Be Patient HD it takes a while. Did you change your diet too? Or anything else? Did you do any on line research about cycling for weight loss? Taking it easy on the knees may keep your loss a little slow for a while. Just keep on riding. If you can't push hard on the knees, if you can keep increasing the distance that will help over time.
About the gain from increased muscle, maybe there is a place to get your body fat measured? Or are you getting slimmer?