Exhibit 10.12

AMENDMENT TO EXECUTIVE EMPLOYMENT AGREEMENT

This Amendment to Executive Employment Agreement (the “Amendment”) is entered
into as of July 2, 2009, by and between NovaRay Medical, Inc., a Delaware
corporation with its principal place of business at 39655 Eureka Drive, Newark,
California 94560 (“Company”) and William Frederick (“Executive”) (collectively,
the “parties”). All capitalized terms not otherwise defined herein shall have
the meaning ascribed to them in that certain Executive Employment Agreement
dated as of November 18, 2008 by and between the Company and Executive (the
“Agreement”).

RECITALS

WHEREAS, the Company and Executive entered into the Agreement;

WHEREAS, the Company and Executive desire to amend the Agreement to be as set
forth herein.

NOW, THEREFORE, in compliance with Section 15 of the Agreement and in
consideration of the mutual promises and covenants set forth herein and in the
Agreement and Statement of Work, the Client and the Company hereby agree as
follows:

Section 4.1 of the Agreement is hereby amended to read in its entirety:

“Salary. As compensation for the proper and satisfactory performance of all
duties to be performed by Executive hereunder, Company shall pay to Executive a
base salary of $225,000.00 per year, less applicable withholdings (the “Base
Salary”). Until the receipt of gross proceeds from equity or debt or other
financing obtained by Company of at least Five Million Dollars ($5,000,000) in
the aggregate after July 7, 2009, eighty percent (80%) of the Base Salary or
$7,500 for each applicable semi-monthly pay period, less applicable
withholdings, shall be paid in accordance with the Company’s regularly
established payroll practice. The remaining $1,875 for each applicable
semi-monthly pay period, less applicable withholdings, shall be paid in the
event of (i) a receipt of gross proceeds from equity or debt or other financing
obtained by Company of at least Five Million Dollars ($5,000,000) in the
aggregate after July 7, 2009, (ii) a termination of Executive’s employment under
the Agreement by the Company without Cause or (iii) a termination of Executive’s
employment under the Agreement by Executive for Good Reason. After the receipt
of gross proceeds from equity or debt or other financing obtained by Company of
at least Five Million Dollars ($5,000,000) in the aggregate after

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July 7, 2009, the Base Salary shall be paid in accordance with the Company’s
regularly established payroll practice. In the event Executive’s employment
under this Agreement is terminated by either party, for any reason, Executive
will be entitled to receive such amount of his salary earned as provided in this
Section through the date of such termination.”

Section 4.2 of the Agreement is hereby amended to read in its entirety:

Incentive Compensation.

 

  (a) Discretionary Incentive Compensation. Executive may be granted incentive
compensation in the Company’s discretion. If Company, in its sole and absolute
discretion, grants Executive incentive compensation, the terms, amount and
payment of such incentive compensation will be determined solely by Company.
Such incentive compensation may be payable in either cash or stock of the
Company or any combination thereof at the election of the Company and pursuant
to terms and conditions established by the Board of Directors of the Company.

 

  (b) Debt or Equity Financing. In the event the Company receives aggregate
gross proceeds not less than $3,000,000 from debt or equity financings after
July 7, 2009 and prior to December 31, 2010 (excluding proceeds from funds
managed by Vision Capital Advisors, LLC), Executive shall receive incentive
compensation set forth in Section 4.3(c) below for raising such additional debt
or equity financing provided that Executive is employed with the Company at the
time of such receipt of gross proceeds.

 

  (c)

Calculation. The method described in this section are to be used as guidelines
for determining such incentive compensation. The Board of Directors of the
Company in its sole and absolute discretion may adjust percentages up or down
based on the terms of such debt or equity financing transaction and based on any
amounts received by Executive pursuant to Section 4.2(d) below. In the event the
Company receives aggregate gross proceeds not less than $3,000,000 from equity
financings after July 7, 2009 and prior to December 31, 2010 (excluding proceeds
from funds managed by Vision Capital Advisors, LLC), such compensation will be
initially based on a percentage of Executive’s base salary listed in Table 1
below taking into account the amount raised and the pre-money valuation. In the
event the Company receives aggregate gross proceeds not less than $3,000,000
from straight debt financings after July 7, 2009 and prior to December 31, 2010
(excluding proceeds from funds managed by Vision Capital Advisors, LLC), such
compensation will be initially based on a percentage of Executive’s base salary
listed in the $80M pre-money valuation row in Table 1 below. In the event the
Company receives aggregate gross proceeds not less than $3,000,000 from
convertible debt financings after July 7, 2009

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and prior to December 31, 2010 (excluding proceeds from funds managed by Vision
Capital Advisors, LLC), such compensation will be initially based on a
percentage of Executive’s base salary listed in Table 1 below taking into
account the amount raised and the pre-money valuation assuming conversion of
such convertible debt. In the event such converted pre-money valuation is
unknown, the Board of Directors of the Company will determine the appropriate
percentage. Such incentive compensation may be payable in either (i) cash or
(ii) a combination of cash and up to 60 to 70% of such incentive compensation in
Incentive Stock Options issued pursuant to the Company’s 2008 Stock Incentive
Plan in lieu of cash with the value of such options determined by the Black
Scholes valuation method used the Company to value stock options in its audited
financial statements.

Table 1

 

Premoney Valuation $M    Amount Raised $M        $3     $5     $7.50     $10  

$30

   9 %    15 %    21 %    24 % 

$40

   12 %    20 %    28 %    32 % 

$50

   15 %    25 %    35 %    40 % 

$60

   20 %    33 %    48 %    60 % 

$70

   25 %    41 %    61 %    80 % 

$80+

   30 %    50 %    75 %    100 % 

or straight debt

        

 

  (d) Performance. Executive may be granted incentive compensation for
performance in the Company’s discretion. If Company, in its sole and absolute
discretion, grants Executive such incentive compensation, the terms, amount and
payment of such incentive compensation will be determined solely by Company. The
Company shall recommend to the Board of Directors that Executive be eligible for
incentive compensation for the first year of employment targeted at no less than
twenty-five percent (25%) of Executive’s base salary (inclusive of and not in
addition to any amounts that Executive may receive pursuant to Section 4.2(a),
(b) and (c) above), with total compensation targeted at a minimum of $281,250.
Such incentive compensation may be payable in either cash or stock of the
Company or any combination thereof at the election of the Company and pursuant
to terms and conditions established by the Board of Directors of the Company.

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Section 4.3 of the Agreement is hereby amended to read in its entirety:

“Stock Options. Executive may be granted stock options from time to time in the
discretion of Company subject to the terms and conditions of a Company approved
stock option plan and pursuant to the stock option agreement under which such
options are granted. The Company shall recommend to the Board of Directors that
Executive be provided with an option to purchase 150,000 shares of the Common
Stock of the Company. This recommendation will be considered for approval at the
Company’s next Board of Directors meeting in December 2008. Executive’s
entitlement to any stock options that may be approved is conditioned upon
Executive’s signing of the Stock Option Agreement and is subject to its terms
and the terms of the Company’s Stock Incentive Plan under which the options are
granted, including vesting requirements of twenty-five percent (25%) after
continued employment of one full year and  1/48 after each full month of
continued employment thereafter. Provided that Company has not terminated
Executive’s employment for Cause and Executive has not terminated his employment
other than for Good Reason, the Company shall grant Executive an option to
purchase 300,000 shares of the Common Stock of the Company upon receipt of gross
proceeds from equity or debt or other financing obtained by Company of at least
Five Million Dollars ($5,000,000) in the aggregate after July 7, 2009. Such
option shall be immediately vested, have an exercise price equal to the then
current fair market value of such Common Stock, have a ten year term and be
subject to the terms of the Company’s 2008 Stock Incentive Plan and the terms of
the form of Stock Option Agreement under such plan.”

Section 6.2 of the Agreement is hereby amended to read in its entirety:

“Termination Without Cause By Company/Severance. Executive’s employment with the
Company shall be “at-will” at all times. The Company may terminate Executive’s
employment under this Agreement without Cause at any time without any advance
notice, for any reason or no reason at all, notwithstanding anything to the
contrary contained in or arising from any statements, policies or practices of
the Company relating to the employment, discipline or termination of its
employees. In the event of such termination, Executive will receive the Standard
Entitlements plus the following Severance Pay: (a) twelve (12) months of
Executive’s Base Salary then in effect on the date of termination, payable in
the form of salary continuation, and twelve (12) months of Executive’s health
care benefits then in effect on the date of termination provided the cost to the
Company of such health care benefits does not exceed the cost in effect on the
date of termination and for such salary continuation and such health care
benefits (the “Severance Pay”) and (b) the vesting of any stock options held by
Executive at the time of such termination will accelerate as to the number of
shares that otherwise would have vested and been exercisable as of the date that
is twenty-four (24) months from the date of termination. The Severance Pay will
be payable in accordance with Company’s regular payroll cycle. If Executive
breaches any provision of Section 7, 8 or 9 during any period

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in which Executive receives Severance Pay, Executive shall immediately cease to
be entitled to receive such Severance Pay. Executive’s receipt of the Severance
Pay will be contingent upon: (x) Executive’s compliance with all surviving
provisions of this Agreement as specified in subparagraph 14.7 below; and
(y) Executive’s execution of a full general release in a form provided by the
Company, releasing all claims, known or unknown, that Executive may have against
Company arising out of or any way related to Executive’s employment or
termination of employment with Company. All other Company obligations to
Executive pursuant to this Agreement will become automatically terminated and
completely extinguished.”

Section 6.3 of the Agreement is hereby amended to read in its entirety:

“Voluntary Resignation By Executive. Executive may voluntarily resign
Executive’s position with Company at any time on thirty (30) days advance
written notice. The Company shall have the option, in its sole discretion, to
make Executive’s termination effective at any time prior to the end of such
notice period as long as the Company pays Executive the amount provided in
Section 4.1 above through the last day of the thirty (30) day notice period. In
the event of Executive’s resignation, Executive shall be entitled to receive
only the (i) the amount provided in Section 4.1 above, earned through the date
of such termination, (ii) benefits coverage through the date of such
termination, and (iii) reimbursement of business expenses properly incurred
prior to the date of such termination and submitted in accordance with the
Company’s policies. All other Company obligations to Executive pursuant to this
Agreement will become automatically terminated and completely extinguished. In
addition, in the event Executive resigns from his employment with the Company,
Executive will not be entitled to receive the Severance Pay or Severance
Benefits described in Section 6.2 or 6.4 herein.

The Company and Executive hereby acknowledge and consent to the foregoing
amendments to the Agreement as set forth herein.

Except as amended herein, all other terms and provisions of the Agreement shall
remain in full force and effect.

This Amendment shall be effective upon its execution by the Company and
Executive.

This Amendment may be executed in any number of counterparts, each of which when
so executed shall be deemed to be an original and all of which taken together
shall constitute one and the same agreement and shall become effective when
counterparts have been signed by each party and delivered to the other parties
hereto, it being understood that all parties need not sign the same counterpart.
In the event that any signature is delivered by facsimile or electronic
transmission, such signature shall create a valid binding obligation of the
party executing (or on whose behalf such signature is executed) the same with
the same force and effect as if such facsimile or electronic signature were the
original thereof.

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IN WITNESS WHEREOF, the parties have duly executed this Amendment as of the date
first written above.

 

Dated: July 2, 2009  

/s/ William Frederick

  William Frederick Dated: July 2, 2009   NovaRay Medical, Inc.   By:  

/s/ Marc C. Whyte

    Marc C. Whyte    

Chief Executive Officer

NovaRay Medical, Inc.