playtime co has a facility called "playcare" that runs as a foster home for orphans. it includes dorm rooms for the children, a school, and places for them to get toys and play.
the children are being experimented on and turned into toys. mommy long legs and catnap used to be children, and the same is implied of kissy missy
dead toys that resemble rabbits are strewn around the map, including a scene where one falls over and is then picked up by catnap, almost like a cat hunting
the player runs through "red mist" which is exactly that, and makes the player go through a hallucination sequence. they later get a gas mask to help them endure the mist.
it is said in the vhs tapes that the red mist is being used on children, and it gives them nightmares
it's implied that the toys have been eating each other, including the mini smiling friends eating dogday and miss delight eating the other teachers in the school.
catnap worships the prototype like a god, we even see him pray at a shrine. the playcare is referred to as catnap's "church" and a character that doesn't like the prototype is called a "heretic"