What it's asking you to do is "pick up" or create stitches around the edge of the hat and start knitting with them. So, you turn the hat upside-down so it looks like a bowl and decide where the earflap is going to start. Now, insert your needle into the cast on edge through one stitch and pull your working yarn through it as if you were knitting through it. You've just picked up one stitch! It is ideal to insert your needle through two strands of yarn, as it gives a more secure bond to the hat. Do this for how many stitches required and start knitting your earflap!
Incidentally, here is a great video for it.