This plugin currently only supports locally stored images so it won't work with images stored on S3.
Your setup with local and remote storage is kind of special and certainly untestet on our side.
Maybe the plugin won't work in your case. Maybe you can try to debug the code and see where the local images are being loaded from. Pull requests to our GitHub repo are always welcome.
There is an option to disable the log messages in the backend settings of the plugin in case the plugin only has problems with remote images and your local images are processed correctly.
Well here's the thing. I tried to process local images as well. I served a file in my footer from my asset folder and it gives me "Could not process image" too. Which leads me to believe if maybe the images aren't being processed on the site because of where they are being called from