What does it mean by Kapalika observance and where does Kapalika come from?
According to scholars the term refers to cremation-ground worker (kapalikah). The use of kapalikah as the meaning ‘cremation-ground worker’ can be found in Narmamala 2.24cd, Rajatarangin 7.44ab and 8.995, and Lokaprakasa, p. 6, l. 3 (kapalakah . in a list of serving castes)—survives in the Kashmiri derivative kawoj u /kawuju (GRIERSON 1915 and 1932, p. 495b41–46).
Srimad bhagavatam canto 5-9.15
Reference Kaplika observence is found Srimad bhagavatam canto 5 sloka 9.13-18 in jada bharatha stroy.
atha paṇayas taṁ sva-vidhinābhiṣicyāhatena vāsasācchādya bhūṣaṇālepa-srak-tilakādibhir upaskṛtaṁ bhuktavantaṁ dhūpa-dīpa-mālya-lāja-kisalayāṅkura-phalopahāropetayā vaiśasa-saṁsthayā mahatā gīta-stuti-mṛdaṅga-paṇava-ghoṣeṇa ca puruṣa-paśuṁ bhadra-kālyāḥ purata upaveśayām āsuḥ.
At this time, one of the thieves, acting as the chief priest, was ready to offer the blood of Jaḍa Bharata, whom they imagined to be an animal-man, to the goddess Kālī to drink as a liquor. He therefore took up a very fearsome sword, which was very sharp and, consecrating it by the mantra of Bhadra Kālī, raised it to kill Jaḍa Bharata.