How to manage files stored on my Apple Watch from my iPhone?
Once you have installed USB Disk on your Apple Watch, an "Apple Watch" item will appear on the main screen of USB Disk on your iPhone. To show up to date information about the files and folders stored on your watch, the iPhone app needs the watch app to be visible on the screen of your watch. If USB Disk is not visible on the screen of your watch, the iPhone app will only be able to show cached information (so an empty file list might be displayed). A message at the top of a file list will tell you if you need to open USB Disk on your watch in order to update the visible information. Note that you can still browse and manage files and folders even if the displayed information is not up to date.
You can copy, paste and rename files in the "Apple Watch" location as you would in any other location in USB Disk. Changes will be applied on your watch when the app is visible on the screen of your watch. So if you are deleting files in the "Apple Watch" location to regain space on your watch, make sure to open the app on your watch for the deletion to occur.
Note that the "Apple Watch" location is only visible from within the USB Disk app. You will not see it when browsing the content of USB Disk from the Files app or any other app. You also won't see it when connecting to USB Disk over WebDAV.