I have tried myself to squashfs my knoppix cd install on usb and created knoppix.sq but I do not have inirt.gz but a look at syslinux.cfg learned that it used minirt.gz.
I modified that the way you did in the above post but I somehow messed up pretty badly.
first there was a syntax error while booting so I reedited the init script and now it's completely screwed up

is someone so kind to share their (m)inirt.gz with me?