When your Punch Shot is ready, choose a photo to paste it on. You can choose one of Photo Punch's generic backgrounds, pull one from your own gallery, or even find one on the Web with the built-in search tool.
One thing I noticed is that you can only add three Punch Shots to a single background. After that, the app seems to break down and close -- or at least it did so for me. In fact, I experienced several such forced shutdowns while using the app, which made the whole thing incredibly frustrating.
Lastly, Photo Punch does more than just create Punch Shots. It lets you add borders, filters, or even clip-art-like images like sunglasses and mustaches to your photos. One thing the app is missing, though, is adjustment sliders, similar to Photoshop's. Sliders for things like color, brightness, and saturation would be help significantly in blending pasted foreground items with their new backgrounds.
Overall, Photo Punch seems like it has tremendous potential. Its autoselection capability isn't perfect, but it works fairly well, and the app's interface is straightforward. At the same time, I do have to give the app low marks for its poor performance, as it froze and force-closed several times while I attempted to use it.