A therapeutic composition comprising a purified fraction of adipose-derived mesenchymal stem cells encapsulated in a three-dimensional biocompatible gel matrix, and methods, and systems for preparing and using encapsulated adipose-derived mesenchymal stem cells. Hydrogel microbeads encapsulating stem cells maintain the viability and location of the stem cells for an extended period as compared to stem cells in suspension. The gel matrix allows the release of cellular factors from the encapsulated stem cells to surrounding tissues to achieve desired therapeutic results.