Your problem is precisely the same as I experienced. You have probably not done anything wrong. This is exactly how it stopped working for me. It is broken in 16.04. But, worse still, whereas it used to work in 14.04, it has also stopped working in there following "updates" from Ubuntu.
Your only option would be to go on to the LTSP IRC and try and find one of the developers of pnp LTSP on there. But, I went on and left a request for help that just never got answered. So I gave up.
I am sorry, but I spent many uncountable hours trying to fix my LTSP installation before finally giving up and I just can't bring myself to delve into yours because the outcome will almost certainly be the same brick wall. This is not your fault and you have my sympathies. Please find the link to the LTSP IRC below and good luck with it.
Finally, please see below for the instructions I wrote on here some time ago, when PNP LTSP was working, for how I did it and check it against what you did.