Same directory structure as other sight mods, should all be right so far as I can tell.
So the entry for $cdmaterials is "models/weapons/upgrades", yes? If it helps any, you can have more than one entries of $cdmaterials, so you can have the pre-existing one, and then, if it's needed, another with "models/weapons" for it's directory
You can try removing all instances of .png from the sights' SMD and removing the PNG files from the game's directory, there may be some confusion going on that's causing the game to think it's supposed to be using the PNGs instead of the VTFs