1) "Why it wouldn't work" is vague and nonspecific. "Applying power and hearing a pop/smelling smoke" is a big hint. You have to phrase the question in a way that gives up some information for it to be a decent use of time.
2) Complexity fucking kills these interviews. You shouldn't be handing off a multi-page schematic with complex interconnects. Five or six major components, max. Label your subsections for clarity: things like "microcontroller", "EEPROM", "LED driver", "half bridge driver", "ADC", etc.
Sounds like you did the right thing, and got penalized for it. Fuck 'em. They weren't the right fit for you anyway.