Technically the hoop should reach the stage where the mass reaches the lowest point of the hoop and is in contact with the floor.
However theoretically it can be shown that if one draws a straight line from the mass to the point of contact between the hoop and ground, then when the angle between this line and the ground goes below pi/4 the normal reaction between the hoop and the ground vanishes, i.e. the back of the hoop flips upwards. Thats why the "energy" goes missing.
This can be seen by considering a skier skiing on a slope that takes the path of a cycloid. As the skiier reaches the curve where the gradient approaches infinite he/she cannot remain on the path as they will fall off.
Anyhow, I consider myself more of a pure mathematician, and only found this problem interesting when introduced to it by Dr Frank Berkshire (Mehh, if you think this problem is complete bollox then take it up with Franky himself - I agree that the hoop is not an intertial frame, but we are not basing the laws of physics around this reference frame, just considering that the mass is never moving relative to the hoop).
Galois.