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The main issue is the common fisheries policy. That is the policy that would have allowed fishing vessels from other countries to fish in Icelandic waters, and vice versa. It's a sensitive topic to Iceland, because fishing is such a large part of their economy and their identity.
It's still a bit silly to not even bother negotiating with the EU though, because the EU had signaled that the common fisheries policy was something that could be a topic of negotiation. Without talks we will never know if the EU was willing to give Iceland an exemption on the common fisheries policy.
It's worth keeping in mind that this was a refending on resuming negotiations. There would have been a second referendum on whether or not to accept the deal that would have resulted from those negotiations.