That is not a bug, sir.
The trigger 'On drop' picks 1 sprite. The dropped sprite. So, at this moment the Selected Objects List (picklist) contains 1 and only 1 sprite.
All sub conditions start picking from that fresh picked Selected Objects List. (fresh because it is a top level event)
There are no other sprites in that list to pick from.
So when you check the overlap in a sub condition, there are no sprites to check for, except that 1 dropped sprite.
Overlap with itself is not reported.
So, at this point the newly Filtered Selected Objects List (That started from that Previous Selected Objects List, containing 1 sprite) is now totally empty.
As a result, that overlap condition is untrue, and it will not run any actions and sub conditions.
Plz read this.