You know, I think it was a good exchange. Of course I wasn't there to hear tone of voice, etc., but it sounds like you didn't get heated or insulting, you just stated the facts in response to his question. A lot of people would have given a softer answer ("cutting back this year" or something), which I think is also fine, but I think there's nothing wrong with a direct, factual response as well. And it seemed like he didn't argue or anything, he was just like, "...okay." And now he knows what the problem is, and how he can correct that if he wants to, in general even if he's lost his chance with you. Some people can just be incredibly oblivious about that kind of thing, without really having malicious or scheming thoughts. I think it went well overall.