Every PHP configuration has settings for sendmail, which is used in internal mail() function. However, if your server admin disabled the mail() function, 1-2-All can still use PHP's settings to find a path to the sendmail application and call it directly to attempt to send an email. Basically, it simulates PHP's mail() function.
This option is supposed to be used only if you don't have mail() function available on your server and you don't have any SMTP accounts you can setup.