably within the legal expertise of Mr. Samuels.

~~Pursuant~~For tolegal ~~the Agreement~~services, Mr. Samuels was paid ~~$4,000 per~~ ~~month for~~ a total of $121,000 ~~during~~and ~~each~~$13,000 offor the three and six months ended ~~March~~June 3130, 2013, ~~and~~respectively. ~~2012~~Mr. ~~The~~Samuels ~~Agreement~~was ~~may~~paid be$12,000 ~~cancelled by~~and ~~either~~$24,000 ~~party~~for ~~with~~the 30three ~~days~~and ~~prior~~six ~~written~~months ~~notice~~ended June 30, 2012.

Agreement to License Office Space

Through ~~April~~ April 26, 2013, DCT licensed office space from Beau Dietl & Associates (“BDA”), a company owned by ~~DCT’s~~the ~~board~~Chairman of ~~directors’~~the ~~chair~~Board of DCT. Effective April 27, 2013, DCT no longer licenses office space from BDA.

-In connection with the License, DCT recorded rent expense of $2,000 and $8,000 -for the three and six months ended June 30, 2013, respectively; and $7,000 and $13,000 for the three and six months ended June 30, 2012, respectively.

-8-

DOCUMENT CAPTURE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

In connection with the licensed office space, DCT recorded rent expense of $6,000 for both the three months ended March 31, 2013 and 2012.

Professional Services

During the ~~three~~first ~~months~~quarter ~~ended~~of ~~March 31,~~ 2013, DCT paid BDA $34,000 for professional services provided during the 2013 Restructure.

Note 3 – 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. Interest bearing accounts are at each institution are insured by the Federal Deposit Insurance Corporation ("FDIC") up to $250,000. As of ~~March~~June 3130, 2013, DCT had consolidated balances of approximately $2,~~265~~220,000, which were not guaranteed by the FDIC. DCT has not ~~experienced~~ experienced any losses in ~~such~~these 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~~net ~~revenues~~sales and accounts receivable were as follows:

	Three Months Ended March 31,
	Three Months Ended June 30,						Six Months Ended June 30,
	2013			2012			2013			2012
Customer A		4132	%		2553	%		36	%		39	%
Customer B		1626			10*			19			11
Customer C		14			2119			14			20
Customer D		10*			19*			11			*

~~Trade~~* ~~receivables~~Customer ~~from~~accounted ~~these~~for ~~customers~~less ~~totaled~~than ~~$1,193,000~~10% ~~at March 31, 2013. As~~ of ~~March~~net ~~31,~~sales ~~2013,~~for ~~all~~ the period ~~Company's trade receivables were unsecured~~indicated.

Trade receivables from these customers totaled $1,808,000 at June 30, 2013. As of June 30, 2013, all of the Company's trade receivables were unsecured.

Note 4 – Concentration of Supplier Risk

Manufacturing. Historically, DCT has purchased ~~substantially~~ substantially all its finished scanner imaging products from Scanner Manufacturers which are wholly-owned subsidiaries of the parent ~~company~~ company of DCT’s former majority stockholder. See Note 2. If these vendors became unable to provide ~~materials~~ materials in a timely manner and DCT was unable to find alternative vendors, DCT’s business, operating results and financial ~~condition~~ condition would be materially and adversely affected.

Components. DCT purchases some controller ~~chips~~ chips that are sole-sourced, as they are specialized devices. To date, DCT has been able to obtain adequate component ~~supplies~~ supplies from existing sources. However, delays or reductions in product shipments could occur if DCT became unable to obtain ~~sufficient~~ sufficient quantities of required materials, components or subassemblies, or if ~~such~~these items do not meet quality standards. These ~~possible~~ possible delays could harm DCT’s business, operating results and financial condition.

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DOCUMENT CAPTURE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

Note 5 – Note Receivable

During the ~~third~~ quarter ofended September 30, 2012, DCT’s board of directors authorized a $300,000 investment in Advanced Cyber Systems Corp. (“ACSC”) in the form of a convertible note receivable (“ACSC Note”). The ACSC Note pays five percent interest per year. DCT will record the interest income when the cash is received. Principal and interest are ~~both~~ due on September 17, 2013 (“Maturity Date”). At any time prior to the Maturity Date, DCT is entitled at its option to convert the original principal amount of the ACSC Note into shares of ACSC equal to six percent of ~~the~~ACSC’s outstanding common stock at the time of exercise. The purpose of the investment in ACSC is to diversify and expand DCT’s future product offerings. The ACSC product is currently in final stages of development.

Note 6 – 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.

The following table sets forth, by the respective option plan, certain aspects of DCT’s stock options as of ~~March~~June 3130, 2013:

Option Approval Method

~~Options Outstanding and Options Available~~

Options Outstanding and Options Available

Description

~~Board of Directors~~

Board of Directors

~~Board of Directors and Shareholders~~

Board of Directors and Shareholders

~~Total~~

Total

~~Outstanding~~

Outstanding

~~Available For Future Grant~~

Available For Future Grant

~~Total~~

Total

2002 Amended and Restated Stock Option Plan

–

3,200,000

3,~~200~~001,~~000~~290

–198,710

3,200,000

2006 Stock Option Plan

–

2,500,000

2,~~500~~190,000

–310,000

2,500,000

2009 Stock Option Plan

–

1,500,000

1,~~500~~060,000

–440,000

1,500,000

2010 Stock Option Plan

–

3,500,000

32,~~500~~683,~~000~~333

–816,667

3,500,000

2013 Stock Option Plan

3,500,000

–

3,500,000

1,~~245~~345,043

2,~~254~~154,957

3,500,000

Key Personnel Option Grants

54,~~075~~175,000

–

54,~~075~~175,000

4,~~518~~175,~~465~~000

–

4,~~518~~175,~~465~~000

8,575,000

10,700,000

19,275,000

16,463,508

2,254,957

18,718,465

7,675,000

10,700,000

18,375,000

14,454,666

3,920,334

18,375,000

Stock Options

DCT issues options under five different stock option plans as well as through employment agreements with key employees, executives and consultants (approved by the board of directors on a case-by-case basis). Options generally vest over two to three years from the date of grant and expire seven to ten years from the date of grant.

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,
	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
Selling, general and administrative	$	~~171~~85	$	~~233~~235	$	256	$	468
Research and development		57		1421		12		35
	$	176	$	247
Total	$	92	$	256	$	268	$	503

-At 10June 30, 2013, DCT had approximately $506,000 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.7 years.

-10-

DOCUMENT CAPTURE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

At March 31, 2013, DCT had approximately $586,000 of total unrecognized compensation cost related to unvested stock options. This cost is expected to be recognized over a weighted-average period of approximately 1.85 years.

Stock Option Activity and Outstanding

DCT had the following stock option activity during the ~~three~~six months ended ~~March~~June 3130, 2013:

	Options			Weighted- Average Exercise Price
Outstanding at December 31, 2012		13,100,508		$	0.38
Granted		3,~~813~~913,000			0.16
Cancelled		450,000			0.37
Exercised		(343,465	)		0.01
Outstanding at March 31, 2013		16,463,508		$	0.33
Cancelled		(2,215,377	)		0.57
Vested or expected to vest at March 31, 2013		16,463,508		$	0.33
Outstanding at June 30, 2013		14,454,666		$	0.30
Vested or expected to vest at June 30, 2013		14,454,666		$	0.30

In January 2013, as part of the 2013 Restructure, DCT’s Board of Directors approved a nine-month extension to 1,583,333 options that were scheduled to expire in April 2013. The total fair value of the amended options, as calculated using the Black-Scholes valuation model, was approximately $80,000 ~~and~~ and was recorded as operating expense with the offsetting credit to additional paid-in capital during the ~~three~~first ~~months~~quarter ~~ended~~of ~~March 31,~~ 2013.

In March 2013, DCT’s Board of Director’s approved a one-year extension to 300,000 options that were scheduled to expire April 2013. The total fair value of the amended options, as calculated using the Black-Scholes valuation model, was approximately $1,000 and was recorded as operating expense with the offsetting credit to additional paid-in capital during the ~~three~~first ~~months~~quarter ~~ended~~of ~~March 31,~~ 2013.

The following table summarizes all options outstanding and exercisable by price range as of ~~March~~June 3130, 2013:

		~~Options Outstanding~~		Options Outstanding								~~Options Exercisable~~		Options Exercisable
~~Range of Exercise Prices~~	Range of Exercise Prices	~~Number Outstanding~~		Number Outstanding	~~Weighted- Average Remaining Contractual Life (Years)~~		Weighted-Average Remaining Contractual Life (Years)	~~Weighted- Average Exercise Price~~			Weighted-Average Exercise Price	~~Number Exercisable~~		Number Exercisable	~~Weighted- Average Exercise Price~~			Weighted-Average Exercise Price
$0.01			643,465			0.5		$	0.01				643,465		$	0.01
$	0.01			300,000			0.8			$	0.01			300,000			$	0.01
~~$0.12-$0.17~~	$0.12-$0.17		~~3,813,000~~	3,913,000		~~9.8~~	9.6	$	~~0.16~~	$	0.16		–	800,000		–	$	0.17
~~$0.29-$0.45~~	$0.29-$0.45		~~9,107,043~~	8,741,666		~~4.2~~	3.8	$	~~0.31~~	$	0.31		~~8,538,288~~	8,474,999	$	~~0.31~~	$	0.31
~~$0.60-$0.70~~	$0.60-$0.70		~~2,900,000~~	1,500,000		~~5.2~~	2.6	$	~~0.68~~	$	0.69		~~2,900,000~~	1,500,000	$	~~0.68~~	$	0.69
			16,463,508										12,081,753
				14,454,666										11,074,999

The “intrinsic value” of options is the excess of of the value of DCT stock over the exercise price of ~~such~~these options. The total intrinsic value of options outstanding (of which ~~all~~ all are expected to vest) at ~~March~~June 3130, 2013 was approximately $9651,000. The total intrinsic value of options outstanding at December 31, 2012 was $103,000. The total intrinsic value for exercisable options was $8439,000 and $103,000 at ~~March~~June 3130, 2013 and December 31, 2012, respectively. ~~No options were exercised during the three months ended March 31, 2013.~~ The total intrinsic value was $2745,000 and $475,000 for options exercised during the ~~three~~six months ended ~~March 31~~June 30, 2013 and 2012, respectively.

- 11 -

DOCUMENT CAPTURE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

Note 7 – Fair Value

During August 2010, DCT and NCR Corporation (“NCR”) entered into (i) Share Purchase Agreement, (ii) Investor Rights Agreement, and (iii) Voting Agreement pursuant to which NCR purchased from DCT 3,861,004 shares of the Company’s common stock for an aggregate purchase price of $4,000,000. Additionally, DCT granted NCR a two-year option (“NCR Option”) to purchase up to an additional $4,000,000 of Common Stock at an exercise price of $1.036 per share, subject to adjustment. On August 4, 2012, the NCR Option matured without being exercised.

OnDCT ~~August~~booked 4,an ~~2012,~~unrealized ~~the~~gain ~~NCR~~of ~~Option~~$308,000 and ~~matured~~$463,000, ~~without~~included ~~being~~as ~~exercised. On~~a ~~the~~component ~~maturity~~of ~~date~~non-operating income (expense), during the ~~fair~~three ~~value~~and ofsix ~~the~~months ~~NCR~~ended ~~Option~~June ~~was~~30, ~~zero.~~2012, respectively. Since the NCR Option matured on August 4, 2012, DCT has had no financial instruments that require fair value measurement ~~at each reporting period~~. As of March 31, 2012, DCT estimated the fair value of the NCR Option using the following assumptions: 0.15% risk-free interest rate, expected volatility of 223%, expected dividend yield of 0%, and remaining life equal to the remaining contractual life of the option.

Until maturity, DCT’s stock option liability fair value was classified using Level 3 inputs, as unobservable inputs to the valuation methodology are significant to the measurement of the fair value, as defined by ASC 820.

The following table summarizes the changes in Level 3 liabilities measured at fair value on a recurring basis during the three months ended March 31, 2012 (in thousands):

Beginning Balance - Stock Option Liability	$	502
Unrealized gain included in net loss (1)		(155	)
Ending Balance- Stock Option Liability	$	347

(1) Included as a component of non-operating income (expense).

Note 8 – Earnings per Common Share - Basic and Diluted

Basic earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the period. Diluted earnings per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock and common stock equivalents outstanding during the period.

~~Common~~DCT had common stock equivalents (“CSE”) of ~~685~~374,000 and 658,000 at June 30, 2013 and 32012,~~121~~ respectively. CSEs were taken into consideration in calculating diluted earnings per common share for both the three months ended June 30,~~000~~ 2013 and 2012, but the CSEs had no impact. CSEs were not considered in calculating DCT’s diluted earnings per common share ~~for~~during either the ~~three~~six months ended ~~March~~June 3130, 2013 ~~and~~or 2012, ~~respectively~~ as their effect would be anti-dilutive. As a result, for all periods presented, DCT’s basic and diluted earnings per share are the same.

The computation of DCT’s basic and diluted earnings per share for the three months ended June 30, 2013 and 2012 is as follows (in thousands, except per share amounts):

	Three Months Ended June 30,
	2013		2012

Net income (A)	$	138	$	16

Weighted average common shares outstanding (B)		22,420		21,567
Dilutive effect of employee equity incentive plans		374		658
Weighted average common shares outstanding, assuming dilution (C)		22,794		22,225

Basic earnings per common share (A)/(B)	$	0.01	$	0.00
Diluted earnings per common share (A)/(C)	$	0.01	$	0.00

Note 9 – Equity

Common Stock

DCT ~~had~~issued ~~no common stock activity during the three months ended March 31~~343,465 ~~2013.~~and ~~DCT issued 100~~1,~~000~~498,850 shares of common stock upon the exercise of employee stock options during the ~~three~~six months ended ~~March~~June 3130, 2013 and 2012, respectively.

~~Common Stock Warrants~~ -12-

In certain instances, DCT issues warrants for consulting services. DCT amortizes the fair value of the warrants, as calculated on the issuance date using the Black-Scholes valuation model, 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 $20,000 during the three months ended March 31, 2012.

DCT did not issue any common stock warrants during the three months ended March 31, 2013 or the three months ended March 31, 2012.

- 12 -

DOCUMENT CAPTURE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

~~The~~Common ~~following~~Stock ~~table~~Warrants ~~summarizes certain aspects of DCT’s outstanding warrants as of March 31, 2013:~~

In certain instances, DCT issues warrants for consulting services. DCT amortizes the fair value of the warrants, as calculated on the issuance date using the Black-Scholes valuation model, over the service period. In connection with these common stock warrants issued and outstanding, DCT charged selling, general and administrative expense with the offset credit to additional paid in capital for $19,000 and $39,000 during the three and six months ended June 30, 2012, respectively.

DCT did not issue any common stock warrants during either the six months ended June 30, 2013 or 2012.

The following table summarizes certain aspects of DCT’s outstanding warrants as of June 30, 2013:

Warrants Issued in Connection with:

Number of Shares Outstanding and Vested

Exercise Price ($)

Issuance Date

Expiration Date

Bank line of credit

68,027

0.59

9/2/09

8/31/16

Note 10 – ~~Debt~~Liabilities

Bank Line of Credit

As of ~~March~~June 3130, 2013, 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 less the aggregate face amount of all outstanding letters of credit, cash management services, and foreign exchange contracts. The interest rate is prime (3.25% at ~~March~~June 3130, 2013) plus 1.0%. Interest payments are due monthly and all unpaid interest and principal is due in full on November 15, 2013.

Upon certain events of default (as defined in the LOC agreement), the default variable interest rate increases five percentage points above the interest rate applicable immediately prior to the default. Additionally, the lender has the right to declare all of the amounts due under the LOC immediately due and payable upon an event of default.

As of ~~March~~June 3130, 2013, DCT was in compliance with all LOC debt covenants and had unused borrowing capacity of $1,~~225~~761,000.

Deferred Revenue

During the three months ended June 30, 2013, DCT entered a five-year license agreement (“License Agreement”) which transfers all ownership rights of certain of DCT’s trademarks for $300,000. In addition, the License Agreement provides for certain volume-related discounts. DCT licensed back the trademarks for use outside North, Central, and South America. Beginning in the third quarter of 2013, revenue will be recognized ratably over the term of the License Agreement.

Note 11 – Commitments and Contingencies

Operating Leases

DCT occupies its corporate office and ~~warehouse~~ warehouse space through an operating lease that extends through October 2015. As of ~~March~~June 3130, 2013, future minimum rental commitments ~~under~~ under non-cancellable leases were as follows (in thousands):

Years Ending March 31,		Future Minimum Lease Payments
Years Ending June 30,				Future Minimum Lease Payments
~~2014~~	2014	$	~~251~~	$	256
~~2015~~	2015		~~270~~		275
~~2016~~	2016		~~164~~		94
		$	~~685~~	$	625

Additionally, under the lease agreement, DCT is responsible for common area maintenance (“CAM”) charges and pro-rated taxes and insurance.

~~Employment Agreements~~-13-

DCT maintains employment agreements with certain of its executive officers that 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, 2013 termination payments totaling $525,000 remain in effect.

- 13 -

DOCUMENT CAPTURE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

Employment Agreements

DCT maintains employment agreements with certain of its executive officers that 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 June 30, 2013 termination payments totaling $525,000 remain in effect.

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.

Note 12 –Inventories

Inventories at the end of each period were as follows (in thousands):

	March 31, 2013			December 31, 2012
	June 30, 2013			December 31, 2012
Raw materials	$	~~288~~281		$	279
Finished goods		1,~~476~~276			1,694
		1,764			1,973
		1,557			1,973
Less: Inventory allowance		(219	)		(246	)
	$	1,~~545~~338		$	1,727

Note 13 – Segment and Geographic Information

Segment Information

DCT operates in one segment: the design, development and delivery of various imaging technology solutions, most notably scanners.

Geographic Information

During the three and six months ended ~~March 31~~June 30, 2013 and 2012, DCT recorded net sales throughout the U.S., ~~Asia~~Europe and ~~Europe~~other, and Asia as determined by the final destination of the product. The following table summarizes total net sales attributable to significant countries (in thousands):

	Three Months Ended March 31,
	Three Months Ended June 30,				Six Months Ended June 30,
	2013		2012		2013		2012
U.S.	$	3,~~027~~920	$	43,~~147~~805	$	6,993	$	7,952
Europe		319		263
Europe and other		274		630		590		893
Asia		~~107~~53		–180		117		180
	$	34,~~453~~247	$	4,~~410~~615	$	7,700	$	9,025

~~Presented below is information regarding identifiable assets, classified by operations located in the U.S., Europe and Asia (in thousands):~~-14-

	March 31, 2013		December 31, 2012
U.S.	$	5,677	$	6,229
Europe and other		645		583
Asia		32		38
	$	6,354	$	6,850

DOCUMENT CAPTURE TECHNOLOGIES, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS – (Unaudited)

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

	June 30, 2013		December 31, 2012
U.S.	$	6,157	$	6,229
Europe and other		524		583
Asia		27		38
	$	6,708	$	6,850

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.

- 14 15-

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

The following discussion and analysis should be read in conjunction with our unaudited condensed consolidated financial statements and notes included in this report. 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 our Annual Report on Form 10-K for the year ended December 31, 2012 as filed with the SEC on April 15, 2013. We undertake no obligation to revise or update publicly any forward-looking statement contained in this report after the date of this report to reflect future events or circumstances.

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. This MD&A section is organized as follows:

Overview. This section provides a general description of our 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 and six months ended ~~March~~June 3130, 2013 compared to the three and six months ended ~~March~~June 3130, 2012. A brief description of certain aspects, transactions and events is provided, including related-party transactions, which impacts 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~~six months ended ~~March~~June 3130, 2013 as compared to the ~~three~~six months ended ~~March~~June 3130, 2012.

Overview

We are in the business of designing, developing and delivering various USB-powered imaging technology solutions. Our ~~technology~~patented and proprietary page-imaging devices facilitate the way information is ~~protected~~stored, ~~under~~shared ~~multiple~~and ~~patents~~managed, and are designed to reduce organizations’ operating costs, improve information accuracy and security, and speed processing time. We focus our research and development activities on new deliverable and marketable technologies related to document digitization and utilization. We sell our products to customers throughout the world.

In August 2010, NCR ~~invested~~purchased ~~$4,000,000 in our company by purchasing~~ 3,861,004 shares of our common stock for an aggregate purchase price of $4,000,000 (“NCR Investment”). The NCR Investment was both a strategic and financial milestone for us. It provided us with the capital to aggressively invest in new product development. It also allowed us to actively pursue strategic partnerships with other businesses ~~world-wide~~worldwide in order to expand our distribution channels and product offerings.

In September 2011, we appointed a Chief Technology Officer (“CTO”), and have since re-aligned our engineers as part of our focused investment in research and development. In addition to re-aligning our engineering staff, we use specialized contractors with unique skills and abilities to supplement our product innovation and development, which allows greater flexibility while minimizing expenses. Our goal is to consistently develop new products while minimizing ~~our~~ time to market, strengthen competitive barriers, broaden our revenue base, and balance the risk of new product development.

In January 2013, we restructured ~~(“2013 Restructure”)~~ our executive management team (“2013 Restructure”) and terminated both our chief executive officer (“CEO”) and our president. In connection with the 2013 Restructure, our former CEO resigned from the Board of Directors. Concurrently with ~~his~~the former CEO’s resignation, we entered into an employment agreement with Michael Campbell to become our new CEO and President. The purpose of the 2013 Restructure is to enhance and strengthen our strategic leadership and reduce overhead expenses. Mr. Campbell has twenty-three years of experience in the technology industry, has been the CEO of four companies in the technology industry and is a seasoned business development and marketing executive. Mr. Campbell ~~expects~~is tofocused ~~focus~~ on mapping DCT’s existing technology and human assets to emerging market opportunities and accelerating financial strength through focused business initiatives.

-1516-

Critical Accounting Policies

This 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 ongoing 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, 2012 have not materially changed since that report was filed.

-1617-

Results of Operations

The following table summarizes certain aspects of our results of operations for the three and six months ended ~~March~~June 3130, 2013 compared to the three and six months ended ~~March~~June 3130, 2012 (in thousands):

	Three Months Ended March 31,
	Three Months Ended June 30,												Six Months Ended June 30,
	2013			2012			$ Change			% Change
								$			%									$		%
Net sales	$	3,453		$	4,410		$	(957	)		(22	)%
		2013			2012			Change			Change			2013			2012			Change		Change
Cost of sales		2,132			2,709			(577	)		(21	)
Net sales	$	4,247		$	4,615		$	(368	)		(8	)%	$	7,700		$	9,025		$	(1,325	)	(15	)%
As a percentage of net sales		62	%		61	%
Cost of sales		2,576			3,125			(549	)		(18	)		4,708			5,834			(1,126	)	(19	)
Selling, general and administrative expense		1,654			1,434			220			15
As a percentage of sales		61	%		68	%								61	%		65	%
Research and development expense		443			467			(24	)		(5	)
Selling, general and administrative expense		1,071			1,409			(338	)		(24	)		2,725			2,843			(118	)	(4	)
Non-operating income (expense), net		(18	)		143			(161	)		*
Research and development expense		438			368			70			19			881			835			46		6
Net loss		(794	)		(57	)		(737	)		*
Non-operating income (expense)		(24	)		303			(327	)		*			(42	)		446			(488	)	*
Net income (loss)		138			16			122			*			(656	)		(41	)		(615	)	*

_____________ * not meaningful

* not meaningful

Net Sales

The decreased sales for both the three and six months ended ~~March~~ 31June 30, 2013 as compared to the three and six months ended ~~March~~June 3130, 2012 was attributable to a 1916% ~~drop~~and 17% drop in unit volume, respectively, and the mix of products sold. The decrease was in line with our expectations as digital storage gains broader acceptance and popularity, which in turn has increased the number of competitors in our market.

International sales are strategically important to our business and, ~~represented~~as 12a percentage of sales, were 8% and 618% offor ~~total~~the ~~sales~~three months ended June 30, 2013 and 2012, respectively; and 9% and 12% for the ~~three~~six months ended ~~March~~June 3130, 2013 and 2012, respectively. ~~International~~The ~~sales~~decrease ~~as a~~in the relative percentage of ~~total~~international sales ~~have~~resulted from ~~been~~the ~~positively~~initial ~~impacted by our recent~~ globalization and expansion of our products into Europe and Asia., which peaked in 2012.

~~Although~~Our ~~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) as a percentage of total sales were 8172% during both the three months ended June 30, 2013 and 752012; and 80% and 70% during the ~~three~~six months ended ~~March~~June 3130, 2013 and 2012, respectively. See “Note 3 – Concentration of Credit Risk and Major Customers” in Part I, Item 1 of this report. 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.

From time to time, our key customers place large orders causing our quarterly sales to fluctuate significantly. Additionally, the timing of when we receive product to sell has a significant impact on our sales. We expect both of these trends and resulting fluctuations to continue in the future.

Cost of Sales, Including Gross Profit

Cost of sales includes all direct costs related to the purchase of scanners and imaging modules manufactured in China. To a lesser extent, cost of sales also includes engineering services, shipping costs, software royalties, depreciation of manufacturing equipment, and labor for scanners assembled in the U.S. Cost of sales as a percentage of net sales during the three months ended March 31, 2013 compared to the three months ended March 31, 2012 increased as a result of increased competition discussed above and currency fluctuations between the Chinese Yuan and the U.S. dollar. This increase was slightly offset by reduced product costs as a result of our continued efforts to reduce overall costs and improve manufacturing efficiencies.

-1718-

Cost of sales as a percentage of sales decreased during the three and six months ended June 30, 2013 compared to the three and six months ended June 30, 2012 as a result of result of product mix, currency fluctuations, and volume-related discounts. Cost of sales as a percentage of net sales has been affected in in the past, and may continue to be affected in the future, by various factors, including, but not limited to, the following:

· our product mix and volume of product sales (including sales to high volume customers); · changes to customer requirements for third-party software integrated into our products; · manufacturing efficiencies and inefficiencies, including cost reduction strategies; · currency fluctuations between the Chinese Yuan and the U.S. Dollar; · product expansion; · the proportion of sales generated from scanners assembled in the U.S. versus the proportion of scanners assembled at our subcontract manufacturer in China; · provisions for slow-moving inventories; and · our ability to advance to the next technology faster than our competitors.

We· ~~expect~~changes ~~our cost of sales as a percentage of net sales~~ to ~~fluctuate~~ incustomer ~~the~~requirements ~~future~~for asthird-party wesoftware ~~experience~~integrated ~~changes~~into in our ~~product mix, work toward implementing further product cost reduction strategies, and expand our product offerings.~~products;

manufacturing efficiencies and inefficiencies, including cost reduction strategies;

currency fluctuations between the Chinese Yuan and the U.S. Dollar;

product expansion;

the proportion of sales generated from scanners assembled in the U.S. versus the proportion of scanners assembled at our subcontract manufacturer in China;

provisions for slow-moving inventories; and

our ability to advance to the next technology faster than our competitors.

We expect our cost of sales as a percentage of net sales to fluctuate in the future as we experience changes in our product mix, work toward implementing further product cost-reduction strategies, and expand our product offerings.

Selling, General and Administrative Expense

Selling, general and administrative (SG&A) 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 and logistics are also included.

The ~~increase~~decrease in SG&A expenses during the three ~~months~~and ~~ended~~six months ~~March~~ended 31June 30, 2013 as compared to the three and six months ended ~~March~~June 3130, 2012 was primarily attributable to the ~~2013 Restructure. One-time expenses associated with the 2013 Restructure, including severance payments to terminated executives, totaled $306,000. This increase was partially offset by the~~ following:

	·	decreased headcount and compensation-related expenses of approximately $73,000 related to the 2013 Restructure; and
	·	decreased stock-based compensation expense (a non-cash charge) as a result of fully amortized options during the latter part of 2012. Stock-based compensation expense was $171,000 and $233,000 for the three months ended March 31, 2013 and 2012, respectively. See “Note 6 – Equity Incentive Plans” in Part I, Item 1of this report.

decreased headcount and compensation-related expenses of approximately $38,000 and $116,000 for the three and six months ended June 30, 2013 compared to the same period in 2012, respectively, as a result of the 2013 Restructure; and

We· ~~anticipate~~decreased ~~that~~stock-based ~~future~~compensation ~~SG&A expenses~~expense ~~will~~(a ~~decrease~~non-cash incharge) ~~the~~as ~~near~~a result of outstanding options being fully amortized prior to Fiscal 2013. Stock-~~term~~based ascompensation weexpense ~~implement~~was ~~further~~$85,000 ~~cost~~and $235,000 for the three months ended June 30, 2013 and 2012, respectively. Stock-~~reduction~~based ~~strategies~~compensation expense was $256,000 and ~~concentrate~~$468,000 ~~specifically~~for on the ~~next~~six ~~generation~~months ended June 30, 2013 and 2012, respectively. See “Note 6 - Equity Incentive Plans” in Part I, Item 1 of ~~document~~this ~~capture~~Form ~~technology~~10-Q.

The above decreases were partially offset by one-time expenses associated with the 2013 Restructure which occurred during the first quarter of 2013. These expenses, including severance payments to terminated executives, totaled $306,000.

We anticipate that future SG&A expenses may decrease in the near-term as we implement further cost-reduction strategies and concentrate specifically on the next generation of document capture technology.

Research and Development Expense

Research and development (“R&D”) ~~expense~~expenses ~~consists~~consist primarily of salaries and related costs, including stock-based compensation costs of employees engaged in product research,; design and development activities,; compliance testing,; documentation and prototypes,; and expenses associated with transitioning the product to production.

~~The decreased~~ R&D ~~expense~~expenses increased during the three and six months ended ~~March~~June 3130, 2013 compared to the three and six months ended ~~March~~June 3130, 2012, ~~was~~which increases are primarily attributable to the final product development of our ~~more~~next ~~focused~~generation products which will be released during the third quarter of 2013. During 2013, our R&D ~~efforts~~ efforts have become more focused toward the next generation of product. We believe ~~that~~our ~~these~~ R&D efforts will allow for ~~quicker~~a quicker time to market for future products.

~~We anticipate that R&D expense will increase in the future as a result of our new product innovation and development, and overall intellectual property strategy.~~-19-

~~-18-~~R&D expense may increase in the future as a result of our new product innovation and development, and overall intellectual property strategy.

Non-Operating Income (Expense)

During the three and six months ended ~~March~~ 31June 30, 2012, the most significant component of non-operating income (expense) was a non-cash gain of $155,000 related to the ~~decreased~~ decreased fair value of stock option liability. See “Note 7 – Fair Value” in Part I, Item 1 of this report. During ~~the~~ the third quarter of 2012, the stock option liability matured without being exercised. ~~As such~~Accordingly, non-operating income (expense) for the three and six months ended ~~March~~June 3130, 2013 was not impacted by the change in fair value of our stock option liability. Other, less impactful, components ~~include~~of non-~~cash interest~~operating income (expense) ~~related~~include tonon-cash ~~amortization~~interest expense ~~of warrants~~ and realized loss on foreign currency transactions resulting from the currency fluctuation between the ~~Euro and the~~ U.S. dollar, the Chinese Yuan, and the Euro.

Liquidity and Capital Resources

At ~~March~~June 3130, 2013, principal sources of liquidity included cash and cash equivalents of $2,~~515~~527,000 and an available borrowing capacity of $1,~~225~~761,000 on our bank line of credit. We had no significant cash outlays, except as part of our normal operations, during the ~~three~~six months ended ~~March~~June 3130, 2013 or ~~March 31,~~ 2012.

The following table summarizes certain aspects of our liquidity (in thousands):

	As of or for the Three Months Ended March 31,
	As of or for the Six Months Ended June 30,
	2013		2012
Cash and cash equivalents	$	2,~~515~~527	$	~~903~~1,920
Working capital		4,777		5,621
Line of credit balance		–		–
Cash provided (used) by operating activities		349		(1,553	)
Working capital		5,002		5,637
Cash provided (used) by investing activities		–		–
Cash provided (used) by operating activities		358		(545	)
Cash provided by financing activities		–		1
Cash used by investing activities		–		(5	)
Cash provided by financing activities		3		15

Operating activities

Cash provided by operations during the ~~three~~six months ended ~~March~~June 3130, 2013 was primarily a result of our $~~794~~656,000 net loss, $~~190~~296,000 of net non-cash expenses and $~~953~~718,000 net cash provided by changes in operating assets and liabilities. Cash used by operations during the ~~three~~six months ended ~~March~~June 3130, 2012 was primarily a result of of our $5741,000 net loss, $~~134~~235,000 of net non-cash expenses and $1739,~~630,~~000 net cash used by changes in operating assets and liabilities.

Net non-cash expenses include: depreciation expense, stock-based compensation cost for options, fair value of warrants issued for services rendered, non-cash interest expense, ~~and~~ change in fair ~~value~~ value of stock option liability, and allowance for slow-moving inventory. The most significant changes in operating assets and liabilities during the six months ended June 30, 2013 included:

~~The~~• ~~most~~Inventories ~~significant~~decreased ~~change in operating assets and liabilities during the three months ended March 31, 2013 was attributable to the decrease in accounts receivable~~ as a result of our decreased ~~sales~~revenue. ~~The most significant changes in operating assets and liabilities during the three months ended March 31, 2012 included:~~

• anDeferred ~~increase~~revenue inincreased ~~accounts receivable~~ as a result of our ~~significantly~~five-year ~~increased~~license ~~sales~~agreement ~~during~~(“License ~~March~~Agreement”) ~~2012;~~which transfers all ownership rights of certain of DCT’s trademarks for $300,000. Revenue will be recognized ratably over the term of the License Agreement.

•The amost ~~decrease~~significant changes in ~~inventories~~operating ~~due~~assets toand ~~the shipment of products~~ liabilities during the ~~three~~six months ended ~~March~~June 3130, 2012, ~~which was originally scheduled for shipment in December 2011; and~~included:

• aTrade ~~decrease~~receivables inincreased ~~trade~~as ~~payables~~a ~~and~~result ~~other current liabilities primarily due to the payment~~ of ~~third-party~~our ~~software~~significantly ~~licenses,~~increased ~~bonuses~~sales ~~and~~during ~~one-time~~June ~~relocation obligations, which were accrued at December 31, 2011~~2012.

~~The~~• ~~remaining~~Inventories ~~changes~~decreased indue ~~operating~~to ~~assets and liabilities during both~~ the ~~three~~shipment ~~months~~of ~~ended~~products ~~March~~during ~~31, 2013 and 2012 were indicative of~~ the ~~normal~~first ~~operational~~quarter ~~fluctuations related to the timing~~ of ~~product shipments~~2012, ~~trade~~which ~~receivable~~was ~~collections,~~originally ~~inventory~~scheduled ~~management~~for ~~and~~shipment ~~timing~~in ofDecember ~~vendor payments~~2011.

•

Trade payables to related parties, net decreased as a result of a temporary reduction to payment terms from 45-days to 30-days to support the manufacturing transition to next generation scanner components.

•

Trade payables and other current liabilities decreased primarily due to the payment of third-party software licenses, bonuses and one-time relocation obligations, which were accrued at December 31, 2011.

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The remaining changes in operating assets and liabilities during both the six months ended June 30, 2013 and 2012 were indicative of the normal operational fluctuations related to the timing of product shipments, trade receivable collections, inventory management and timing of vendor payments.

We expect future cash provided (used) by operating activities to fluctuate, primarily as a result of fluctuations in operating results, timing of product shipments, trade receivables collections, inventory management and timing of vendor payments.

Investing activities

Our business requires minimal capital investment. ~~As such~~Accordingly, we had no investing activities for ~~either~~ the ~~three~~six months ended ~~March~~June 3130, 2013. orInvesting activities during the six months ended June 30, 2012 included capital purchases to support normal business operations.

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Financing activities

WeDuring ~~had~~both ~~no financing activities during~~ the ~~three~~six months ended ~~March~~ 31June 30, 2013. ~~During~~and ~~the three months ended March 31,~~ 2012, ~~our~~ financing activities ~~were~~consisted ~~limited~~of toproceeds received from the exercise of employee stock options.

Cash and Working Capital Requirements

Our strengthened financial position as a result of the 2010 NCR Investment allowed us to actively pursue revenue growth through new strategic relationships, as well as invest in new product development. However, during 2012 and the first ~~quarter~~half of 2013, sales fell short of expectations, and our working capital ~~has~~ decreased.

During January 2013, we reorganized and downsized our executive management team to reduce operating expenses to more align with our current and anticipated sales. The reorganization immediately reduced operating expenses and we believe that it will allow us to focus specifically on the next generation of document capture technology.

We believe that current and future available capital resources, revenues generated from operations, and other existing sources of liquidity, including our credit facility, will be adequate to meet our anticipated working capital and capital expenditure requirements for at least the next twelve months. If, however, our capital requirements or cash flow vary materially from our current projections, or if unforeseen circumstances occur, we may require additional financing. Our failure to raise capital, if needed, could hinder our ability to ~~compete~~operate.

Contractual Obligations

The following table summarizes our contractual obligations at ~~March~~June 3130, 2013, and the effect ~~such~~these obligations are expected to have on our liquidity and cash flows in future periods (in thousands):

Less Than

One – Three

Four – Five

Total

One Year

Years

Operating lease obligations (1)

~~685~~625

~~251~~256

~~434~~369

–

Line of credit (2)

–

Total contractual cash obligations

~~685~~625

~~251~~256

~~434~~369

–

^{_________________}

(1) Operating lease obligations relate to our corporate office and warehouse space ~~that~~and ~~extends~~extend through October 2015. In addition to the lease payments, we are ~~also~~ also responsible for common area maintenance (“CAM”) charges and pro-rated taxes and insurance. CAM is subject to change, but has averaged approximately $10,000 per month since the inception of the lease.

(2) As of ~~March~~June 3130, 2013, we 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 less the aggregate face amount of all outstanding letters of credit, cash management services, and foreign exchange contracts. The interest rate is the prime rate of interest (3.25% at ~~March~~June 3130, 2013) plus 1.0%. Interest payments are due monthly and all ~~unpaid~~ unpaid interest and principal is due in full on November 15, 2013.

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Upon the occurrence of certain events of default (as defined in the LOC agreement), a default variable interest rate will be applicable to amounts owed to the lender, which default variable interest rate will equal 5% above the interest rate under the LOC immediately prior to the event of default. Additionally, upon an event of default, the lender has the right to declare all of the amounts due under the LOC immediately due and payable.

As of ~~March~~June 3130, 2013, we were in compliance with all LOC debt covenants and had unused borrowing capacity of $1,~~225~~761,000.

Item – 3 Quantitative and Qualitative Disclosures About Market Risk.

Not applicable.

-2022-

Item 4 – Controls and Procedures

Evaluation of Disclosure Controls and Procedures

We conducted an evaluation under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by the company in the reports it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures also include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, or persons performing similar functions, as appropriate, to allow timely decisions regarding required disclosure. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded as of ~~March~~June 3130, 2013 that our disclosure controls and procedures were effective at a reasonable assurance level.

Evaluation of Changes in Internal Control over Financial Reporting

There were no changes to our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) that occurred during the period covered by this report that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, does not expect that our disclosure controls or our internal control over financial reporting will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, have been or will be detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Projections of any evaluation of the effectiveness of controls to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

We are subject to legal proceedings, claims and litigation arising in the ordinary course of business. While the amounts claimed may be substantial, the ultimate liability cannot presently be determined because of considerable uncertainties that exist. Therefore, it is possible that the outcome of those legal proceedings, claims and litigation could adversely affect our quarterly or annual operating results or cash flows when resolved in a future period. However, based on facts currently available, management believes such matters will not adversely affect in any material respect our financial position, results of operations or cash flows.

Item 1A. Risk Factors

In addition to the other information set forth in this report, you should carefully consider the factors discussed under “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2012, which could materially affect our business, financial condition and results of operations.

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

Not applicable.

Item 3. Defaults Upon Senior Securities

Not applicable.

Item 4. Mine Safety Disclosure

Not applicable.

Item 5. Other Information

None.

-2224-

Item 6 - Exhibits

ExhibitNumber		Description of Exhibit
Exhibit Number		Description of Exhibit
31.1		Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
31.2		Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (*)
32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (*)
101.INS		XBRL Instance Document () (*)
101.SCH		XBRL Taxonomy Extension Schema Document () (*)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document () (*)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document () (*)
101.LAB		XBRL Taxonomy Extension Label Linkbase Document () (*)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document () (*)

____________________

	(*)	Filed herewith.
	(**)	Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

(*)

Filed herewith.

(**) Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-~~23-~~fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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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.

Document Capture Technologies, Inc. Date: ~~May~~August 1514, 2013 /s/ Michael J. Campbell Michael J. Campbell Chief Executive Officer (Principal Executive Officer) Date: ~~May15~~August 14, 2013 /s/ M. Carolyn Ellis M. Carolyn Ellis Chief Financial Officer (Principal Financial Officer)

-2426-

EXHIBITS FILED WITH THIS REPORT

ExhibitNumber		Description of Exhibit
Exhibit Number		Description of Exhibit
31.1		Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2		Certifications Required by Rule 13a-14(a) of the Securities Exchange Act of 1934, as amended, as Adopted Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1		Certification of Chief Executive Officer and Chief Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101.INS		XBRL Instance Document (*)
101.SCH		XBRL Taxonomy Extension Schema Document (*)
101.CAL		XBRL Taxonomy Extension Calculation Linkbase Document (*)
101.DEF		XBRL Taxonomy Extension Definition Linkbase Document (*)
101.LAB		XBRL Taxonomy Extension Label Linkbase Document (*)
101.PRE		XBRL Taxonomy Extension Presentation Linkbase Document (*)

____________________

(*)

Pursuant to applicable securities laws and regulations, we are deemed to have complied with the reporting obligation relating to the submission of interactive data files in such exhibits and are not subject to liability under any anti-fraud provisions of the federal securities laws as long as we have made a good faith attempt to comply with the submission requirements and promptly amend the interactive data files after becoming aware that the interactive data files fail to comply with the submission requirements. Users of this data are advised that, pursuant to Rule 406T, these interactive data files are deemed not filed and otherwise are not subject to liability.

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Filing Compare · DOCUMENT CAPTURE TECHNOLOGIES, INC.