- "Their motive was to overcome the square-cube drawback of scaling up closed expander cycle engines."
It seems, the days of scaling up any rocket engines are past. The success of F-1 was a miracle. Soviet NK- series engines spelled doom of their N1 project and killed their dream of moon landing. There are countless problems with scaling the engines up, and this doesn't address most of them. It seems if you want more thrust, you add more mid-sized engines, which solves most of the problems and adds benefits of redundancy and economy of scale (mass production of the engines makes them cheaper). So, it's a solution for one bit of a problem that was taken care of in its entirety by a paradigm shift. No-one needs it anymore.
- "The only problem they encountered in their experiment was that the heat exchanger produced a higher pressure drop than anticipated"
The pressure drop is an inherent property of this solution. Sure you can fine-tune how much of pressure drop you get, but regardless, it will be a significant amount - the temperature in the combustion chamber directly contributes to pressure of the exhaust gas, thrust and specific impulse, and you're tapping into that heat to vaporize cryofuels. Reduce the temperature - you reduce the engine performance. user3528438 has it right: you're not using waste heat, you're using useful heat. Currently we're in a race for higher chamber pressures. We don't want to reduce the chamber temperature.
- Issues of throttling.
The amount of heat for use of this kind of heat exchanger depends
directly on how much the engine is throttled - how much fuel and
oxidizer is burned, producing heat. And throttling is critical for
control of the rocket flight. With regular preburners and separate
heat exchangers you can control and fine-tune the performance of the
preburner or exchanger independently, as required, to provide
optimal mix for required engine throttling level. Here you're
tightly coupling two only indirectly dependent parts of the process;
the chamber pressure and temperature is strictly subordinate to
flight control requirements and we can't tune it willy-nilly to
serve regulating performance of the heat exchanger.