Small bag instructions confusing - picot edge

I’m a newbie trying to finish the following cell phone bag:

I already created the row where the “holes” are and then knitted 5 stockinette rows. I’m confused about the next step, which I bolded below in the pattern. When I repeated the steps in brackets, I ended up with a second row of “holes” but the picture does not show one. ???

Is it because somewhere in the remainder of the pattern, I am going to turn the very top to the inside and you won’t see the holes? I tried reading the remainder of the pattern to see, but I’m new and don’t really understand the finishing steps =).

The pattern says:
[I]Next Row (make picot st holes for drawstrings): [K1, (yo, k2tog) across to last st, k1.]

Work 5 St st rows, [B]then rep bet []s to form picot edging[/B]. Work 3 St st rows. Leaving a 24" tail, thread all sts onto another length of yarn.

With WSs tog and 1 strand A (color 1), sew sides tog through both thicknesses, 1 st in from each edge and working from the top to the base.
With the same tail, join base. Fold facing toward you at the picot edging and using 1 strand of yarn, hem sts (from thread) in place and above drawstring holes. Remove thread as you work. Weave loose ends into WS of work. Turn RS out.[/I]

Thanks for any help you can provide!

Yes, you turn the edge under for a hem and the row with the holes (the yarn overs) will make the picot edge.