Did you export those files using the VS Code extension? The extension uses its export settings to determine where it will look for local copies. For example, if you have the AXIS folder open in VS Code you would need the following export settings to reflect the existing folder structure that you have: objectscript.export.folder setting equal to "", objectscript.export.atelier setting set to true, and objectscript.export.addCategory setting set to false.

I believe this is the same problem described here. You need to add the --check-caps false command to the iris container in your docker-compose.yml file, like this:

...
iris:
    command: --check-caps false
    init: true
...

The SAM 1.1 distribution should have this done for you but that change must not have made it in. I think you can still enter the SAM 2.0 EAP if you'd like to start with the upcoming version.

@Michael Davidovich 
If you have a local folder open there should be two tree views within the ObjectScript view container (the left pane that is shown after clicking the InterSystems logo in the activity bar on the far left). The bottom one is the Projects Explorer and it's only used to create/modify/export server-side project contents (also known as Studio Projects). The top tree (with the Explorer name) is the ObjectScript Explorer where you can Compile/Export/Delete packages and files. Since you don't use server-side source control and need files in your local file system, you can safely ignore the Projects Explorer since they won't be useful for your workflow. Here's a screenshot of what this looks like for me in a locla folder called "langauge-server":

EDIT: If the ObjectScript Explorer isn't showing, make sure you don't have the setting "objectscript.showExpolorer" set to false.