1. The dropdown should look 1 level deep into folders. If it doesn’t, make sure your AdRotate Pro version is the latest.
2. Looks like the files you uploaded (via (s)FTP) are not accessible by your website then. This happens sometimes on servers where the FTP user is different from the website user (the app that runs the webserver). Often setting the folder and file permissions to something like 0755 (0644 for files) should be fine. But it’s better to match the owner and group to whatever your webserver uses, too. Your hosting provider can tell you more about what the best setting is for this.