A similar method was used in ImageSynth (now discontinued). There's also Pixplant, which uses a different algorithm altogether (pixel based, and not patch based as far as I can tell).
I'd squish up that wood handle UV, to make it a 512x256. Saved half your pixels for a small decrease in quality. Other than that, your sculpts are looking awesome!
I've found plenty of links that lead to dead ebay auctions. 256 pixel thumbnails don't make good references. And all of my previous issues with it still stand.
I think I've tracked my issues down to the samplers in the pixel processor not tiling. If the x or y axis has a negative coordinate then it just shows up as black.
Thank you pixel patron ! Here is Yvan, the father of Lily, the main character : Low poly, setup & animations by Alex Accorsi Art Direction in collaboration with Alex Accorsi.
Is that your HighPoly? Then you need to make your Edges a lot softer. The Softer your HighPoly is, the more normal Pixel you will get when baking on to your LowPoly.