Wow, it's cool to hear that your kids played through all the levels many times! That's great!
It is definitely possible to get more levels in Squiddy - currently a level takes around 200 bytes. so 5 levels would take about 1k, and 50 levels would take about 10k. So there's room for more levels.
On the other hand, all of the current 31 levels were designed by Aphrodite for the original Pico-8 version, so I haven't tried designing any yet. I could give it a go, though...
If your kids have any ideas for levels they want to see, they could design them themselves.
Just get a piece of graph paper, mark out a 16 by 16 square area, and fill the squares with these codes:
0 (or empty square) blank
1 grid tile (white square)
2 goal tile (green square)
3 up arrow
4 right arrow
5 down arrow
6 left arrow
7 background "squiddy" square
Send me a picture of the graph paper, and I'll enter it in...
(Sorry it's so low tech... I guess if there was enough demand I could work on an editor...)
Thanks for playing,