UPDATE:

So I decided to try a warranty repair. I boxed up the engine and sent it back to Horizon Hobby including a long letter explaining my problems. Just got the engine back yesterday. They basically rebuilt the whole engine for free. They replaced the crank shaft, both bearings and piston sleeve/liner as well as providing a new glow plug. Now that's great service.

I put the new tower muffler assembly on and now I should be good to go.