All "random numbers" in a computer are generated by a math formula. There a lots of different formulas for doing this. This demonstrates the concept of randomness in the computer (and how "random" numbers truly are not random). To experiment, choose a seed value then click start.
Notice that if you choose the same seed, you get the same sequence every time. The program implements a very simple (but still correct) random number generator instead of the Scratch generator to make the point. Be sure to "look inside" to see the code for the random number generator (attached to the "Start" sprite).