Your image needs to have URL associated with it, so it needs to be housed on a website or image hosting site of some sort. Then all you do is hit the "Enter an image" icon above and insert the URL address of the image into the form. For example, here a URL address for one of my images...

http://mattjohnsonoutdoors.com/sitebuilder/images/MJ_walleye_horz-420x294.jpg

Then when I hit the "Enter an image" icon and paste the above URL address into the form I get the following...