The term comes from the well know phrase "coming out of the closet" which refers to a person revealing that they are gay/lesbian.
The "closet" part is replaced by "cupboard" because, as we know, Harry Potter lived in the "cupboard under the stairs" in the beginning of the book series.
The participant enters a cupboard and sticks his manhood through the glory hole for a happy ending.
Jon: "No, that's just Roy, coming out of the cupboard. Do you see the glory hole drilled in it?"
So called because most gay folks come out of closets, but the small stature of little people necessitates they come out of someplace smaller