When installing QLR Manager in SQLite3, a sqlite3 database file called "qlr.sqlite" is created. The server directory is the relative or absolute path to where you want to store the "qlr.sqlite" database file. The relative path is relative to the main QLR Manager directory.
SQLite3 databases do not manage User IDs and passwords. However, QLR Manager uses a master ID and password to save / access queries, layouts, etc... that are created by Users. This ID and password will be used in that process. You can create any User ID and password that you wish.