Solved
Just got off phone with PTC techinal support and here is the answer. AutoCAD does not recognize .png files. To solve this, when you create .dwg files from .drw files, go to the "misc" tab and select ".jpg" to export images as jpegs. To make it a default, go to configuration editor and type in "int2d_out_image_format" and set to ".jpeg" to export all .dwg's as jpeg.
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