How does matlab keep track of files not on search path?

I tried to use a class not on the matlab search path and get the following message:

'Session' is not found in the current folder or on the MATLAB path,
but exists in:
    /Users/liyuan/Desktop

Change the MATLAB current folder or add its folder to the MATLAB path.

My question is how does matlab keep track of files not on the search path? Does it index all .m files in the system? None of the parent directories Users or Users/liyuan are on my search path either.

[Walter Roberson]

Does it index all .m files in the system?

No, definitely not. It would take well over half an hour if it tried to do that on my system, as I have over 15 terabytes of external drives. It would take about two days on my system if it accidentally tried to find the files inside one of my Time Machine backups.