You need to download this appliance:
http://download.libguestfs.org/binaries/appliance/ appliance-1.36.1.tar.xz
and unpack it under /home/user/appliance/ .
Directly inside the /home/user/appliance directory you should see
files called "initrd", "kernel", "README.fixed" and "root".
If it still doesn't work then you'll have to post the complete output
of ‘libguestfs-test-tool’.