This is a how to in converting a .img file to a squashfs .img file.
Note: This may not necessarily work with every image file. Many that I have tried have not worked. These steps are done on a Windows PC, and Mac & Linux instructions should be similar, but particular steps may vary. This has worked or me in all cases, but may not alway work for you.
Step 1: Download Your .img File
In this case, I am using a RasPlex image.
This should be a .img file, and not anything else.
Step 2: Open the File
Open the .img file using a program like WinZip or 7-Zip.
I use 7-Zip, but both should work fine.
However, the default windows program will NOT work for opening these.
Step 3: Navigate to the 0.fat File
Easy as double-clicking on a folder in Windows.
Step 4: Find the File & Extract It
Look for a file named "System". Extract this file from the directory. You are clear to delete the .img file now.
Step 5: Rename the File
To finish it off, find the file you just extracted. It should be named "System". You can rename this to #YourFileName.img. Now the file is squashfs compatible! If a pop-up shows saying changing the file extension might corrupt this file, click yes. (windows only)