I did some spooky magic on everything and...
I really hate to break it to you, but I actually changed nothing at all save for the \ after "models\weapons\upgrades
\"
I used the original .smd file, and a slightly modified .qc file that removed the two $includes so I could compile
This means either that \ was the most important figure of all of mankind's history and we should worship it, or you put your .vmts in the wrong directory. Or the $includes are killing the materials, which shouldn't be the case.