Thanks for sharing with us this unexpected behavior.
I tried to reproduce it, but it work fine. I could use the image I added to my project right away and when I saved the CSS it appeared in my Simulator.
This could be a Cache issue so I would suggest closing all AppBuilder and VS clients, deleting %localappdata%\Telerik\BlackDragon\Cache
folder and then run again the Simulator.
If this does not resolve the problem, we will be glad if you send us a sample project that reproduces it so we could test with it locally.
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