It happens to me too. It doesn't matter what format I use, it may be JPG or PNG, but it happens anyway. Furthermore, I could see something a bit worrying: I tried to change permission to the PNG file giving it root as owner and group and changing the file into 444 (read only for everybody). And still, it has been deleted from the directory. Is there any update about this issue? It's not that fine...! I was trying to see if a pro version of this theme existed, but it doesn't look to exist! Please help us to resolve this problem!
To be honest, I tried step by step what you wrote, but at the moment of adding a variation (+Add Variation) I only see a form to add "SKU" and "Price". Still, no way to see an "Add to cart" button. It looks so absurd that going on with Drupal we have a more complex route than an easier one.